Man Without Qualities

Thursday, June 19, 2003

Paul Krugman Bubbles Up

Paul Krugman says that his latest effort is directed at arguing: What's clear, however, is that [equities] investors' big move back into the market has been driven not by careful comparison of returns, but by the fact that stocks are rising — and the fear that if you don't buy stocks, you'll miss out on a good thing. His phrasing is all the more peculiar because only a few paragraphs previously he had opined that "investors seem to be buying stocks because they are rising." Why it is that investors' reliance on this particular motivation migrated from "seem" to being "clear" in the course of, say, four column inches, is anything but clear. But there it is.

But what is really odd is that his column offers not a single groat of direct support for his hypothesis. Or is it a conclusion?

For example, does Herr Doktorprofessor try to identify the kind of investor that has led this so-called big move back into the market and determine whether that kind of investor is prone to "bubble" investing? No.

Is it professionally managed funds or recently-spooked individual investors who are leading the charge? Herr Doktorprofessor seems not to have thought the point is worth checking.

Does Herr Doktorprofessor offer any anecdotal evidence that investors who have led this so-called big move back into the market are motivated "by the fact that stocks are rising — and the fear that if you don't buy stocks, you'll miss out on a good thing?" Something along the lines of "Joe Blow, a broker I called at Merrill, says that he's hearing a lot of investors tell him to buy stocks for their accounts because stocks are rising — and if you don't buy stocks, you'll miss out on a good thing?" No.

Bubbles normally "take off' after a period of rational growth in the stock market as "irrational" extensions of previously rational periods of appreciation. Has that happened here? No. Does Herr Doktorprofessor offer any explanation why this market run-up should be an exception to the normal course? No. He does, however, offer lots of arguments as to why there could not - in his mind - have been any rational appreciation at all. So much for history.

What does he do? While he attempts to dress it up a bit by citing to an eccentric collection of negative factors without providing any substantial reasoning as to why those factors should be determinative while dismissing other positive factor equally without reasoning, his argument is nothing more than this: I, Paul Krugman, do not think the market should be going up. Therefore, it is irrational for the market to be going up - a bubble.

Low interest rates? Who cares, says Herr Doktorprofessor: Well, interest rates have been low for a while. And if low interest rates haven't had an effect for a while, he implies, then they can't be having a cumulative effect now. So, by Herr Doktorprofessor's reasoning, low interest rates can never affect the economy. Ah! Behold the workings of the heavyweight economics mind!

Another pearl: A few months ago, some analysts began to argue that because interest rates were so low, even today's very expensive stocks were a good buy. I don't agree, but that's a long discussion.

Sure, Herr Doktorprofessor, sure. Glad you told us that.

Someone is actually paying this guy to write this stuff? Has anyone sniffed the Evian bottle in his office recently?

UPDATE: Don Luskin provides the coherence and perception lacking in Herr Doktorprofessor's screed - and shows why the markets are being anything but bubble headed today.

MORE: Scroll down to "Bubble Buddies."

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