Or maybe more rigorously, when the cost of rolling the contango to next month exceeds the capital gains on last month’s roll.

David’s point, and one you can actually invest upon, is when the financing goes away, the bubble will pop. In all the cases he cited, the financing went away. It took longer than it should have in every case because the CYA regulators did not want to be blamed for ruining what was generally regarded as fabulous economic growth. But eventually the market demands the financing go away. Colloquially you hear it’s when there is no one left to lend to, that’s the Ponzi nature bubbles. More rigorously it’s when the next round of speculators can no longer service the running interest on their speculation.

In housing we had negative amoritization there at the end to keep the bubble going. It finally popped when early payment defaults (that is loans that never had one payment made on them) started flying back to the originators killing their cash flow and thus their ability to fund a new round of loans. Yeah, it’s all 20/20 in hind-sight.

With regard to your first point about oil, lots of people are borrowing money to buy oil. You can buy $133,000+ worth of oil for future delivery with under $9,000 down.

What is your opinion of what is commonly regarded as a bubble in tulip bulbs in Holland in the 17th(?) century? Was that a bubble and if so was it caused by easy financing?

How about internet stocks at the turn of the century? I am not sure I get how that was caused by easy financing. I can certainly see how margin debt helped fuel the bubble, but not how it caused it.

I am not trying to be provocative, I really am curious as to your thoughts. I think financing is a necessary but not sufficient condition for a bubble to form. But I don’t think financing is generally a primary cause of a bubble.

I think the housing situation is actually unique historically. I am not aware of any other situations where you could buy a significant asset or assets with little or nothing down and have a pretty good shot at walking away from your financing obligations if the asset price didn’t appreciate. That was not the case with internet stocks, tulip bulbs, and certainly not with oil today.

All bubbles are easy to identify. All debits cleared through demand deposits with the exception of Mutual Savings Banks (since their inception).

Monetary flows (MVt)are a mathematical truism. Predictions are infallable.

“it’s the financing stupid.” I think one of the reasons treasuries are a bubble is that the world is over financing the US. The data is undeniable.

shrek

I had a few rules of thumb of my own for distinguishing a bubble from unsustainable speculation, but I think I like yours best as it cuts right to the chase: it’s the financing stupid.

Which reminds me, when I was a kid, across the street from my grandparents house, out in a rural part of the county their neighbor, a realtor, had in his back yard a big hole with a tank in it. He had bought a gas station tank to store gasoline in. Before he could complete the project the bottom had fallen out of oil. I guess you could say he was lucky. He was only in for the cost of a hole and a tank. He never filled the tank, so he didn’t quite buy at the top.

Whether it took financing to buy the tank and dig the hole, probably not. But like pension planners you refer to there are oppr costs nonetheless, and those can be treated like costs of financing all the same.

I think that people are way to fast to label speculative excess as a “bubble”. Did US equity form a bubble from 1985-1987? I would say no, but given many people’s current criteria it was. Prices ran up in a speculative frenzy and resulted in a crash. However, there was not a credit mania and did not result in a major mis-allocation of capital – that is why the economy remained sound even after the crash.

Personally, I believe that crude will suffer a massive correction or possibly even a crash at some point in the next 6-12 months. However, speculative frenzies can get looney and REALLY go parabolic, so the correction could be from $150 to $100! This action is very typical in the 3rd to 6th inning of a long bull market. Stocks in the US in 1987 and the horrible gold correction that started in 1973 is another. The fact is that there will simply be too many owners of crude at some point and that may create a vacuum to the downside which will cause a deleveraging and panic selling. However, trying to pick a top in such an environment is a dangerous business – I have simply moved out of the way.