James Kwak at The Baseline Scenario Looks at Spotting Bubbles

By on July 18, 2009

James Kwak, writing for The Baseline Scenario, a website devoted to determining “What happened to the global economy and what we can do about it,” recently published a piece on whether price-to-rent could be used to spot a housing bubble. Kwak comes to the conclusion that it isn’t a perfect solution. The essay generated many reader comments on whether we can determine whether a bubble exists, or not.

SMA Comment: Anyone schooled in statistics realized the housing market was way out of line 2004-2006. It was an obvious bubble; although not any more than the recent internet and oil market bubbles. These 2 standard deviation events always revert back to the mean. Jeremy Grantham has been very successful at identifying bubbles through this simple means.

Of course, you always have naive interpretations such as this one:

http://www.newyorkfed.org/research/economists/mccarthy/athens_bubble_paper.pdf

Source:

http://baselinescenario.com/2009/07/17/more-on-spotting-bubbles/
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