Boombustology. Spotting Financial Bubbles Before They Burst

  • ID: 1853091
  • Book
  • 272 Pages
  • John Wiley and Sons Ltd
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Praise for BoomBustology

"Asset class bubbles are by far the most important events in the life of both stock markets and economies. Boombustology is a comprehensive, informative, and entertaining look into how bubbles form, what really constitutes a bubble, and, critically, the causes and circumstances of bubbles breaking. It is essential reading for any bubbliophile."
Jeremy Grantham, Co–founder and Chief Investment Strategist, GMO

"Imaginative, accessible, and blessedly concise, Boombustology is a Baedeker for these boomy and busty times."
James Grant, Grant′s Interest Rate Observer

"If there′s one thing that cleaves Wall Street′s winners from its losers, it′s the ability to say, ′I′ve seen this movie, and I know how it ends.′ VikramMansharamani′s Boombustology will entertain readers with an entire film festival of past, present, and future investment disaster flicks that willmake them laugh, make them cry, and save their bacon."
William J. Bernstein, bestselling author of The Investor′s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between

"Investors are attracted to bubbles. To paraphrase Orwell, they find themselves playing with fire without even knowing that fire is hot. Vikram Mansharamani′s highly readable book will set them right. It provides a sound intellectual framework for identifying bubbles before they burst. If you buy only one investment book this year, make it Boombustology."
Edward Chancellor, author of Devil Take the Hindmost: A History of Financial Speculation

"Through an artful and accessible melding of theoretical frame works and historical cases, Boombustology provides the essential tools to identify and navigate the financial booms and busts that can be so hazardous to one′s portfolio. Required reading for all investors."
Paul A. Reeder, President, PAR Capital Management

"Who is the better investor: the generalist or the expert specialist? In this spirited book, Vikram Mansharamani brings to life five famous boom–bust episodes and argues for a multidisciplinary, generalist approach. Boombustology is an engaging read for specialists and generalists alike."
John Geanakoplos, James Tobin Professor of Economics at Yale University; External Professor, the Santa Fe Institute; and Partner, Ellington Capital Management

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Foreword xi

Preface Is There a Bubble in Boom Bust Books? xvii

Acknowledgments xxiii

Introduction The Study of Financial Extremes: One–Armed Analysts, Secrets, Mysteries 1

Secrets versus Mysteries

Different Problems Necessitate Different Approaches

Financial Booms and Busts as Mysteries

Part I Five Lenses

Chapter 1 Microeconomic Perspectives: To Equilibrium or Not? 9
"Random Walks" and Accurate Prices: The Efficient Market Hypothesis
Constant Instability and Inefficiency: The Theory of Reflexivity
Reconciling Efficiency and Reflexivity

Chapter 2 Macroeconomic Perspectives: The Impact of Debt and Deflation on Asset Markets and Prices 23
The Magnifying Power of Leverage
Collateral Rates and Debt Dynamics
Hyman Minsky s Financial Instability Hypothesis
Debt Defl ation and Asset Prices
The Austrian Business Cycle Theory
Integrating the Macro Lenses

Chapter 3 The Psychology Lens: Homo economicus Meets Homo sapiens 45
The Study of Irrationality Is Born
Heuristics Gone Wild: How Rules of Thumb Lead Us Astray
Our Flawed Brains: Other Cognitive Issues
The Certainty of Uncertainty

Chapter 4 Political Foundations: Evaluating Property Rights, Price Mechanisms, and Political Distortions 69
Can Anyone Own Anything?
Prices: To Guide or Be Guided?
Political Distortions of Property and Price

Chapter 5 Biological Frameworks: Epidemiology and Emergence 85
Revealing the Maturity of an Unsustainable Boom
How Micro Simplicity Drives Macro Complexity
Emergent Behavior in Human Swarms
The Blind Leading the Blind

Part II Historical Case Studies

Chapter 6 Tulipomania: A Bubble in Seventeenth–Century Holland 103
The Uniqueness of Tulips
Fertile Soil for Bubble Formation
The Boombustology of Tulipomania
The Multilens Look

Chapter 7 The Great Depression: From Roaring Twenties to Yawning Thirties 117
Castles in the Sand
From Booming Twenties to Busted Thirties
The Boombustology of the Great Depression
The Multilens Look

Chapter 8 The Japanese Boom and Bust: A Credit–Fueled Bubble Economy 137
Japan(ese) as Different
An Overview of the Bubble Economy
The Boombustology of the Japanese Boom and Bust
The Multilens Look

Chapter 9 The Asian Financial Crisis: The Mirage of a Miracle 155
Boom Times in East Asia
Thailand Catches the Flu
The Boombustology of the Asian Financial Crisis
The Multilens Look

Chapter 10 The U.S. Housing Boom and Bust: The Homeowner s Society Creates the People s Panic 173
"Safe as Houses"
The Music Stops
The Boombustology of the U.S. Housing Boom and Bust
The Multilens Look

Part III Looking Ahead

Chapter 11 Spotting Bubbles before They Burst: A Method for Identifying Unsustainable Booms 193
Reflexivity and Self–Fulfi lling Dynamics
Leverage, Financial Innovation, and Cheap Money
Overconfidence
Policy–Driven Distortions
Epidemics and Emergence
Conclusions

Chapter 12 Boombustology in Action: Is China Next? 217
Tendencies toward Equilibrium
Leverage, Cheap Money, and Potential Defl ation
Conspicuous Consumption and Overconfi dence
Rights, Moral Hazard, and Political Distortion
Consensus, Silent Leadership, and Epidemics
The Unsustainable Chinese Story

Conclusion Hedgehogs, Foxes, and the Dangers of Making Predictions 243

Notes 247

About the Author 265

Index 267

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Could the investment community’s hopes for a strong Chinese economy be unfounded? China’s booming economy is the envy of nations around the world, but according to Yale University lecturer and global equity investor Vikram Mansharamani, warning signs are proliferating that China is in for a very serious bust, perhaps very soon. How to recognize these signs, and realize what they mean, is the subject of his book BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst. In it, Dr. Mansharamani offers the first clearly defined methodology for determining when a nation’s financial markets are about to change from a cycle of prosperity to one of struggle.

BOOMBUSTOLOGY presents a multi-disciplinary framework for identifying unsustainable booms and their subsequent busts. In the book, which is modeled after his popular seminar at Yale University, Dr. Mansharamani applies five “lenses”—macroeconomic, microeconomic, psychological, political, and biological—to several major booms and busts in history. In doing so, he shows how booms come about culturally and socially, not just financially or economically, and also how the downward spiral that follows can be predicted—if one knows what to look for. The ability to recognize the signs of an impending financial downturn has important implications for individuals’ investment and retirement accounts as well. By explaining the “needle-moving” extremes that render many traditional investment approaches useless, Dr. Mansharamani hopes to provide readers with a seismograph that can help identify forthcoming quakes.

Dr. Mansharamani can discuss:

- How a multi-disciplinary approach utilizing his five lenses (microeconomics, macroeconomics, psychology, politics, and biology) might be used to interpret the latest financial news.
- Unique and accessible indicators such as construction of the world’s tallest skyscrapers, or Sotheby’s stock price, that can be used as “bubble indicators.”
- Several signs that China is likely to be the next bust: the unsustainable boom in property prices, the gross misallocation of capital, conspicuous consumption in wine and art markets, political tensions between central and provincial objectives, and herd behavior among investors.
- Signposts to look for in other countries to see if they may also be headed for a bust.
- The important role that practicing “Boombustology” can play in helping individual investors avoid unnecessary losses and protect their assets.

BOOMBUSTOLOGY is a fascinating read that will change the way you look at the culture around you and assess its financial health. It provides a unique framework for evaluating the possibility of financial ruin, and as such, will prove useful to all audiences.
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Vikram Mansharamani
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