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The "Mathematical Equation" Of Asset Bubbles

Tyler Durden's picture


Just when you thought the central planners had everything squared away in a tidy little package (the jobless rate is rising? Sell vol. Not enough iPhone 77.25S are being sold? Sell vol. Ben Bernanke's voice is shaking? Sell more vol. The Russell 2000 is up only 1%? Dump all the vol!), here comes the Harvard-based NBER ( the same people who determine the start and end of recessions), in conjunction with those economic wizards from Princeton, with what is actually an interesting paper discussing the nature of debt (as opposed to equity) bubbles, i.e., "Quiet Bubbles."

In the paper, the authors postulate the following about credit bubbles (an issue that is obviously quite sensitive in a day and age when central banks are responsible for the gross monetization of some 80-100% of government debt/deficits):

"greater optimism leads to less speculative trading as investors view the debt as safe and having limited upside. Debt bubbles are hence quiet—high price comes with low volume. We find the predicted price-volume relationship of credits over the 2003-2007 credit boom."

Sadly, the authors completely ignore the fact that there are some several hundred trillion in credit derivatives where the true impact of credit and interest rate bubble manifests itself, because as far as we recall when AIG blew up courtesy of a few trillion in CDS the outcome was far from quiet, not to mention tens of billions of synthetic structured products (or maybe everyone has forgotten the CDO3s 2006?), as well as one particular entity, the Fed, whose DV01 is now so large at $2.75 billion, the Fed not only will never unwind, but even the tiniest rise in rates will force the Fed to monetize even more as the alternative is a toxic spiral that explodes the Fed's balance sheet. In other words, perfectly logical things than anyone with some practical experience would note but certainly not the Ivory Tower denizens of Harvard and Princeton.

Yet where the paper turns from the merely wrong, to the supremely farcical, is when the authors Harrison Hong and David Sraer, decide to compile a formula that captures and explains the math behind, you know, bubbles - a purely psychological, and utterly irrational, concept, which demonstrates the same hubris best represented by those Marriner Eccles dwelling professors who believe that three programs can correctly predict and forecast the intangible that is the US economy. But hey - at least it has a ton of complex-looking integrals and variances, so it must be correct.

So for anyone who has dreamed of quantifying the irrational human condition, here is the bottom line of the professors' equation (this jumps straight to the conclusion and ignores the preceding several pages of just as meaningless gibberish):

QED indeed: with central planners like this, is it any wonder why the world, the real world - the one which much to the chagrin of Princeton and the Wachowski brothers, can not be explained by an equation or even inequality, is doomed?

Full "proof" for your LOLing pleasure (and the full paper can be found here):

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Thu, 01/03/2013 - 18:47 | 3120294 IvyMike
IvyMike's picture

Central planning cannot work. Which is why all businesses internally are run like little markets, with no centralized leadership.

Thu, 01/03/2013 - 18:49 | 3120299 Raymond K Hessel
Raymond K Hessel's picture

From the set of all people that exists in the world, there exists a set of people within the set of all people that exists in the world such that these people are completely totally fucking banal when it comes to treating humanity like a herd.



There exists Nazis, Progressives, Liberals, Neo-Cons, Warlords, Traffic Cops, Hall Monitors, TSA, KGB, CIA, FBI, Central Planners, Central Bankers, Bilderburgers, Burgermeisters, Soda-hating Mayors, ad infinitum.

Quod erat demonstrandum, motherfuckers!!

Thu, 01/03/2013 - 19:08 | 3120320 IvyMike
IvyMike's picture

Would you include genocidal capitalism in your list of City-Statist (Civilizationist) horrors?

City-Statism (civilization) has always brutally enFORCED its RIGHT TO TAKE.

"[The Native Americans] didn't have any rights to the land ... Any white person who brought the element of civilization had the RIGHT TO TAKE over this continent."

~Ayn Rand
US Military Academy at West Point, March 6, 1974

"Civilization originates in conquest abroad and repression at home."

~Stanley Diamond
In Search of the Primitive: A Critique of Civilization, p. 1

Thu, 01/03/2013 - 19:17 | 3120367 Shell Game
Shell Game's picture

I LMFAO when I hear people point to the evil white man for coming to the new world and squatting.  As if legions of our forebearers didn't do the same throughout the Asian, Europen and African continents, over and over again across time.  Nope.  It all started with the evil white man.  LOL!


Thu, 01/03/2013 - 19:21 | 3120382 IvyMike
IvyMike's picture

people point to the evil white man

Do you laugh your ass off at Ayn Rand?

She's the brutally racist City-Statist (Civilizationist) who said it. Read her again if you conveniently missed it.

Thu, 01/03/2013 - 19:55 | 3120463 Michaelwiseguy
Michaelwiseguy's picture

I have a PHD on this Asset Bubble topic, well at least a pre Dot-Com bubble CSI Hobbyist certificate, and I can conclusively tell you the equation is wrong.

The equation fails to recognize the "Taunting" factor that is crucial in determining how big the bubble can be grown to.

Blogs like Zero Hedge and housing bubble blogs serve to taunt and play with the financial levers of power testing their manhood, bruising their egos, and causing TPTB to do the exact opposite of good advice from blogs like ours, driving economic bubbles to astronomic levels, before bursting under their own bloated weight.

Remember the "Taunting Factor" when doing your calculations. I know what I am talking about. I have 13 years of blogging experience in this field.

Thu, 01/03/2013 - 20:44 | 3120607 Stackers
Stackers's picture

Is it me or are there an awful lot of "infinity" symbols in those equations ???

Thu, 01/03/2013 - 23:04 | 3120998 Harbanger
Harbanger's picture

It's the magical function in the differential equation.

Fri, 01/04/2013 - 00:19 | 3121113 economics9698
economics9698's picture

I remember this junk in grad school, these guys are brilliant as long as the economic growth is stable and linier, which of course begs the question, why the model and not a pencil and ruler?

Fri, 01/04/2013 - 00:32 | 3121135 Harbanger
Harbanger's picture

I don't see their brilliance, never did.  I only see social engineers and marketeers with formulas and studies custom made to fit their false preconceived notions.

Fri, 01/04/2013 - 03:19 | 3121278 SAT 800
SAT 800's picture

And don't forget, the result has to be pleasing to the head of the dept., also. In fact, this is the most important aspect of the project. This is how we get people like Bernanke; who Milton Friedman's wife thought was an inveterate "brown noser".  (Friedman was his professor).

Fri, 01/04/2013 - 09:11 | 3121531 mickeyman
mickeyman's picture

Even worse, they try to force you to live out their fantasy equations.

Fri, 01/04/2013 - 03:16 | 3121276 SAT 800
SAT 800's picture

I believe the fundamental problem is summed up as, "garbage in-garbage out". their assumptions are so bad that the whole thing is just tedious nonsense. But aside from that; it's just dandy.

Fri, 01/04/2013 - 03:22 | 3121279 SAT 800
SAT 800's picture

hey, you're a smart kid.

Fri, 01/04/2013 - 03:13 | 3121274 SAT 800
SAT 800's picture

No, it's not just you. there are an awful lot of "infinity" symbols in the equations. I like putting "infinity" in quotes; but I don't have time to explain why, right now. But it's alright, because it's just part of a system of arriving at conclusions about things that otherwise wouldn't submit to analysis. I hope this makes you feel better. I mean they're not really discussing the possibility of an "infinity" of anything; or anythings; it's just a formal process for examining things which are difficult to calculate. Like, how much paint does it take to paint a moving train that's constantly slowing down while the stripe you're painting is growing wider as a function of local gravity, for instance.

Fri, 01/04/2013 - 07:34 | 3121434 StandardDeviant
StandardDeviant's picture

Well, they're supposed to be continuous functions.

The part I'm having trouble with is, why does pi keep showing up?  Are there circles or spheres involved -- are they taking the "bubble" metaphor just a bit too literally?

Thu, 01/03/2013 - 20:48 | 3120629 SheepleInAction
SheepleInAction's picture

What's the address of your weblog?

Thu, 01/03/2013 - 21:02 | 3120677 Michaelwiseguy
Michaelwiseguy's picture

I can't be traced, but I will say, if the Internet did not exist, the bubbles would not get as big and devastating the way I like.

Thu, 01/03/2013 - 21:46 | 3120788 old naughty
old naughty's picture

Battle of the giants.

Mathematicians beat economists. Good.

Fri, 01/04/2013 - 01:51 | 3121192 Bad Lieutenant
Bad Lieutenant's picture


Perhaps, but maybe there's a shorter alternate version of what the math is trying to say: that a "bubble" is what results from the "short"-term misperception that the total amount of paper/electronic/promised wealth (i.e. not real/hard wealth) can be essentially redeemed by the the amount of real/hard wealth actually out there (over time).  Same thing really, just a little less symbolic and lends itself to conversation.

This unfolding Global Government Finance Bubble (as Doug Noland at prudent bear likes to call it, so I'll capitalize it) will be especially action-packed since the wealth categories/classes we're talking about basically encompass every traded unit of tradable wealth out there (including the classes that allow people to get food and have a place to live).

Keep your hands inside the car at all times.


Fri, 01/04/2013 - 00:15 | 3121106 SafelyGraze
SafelyGraze's picture

I have a PHD on this Asset Bubble topic, and I can conclusively tell you the equation is wrong.

The equation fails to recognize the "Hookers & Blow" factor that is crucial in determining how big the bubble can be grown to.

I know what I am talking about and have been blogging from nana's basement for over a year.

Fri, 01/04/2013 - 00:25 | 3121121 economics9698
economics9698's picture

Nana has some damn fine greens and ham hocks.

Fri, 01/04/2013 - 04:41 | 3121328 Bad Lieutenant
Bad Lieutenant's picture

Trying to think which greek letters we should assign to hookers and to blow.

Fri, 01/04/2013 - 12:04 | 3122203 Col_Sanders
Col_Sanders's picture

Alpha and Omega

What else?

Fri, 01/04/2013 - 16:22 | 3123573 Ruffcut
Ruffcut's picture

This fucking new math has Ben wrong.

Thu, 01/03/2013 - 21:25 | 3120746 A Nanny Moose
A Nanny Moose's picture

So the fuck what? Just because she got many things right, doesn't mean she got everything right. Not sure how this is relevant to.

Do we throw out Relativity because Einstein was a poor speller, poor student, and known philanderer?

Fri, 01/04/2013 - 00:29 | 3121130 economics9698
economics9698's picture

As was typical of Einstein, he did not discover theories; he merely commandeered them. He took an existing body of knowledge, picked and chose the ideas he liked, then wove them into a tale about his contribution to special relativity. This was done with the full knowledge and consent of many of his peers, such as the editors at Annalen der Physik

The most recognisable equation of all time is E=mc2. It is attributed by convention to be the sole province of Albert Einstein (1905). However, the conversion of matter into energy and energy into matter was known to Sir Isaac Newton ("Gross bodies and light are convertible into one another...", 1704). The equation can be attributed to S. Tolver Preston (1875), to Jules Henri Poincaré (1900; according to Brown, 1967) and to Olinto De Pretto (1904) before Einstein. Since Einstein never correctly derived E=mc2 (Ives, 1952), there appears nothing to connect the equation with anything original by Einstein. 


Sun, 01/06/2013 - 02:38 | 3126647 S.N.A.F.U.
S.N.A.F.U.'s picture

"She blinded me with sci^H^H^Hbullshit."

Oh look.  Another jew-hating fucktard blindly repeating shit he found on the internet and knows nothing about.  Oh, but it must be true because it's referencing famous people and dates.  Like the Newton quote, which rather than indicating Newton had any idea about converting between energy and mass actually has to do with his corpuscular theory of light which postulated that photons were actually small particles -- a theory which was abandoned a couple hundred years ago because it doesn't cover basic photon behaviors like diffraction and interference.  And like saying "the conversion of matter into energy and energy into matter was known to Sir Isaac Newton" isn't anything other than a flat-out lie.  And because Newton had a simplistic idea that turns out has absolutely nothing to do with reality, that totally proves that Einstein's theory (which has to date held its own against all sorts of crazy tests) must just be a rip-off of Newton's glorious idea!

Thu, 01/03/2013 - 19:26 | 3120395 spastic_colon
spastic_colon's picture

ya, kinda like slavery, nobody really talks about after while the african families were willingly selling their family members to the europeans

Thu, 01/03/2013 - 19:51 | 3120455 IvyMike
IvyMike's picture

Ah, African based slavery, the first market of civilization.

Yeah, let's talk about it.

Thu, 01/03/2013 - 20:23 | 3120480 akak
akak's picture

Somehow, I get the feeling that you have been here before, and we have heard all this before --- are you sure that you do not in fact wish to harangue us all about "blobbing-up US 'american' citizenism" civilization?  You know, how "farming the poor and extorting the weak" is the eternal 'american' citizenism, er, civilization, nature?  Sound familiar?

Hey, it's the mattering thing!


PS: In the future, it might pay for you to be a bit less obvious in your attempts at monolizing the speeching means.

Thu, 01/03/2013 - 20:37 | 3120577 TheFourthStooge-ing
TheFourthStooge-ing's picture

The crustiest bit: this parangong of civilizationalism will appeared then during absenteeification of the George Dishwashington of citizenism.

For the tale of civilizationalism to be valuable, one has to checked validity of it.

Casting an hypothetical against reality is definitively a nasty thing for civilizationalists making interpretations whether or not the state has this or that priviledge.

Civilizationalism could have charm of battling wind mills.

Thu, 01/03/2013 - 20:52 | 3120635 akak
akak's picture

It's like the old saying: "When God closes a door, he opens a window --- and throws another citizenism/civilizationism turd onto the nearest roadside".

Thu, 01/03/2013 - 21:01 | 3120672 IvyMike
IvyMike's picture

monolizing the speeching means

Can't compete?

Thu, 01/03/2013 - 21:09 | 3120685 akak
akak's picture

With AnAnonIvyMike?

No fucking way!

Make me laugh!

Thu, 01/03/2013 - 22:29 | 3120903 Apostate2
Apostate2's picture

You made me laugh! Well done.

Thu, 01/03/2013 - 19:29 | 3120399 falak pema
falak pema's picture

actually it started wihth Helen of Troy.

That event meant we had reached a state where we were sedentarised into cities, we had arms and our worst enemy was the other guy; not the Dinosaur anymore. Paleolithic had gone Neolithic bigtime. 

WHite civilization went down that road faster and harder than anybody else. Thats for sure.

Urban armed civilization was ramped up by White men after they discovered the industrial revolution. 

But upto that age it was every man doing it an all continents. Now its WMD in your back yard. Awesome.

Thu, 01/03/2013 - 20:48 | 3120605 Shell Game
Shell Game's picture

So it all started with Helen of Troy, daughter of Zeus and Leda?  ;)

Fri, 01/04/2013 - 02:39 | 3121252 NewThor
NewThor's picture

It started with Prometheus. 

Fri, 01/04/2013 - 08:11 | 3121462 jlindesay
jlindesay's picture

Heard of the millihelen?  It's the unit of beauty required to launch one ship.

Thu, 01/03/2013 - 20:55 | 3120502 michael_engineer
michael_engineer's picture

Do the equations in this article somehow inherently make the possibly very incorrect assumption of steady state inputs for resources or do they account for possible declining inputs due to Hubbert like curves trends and the high grading extraction profiles we've been exhibiting for many decades now? Maybe that's where the FEDs other math models(Ferbus, Edo, and Sigma) are going wrong in assuming steady state conditions.

Thu, 01/03/2013 - 19:17 | 3120370 quintago
quintago's picture

"moreover", "similarly", "thus", "therefore". In college my buddies and I would always joke that the amount of bullshit spewed onto a term paper was directly proportional to the number of conjunctive adverbs it contained. Turns out, the same test also translates well to mathematical equations.

Thu, 01/03/2013 - 19:20 | 3120380 FEDbuster
FEDbuster's picture

When in doubt, bury them in bullshit.

Thu, 01/03/2013 - 19:22 | 3120386 IvyMike
IvyMike's picture

No evidence to the contrary? Poor dear. Whine away, loser.

Fri, 01/04/2013 - 00:15 | 3121108 perchprism
perchprism's picture


You are a stupid cocksucking commie faggot.  Congratulations.

Fri, 01/04/2013 - 06:14 | 3121379 IvyMike
IvyMike's picture

Psychologically projecting today?

Fri, 01/04/2013 - 05:37 | 3121367 awakening
awakening's picture

Technique #3 - 'TOPIC DILUTION'


Fun game Zh'ers I like to call "spot the troll".

Thu, 01/03/2013 - 19:07 | 3120335 IvyMike
IvyMike's picture

It's rather disingenuous to list brutal political systems without listing your own brutal political system, in one metric--genocide--the most brutal of all:

"[It] was, far and away, the most massive act of genocide in the history of the world." (prologue)

"During the course of four centuries - from the 1490s to the 1890s - Europeans and white Americans engaged in an unbroken string of genocide campaigns against the native peoples of the Americas."(p.147)

~David Stannard

That's what capitalism takes, same as communism. Natural Non-State peoples must be destroyed to make way for City-State society (civilization.)

Thu, 01/03/2013 - 19:11 | 3120351 EmmittFitzhume
EmmittFitzhume's picture

Concern Troll

Do NOT follow this link or you will be banned from the site!