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You are correct that leverage plays an important part in bubbles, because
it is the weakest link when they implode.
Whether the leverage itself is the cause of the bubbles, however, is
not clear to me.
The South Sea bubble, for example was a swindle, an early form of Ponzi
scheme. Plus, the managers were borrowing from the company in order to
buy stock for speculation. This is not leverage, it's a scam.
And did the availability of credit 'cause' the tulip bulb prices to
rise, when the price of nothing else did?
Regards
DanG
BruceB wrote:
----- Original Message -----
From:
Daniel
Goncharoff
To: BruceB
Cc: Earl
Adamy ; RealTraders
Discussion Group
Sent: Wednesday, October 06, 1999
12:31 PM
Subject: Re: definition of "speculation"
and "bubble
>Bubbles do not require margin or borrowed money. The most clasic
bubble >of all, tulip-mania, burst naturally through the breeding of more
rare tulips, >making them less rare, and less valuable. Dan, I think
you're mixing up cause with effect. The increase in supply of rare
bulbs almost certainly did cause the bubble to burst, but the important
question is how did the price of tulips reach such astronomical levels
to begin with? The answer is leverage. Buyers were allowed
to put down only a fraction of the sales price, and that caused the bubble.
Leverage, or margin, is the key. This was also true in the South
Sea Bubble, 1929, and Japan in the 90's.>Today's bubble in the stock prices
of dot-coms, creating billion dollar >valuations for companies that may
never turn at a profit, but having nothing >to do with leverage, will also
die a slow death as the substantial quantities of >shares still held by
insiders come onto the market.
Agreed, but if you add up the market cap of EVERY internet stock (including
the eventual winners), I'm guessing you get about $500 billion. That
might sound like a lot, but in a market with a total value of well over
$12 trillion, it's peanuts. I have trouble seeing an internet stock
meltdown crashing the whole market (assuming it even happens).
Bruce
----- Original Message -----
From:
Daniel
Goncharoff
To: BruceB
Cc: Earl
Adamy ; RealTraders
Discussion Group
Sent: Wednesday, October 06, 1999
12:31 PM
Subject: Re: definition of "speculation"
and "bubble
Bubbles do not require margin or borrowed money. The most clasic
bubble of all, tulip-mania, burst naturally through the breeding of more
rare tulips, making them less rare, and less valuable.
Today's bubble in the stock prices of dot-coms, creating billion dollar
valuations for companies that may never turn at a profit, but having nothing
to do with leverage, will also die a slow death as the substantial quantities
of shares still held by insiders come onto the market.
Regards
DanG
I think most
people (myself included) define these terms as meaning asset prices
that
have been artificially inflated through the use of margined or borrowed
money. If you agree to that definition, then there is simply
no evidence
for your claim. Over the past 5 years (since the stock market
first began
to take off), the amount of stock purchased on margin as a percentage
of all
stock outstanding has actually FALLEN. In absolute terms,
the figure has
grown significantly, but as a percentage of the whole market, it's
down.
Where's the bubble?
Bruce
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