Circular Bubble Logic

Tyler Durden's picture

Some have suggested that the surge in "bubble-talk" implies there can be no popping of the bubble, Pater Tenebrarum has a different perspective...

Submitted by Pater Tenebrarum of Acting-Man blog,

Interest In Bubbles Makes them Disappear – Like Magic

There comes a time in every bubble's life when participants who have a stake in its continuation have to employ ever more tortured logic to justify sticking with it. We have come across an especially amusing example of this recently. “Good news!” blares a headline at CNBC “Bubble concern is at a 5-year high”. Ironically, since at least 1999 if not earlier, the source of this headline has been referred to as 'bubble-vision' by cynical observers (or alternatively as 'hee-haw'). Let us take a look at what is behind this 'good news' announcement:

“People are more interested in the concept of a "stock bubble" than they've been at any time since the housing bubble collapsed. But ironically, that very concern could be what prevents another bubble from forming anytime soon.

According to Google Trends, worldwide search interest in the term "stock bubble" is higher in November 2013 than in any month since October 2008. The rise in interest is even more pronounced in the United States, where in data going back to 2004, the volume of searches for the term is the highest it's ever been (with the exception of the bubble-period around November 2007.)


Paradoxically, many market participants say this should actually calm those who fret that equities are currently in a bubble. "That means, conclusively, that there is no stock bubble," Jim Iuorio of TJM Institutional Services told "It means that people aren't caught up in the hysteria of being deluded that there is no bubble, which is the only way that a bubble can exist."


Mark Dow, a former hedge fund manager who writes at the Behavioral Macro Blog, diagnoses investors with a bad case of "disaster myopia."


"If you went through an earthquake, or were mugged, or whatever traumatic event it might be, you overestimate the probability of that event occurring again," Dow said. "It's because we just went through a bubble that everyone's looking for them. Generals always fight the last war, and firemen fight the last fire." Dow similarly believes that the tremendous deal of concern about a bubble will "probably prevent it," at least for a little while.


"It's never obvious, by definition, or you wouldn't get the bubble," he said.

(emphasis added)

At that point we really had to laugh out loud. There is no bubble because people search for the term on Google? Their act of searching for the term will 'prevent a bubble' from forming? Really? No-one seems to have noticed that the 'record high in bubble searches in November 2007 in the US' definitely did not indicate that one shouldn't be concerned.

Before we look at some empirical evidence that immediately blows these notions out of the water, let us briefly look at the basis of such claims. The idea that a 'bubble is never obvious' is obviously wrong, because as a matter of fact, all bubbles are 'obvious' to varying degrees to a great many people. Participants are just never sure how big they will become and all of them are hoping that they will correctly guess when the moment to jump off has arrived. In fact, this article itself – which denies the existence of a bubble – is a perfect example of the rationalizations people use to talk themselves into remaining  enmeshed and invested in the bubble. Note that no-one mentions valuations, monetary policy, or any of the other yardsticks or forces that may be relevant. Instead, the argument is solely based on search trends on Google!

We already briefly discussed behaviorism in a critical appraisement of Robert Shiller's article on economic science (see: “Economics Is a Science”). It is of course true that quite a bit of the decision making on the part of investors and speculators becomes increasingly irrational as an asset bubble progresses. The rationalizations tend to become ever more absurd once it becomes difficult to come up with tenable, rational arguments for remaining invested. It is definitely worth studying these phenomena and being aware of them as an investor.

However, what we must also ask is: are there fundamental economic causes for the formation of bubbles? The Mises Institute recently published an article by Frank Shostak that also takes a critical look at Robert Shiller's theories (we encourage readers to read Mr. Shostak's article in its entirety. Similar to the point we made in our article, he argues that behaviorism is definitely not economics. It belongs to the realm of psychology). A few excerpts:

“[...] at the World Economic Forum in Davos, Switzerland on January 27, 2010, Nobel Laureate in Economics Robert Shiller argued that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness. Shiller is of the view that a bubble is a form of psychological malfunction. Hence, the solution could be to prepare a checklist similar to what psychologists do to determine if someone is suffering from, say, depression.


1. Sharp increase in the price of an asset.

2. Great public excitement about these price increases.

3. An accompanying media frenzy.

4. Stories of people earning a lot of money, causing envy among people who aren’t.

5. Growing interest in the asset class among the general public.

6. New era “theories” to justify unprecedented price increases.

7. A decline in lending standards.


What Shiller outlines here are various factors that he holds are observed during the formation of bubbles. To describe a thing is, however, not always sufficient to understand the key causes that caused its emergence. In order to understand the causes one needs to establish a proper definition of the object in question. The purpose of a definition is to present the essence, the distinguishing characteristic of the object we are trying to identify. On this, the seven points outlined by Shiller tell us nothing about the origins of a typical bubble. All that these points do is to provide a possible description of a bubble. To describe an event, however, is not the same thing as to explain it.”

(emphasis added)

This is a key point. Bubbles don't just drop out of the sky because a critical mass of people begins to display symptoms of a kind of mental illness. There is a causative force at work, something that actually enables bubble formation. So what actuates financial asset bubbles? For asset prices to rise sharply, there is a sine qua non, and that is an expansion of the money supply.

As Shostak points out, an expanding money supply diverts resources from wealth-generating activities to activities that end up consuming wealth, as it enables exchanges of nothing (money from thin air) for something (real resources). Monetary pumping by the central bank and credit expansion by fractionally reserved commercial banks are therefore at the root of bubbles from an economic standpoint.

We recently showed this chart of the broad US money supply TMS-2. Take a close look at the period from 2008 to today specifically. We would argue this is prima facie evidence that a bubble is indeed underway.


The History of Google Searches on Bubbles

When reading the CNBC article discussed above, we dimly remembered that Robert Prechter once mentioned that (paraphrasing) “as a bubble matures, there is increasing evidence of bubble talk”.

This is actually to be expected, as asset bubbles tend to exhibit certain repetitive patterns. As they move toward their final stage, corrections as a rule become ever smaller, and the ascent of prices steepens (see this discussion of the 'Sornette bubble model' by John Hussman).  In short, it becomes obvious that something unusual is going on. Those who argue that prices cannot be justified by the fundamental data tend to become more vocal as prices continue to rise above what they regard as fair value and public debate intensifies.

In order to find out if there is any correlation between price peaks and Google searches for the term 'bubble' in the context of specific assets, we decided to take a look for ourselves. The results are surprising.

It seems that peaks in 'bubble searches' slightly precede peaks in the prices of the assets concerned. In other words, a strong surge in 'bubble searches' is definitely not a reason to be complacent. On the contrary, it is a warning sign that a major price peak could be imminent. In the case of stocks, the correlation between 'bubble search' peaks and price peaks is a bit less precise than in the other assets we have looked at, but it is still noteworthy.

Below are several charts illustrating the situation:



Bubble search-oil

Google searches for 'oil bubble' rose strongly as oil approached its 2008 top and peaked exactly one month before the oil price did – click to enlarge.



Bubble search-silver1

The peak of searches for the term 'silver bubble' occurred in April of 2011. The Silver price peaked on the last trading day of April – click to enlarge.



Bubble search - gold

Searches for 'gold bubble' peaked in August 2011. The gold price peaked in early September – click to enlarge.



Bubble search-stocks

Searches for 'stock market bubble' peaked in May of 2007. The S&P 500 made an initial peak in July, then rose one more time to a slightly higher high in October. Currently searches for 'stock market bubble' are in a strong uptrend, but still remain below previous highs. As this chart shows, the rise into 'search peaks' often happens in a very short period of time, so this bears watching – click to enlarge.




It definitely cannot hurt to be aware of market psychology and sentiment. However, the argument that a surge in searches for the term 'bubble' on Google can be interpreted as an 'all clear' for a bubble's continuation seems to have things exactly the wrong way around. Moreover, it certainly can neither show that there 'is no bubble', nor can it prevent one, as the economic cause for bubble conditions is money supply growth. One must therefore consider what is happening in the monetary realm when trying to ascertain whether a bubble exists. The misguided behavior of financial market participants that can be observed during bubbles is merely mirroring the clusters of entrepreneurial error monetary pumping brings about.


Addendum: Retail Euphoria

Incidentally, retail investors have recently become quite euphoric. We have  discussed this phenomenon previously, and shown that equity fund flows are usually strongly positively correlated with prices (sell low, buy high is the motto). In the meantime the news has found its way to Bloomberg as well. There is not much that is new here of course, aside from the information on allocation percentages which we found quite interesting: 

“Investors are pouring more money into stock mutual funds in the U.S. than they have in 13 years, attracted by a market near record highs and stung by bond losses that would deepen if interest rates keep rising.


Stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, according to Morningstar Inc. estimates. Even with most of the cash going to international funds, domestic equity deposits are the highest since 2004.”




The market run-up has left investors as a group with an unusually high allocation to equities, at 57 percent, said Francis Kinniry, a principal at Valley Forge, Pennsylvania-based Vanguard Group Inc., the world’s largest mutual-fund company.

Equity allocations were higher only twice in the past 20 years, Kinniry said: in the late 1990s leading up to the technology stock crash of 2000, and prior to the 2007-2009 global financial crisis. He based his calculations on the total amounts of money in mutual funds and exchange-traded funds across asset classes at U.S. Firms.”

(emphasis added)

We hasten to add that the information on recent fund flows should not be regarded as a market timing aid. As we have often pointed out, such information is best characterized as a 'heads-up', a sign that one must pay attention to the fact that risk is on the rise.


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Bob Sacamano's picture

I would prefer many fewer people talking about the current bubble.  It will likely extend its life. 

SheepDog-One's picture

Contrary to all this prevailing conventional 'wisdom' that there is no bubble, and any talk of a bubble only makes the bubble stronger, I'm convinced we're rather on the verge of the morning when they pull the rug out and leave everyone flopping around wondering WTF just happened...again.

hedgeless_horseman's picture



The misguided behavior of financial market participants that can be observed during bubbles is merely mirroring the clusters of entrepreneurial error monetary pumping brings about.

...the clusters of entrepreneurial error INSANITY monetary pumping brings about.

"It is difficult to get a man to understand something, when his salary depends on his not understanding it."
-Upton Sinclair

TBT or not TBT's picture

The most obvious and biggest type of activity being pumped by QE has been the federal leviathan. The money pumping has rather infamously not gone into productive investment lately. Like under FDR, regime uncertainty has dampened private investment terribly.

Chris Jusset's picture

What makes this bubble different is that it is the FIRST TIME IN HISTORY that the Fed is intentionally blowing the bubbles.  This current bubble-blowing is a deliberate, premeditated act.  The Fed has been blowing bubbles for 5+ years (with ZIRP, QE, etc), and now with Yellen in power, the Fed will continue this up until the bitter end.


Recall that in 2000 during the height of the Tech Bubble, Greenspan actually raised interest rates because he was afraid of bubbles; and in 2008 during the height of the Housing Bubble, interest rates were at 5.25%.


Today, however, interest rates remain at ZIRP ... because the Fed is deliberately putting the pedal to the metal to blow the biggest bubble in world history.

Imminent Crucible's picture

"it is the FIRST TIME IN HISTORY that the Fed is intentionally blowing the bubbles."

Not quite. Go back and read the full, unredacted minutes of the April 2004 FOMC meeting. Chairman Greenspan and Donald Kohn are high-fiving each other over their success in getting both stock and house prices to rise together, and agreeing that it would be utterly foolish to discontinue such a successful policy at that point.

OwnSilverPlayMusic's picture

This time it's fucking different.  Get over it already.  TWTR and FB are worth more than water, energy and precious metals.  What's so hard to understand?  Oh you haven't been lobotomized and reeducated yet?  Well a trip to room 101 is in store for you!  All praise to the mighty Obama!

NOTaREALmerican's picture

Re: This time it's fucking different. 

It is different because you've got QE.    The entire US has been a debt-bubble for 60+ years, since (roughly) Johnson's guns-n-butter era.   

But, over time, the percentage of "debt-bubble" benefit has shifted toward the smartest-n-savviest people.  Now, almost all of the benefit of the debt goes directly to the top 10%.

Survival of the fittest, bitchez!

TBT or not TBT's picture

LBJ got into office almost exactly 50 years ago today. Indeed the corrupt sociopath caused lots of strains to pile up, which Nixon fatally squirmed us out of by ending the gold standard.

Herd Redirection Committee's picture

You know that speech in The Godfather,  where Vito tells Michael he wishes he could some day be a Senator, or President?  Thats what LBJ's presidency reminds me of.

topshelfstuff's picture

Though there now exists info that show LBJ considered Nixon guilty of Treason, prior to the elections [and I should add that even the top GOP Senator agreed] LBJ,a DEM, didn't disclose this, not even to H. Humphrey which would have Insured a Loss for you have to ask Why LBJ kept quiet.

But I'm mainly posting to point out one thing that should be obvious, though Never mentioned. And I believe most here would agree that Nixon, like other Pres.'s, is little more than a Puppet whose Strings are controlled by the Puppet Masters. The Common Sense Proof that the Closing of the Gold Window was Planned years in advance is shown by the Removal of US Silver Coinage, one of the first moves LBJ did. Keep in mind that it was Nov 22 1963, too late to pull Silver Coinage out in 1964, so 1964 was the last year we had circulated Silver Currency. I believe that shows that the 1971 reneg of Bretton Woods was, as I said, Planned years in advance.

LBJ accused Nixon of treason

Uploaded on Dec 20, 2008
Robert Parry discusses the evidence of Nixon's treasonous legacy and the media's choice to ignore it

[ this was the out of the Playbook, later example known as Iran-Contra, but this came first and 99%+ Americans don't know about added 5 more years to the Vietnam War over 20,000 more American Troops killed, a million plus people, and so much more...think about the importance of this info, had LBJ let out out we never would have had Nixon be Pres...I hope you can figure out why LBJ Had to keep quiet ]

topshelfstuff's picture

I hope you understand my point. They had to get Silver Coins Out of circulation First, and it took 7 years to accomplish that. The Gold Window could Not be Closed with Silver Coins in circulation

SheepDog-One's picture

So there can only be a bubble if no one thinks there is a bubble? This is more ridiculous than the Citi guy who said that a bubble has never been called before a bubble burst.

Ridiculous delusion.

ParkAveFlasher's picture

How do I know that google search metrics aren't manipulated by TBTF?  Even mediocre firms carefully hone their brand image by analyzing and managing their digital impressions.  And on another note, what are the google stats for searches of "boiling frog pots"?

NOTaREALmerican's picture

Another graph/post showing we are about two years away from "the top".   The other post was a few days ago.

It's normal.    Why is everybody so obsessed about normal human behavior?   

Bubbles are how the smart-n-savvy people screw the dumbasses.     The timid lose by not participating, the gamblers loose by staying in to long.    In a survival of the fittest society what OTHER system would allow the "most fit" to screw the "less fit" easier than this?

Marco's picture

It's not the gamblers who lose for he most part, only a percentage of them lose ... it's the timid who lose, but not by not participating. Their money is what's all in at the top of the bubble, not by choice but because smart people (with no real skin in the game) manage their savings.

fonzannoon's picture

The bubble will exist until there is actually an alternative to equities that people feel they should own. The fed has dismantled every other asset class. It's zirp 4eva so there is no end in sight. and in fact people are still in the early stages of putting money back into the market. Unless the gold market breaks and gold goes stratospheric this will continue. As of right now people see prices rising and stocks are now the only hedge against inflation.

There is your stock pumping post for the day. I am now fixing the suspenders on my suit and slicking my hair back before i get in my mercedes and slam the horn at some bag lady crossing the street. 

NOTaREALmerican's picture

It's the correct assesment tho.  

Everything the Fed has done has been to push people to take risks.   The dumbasses are trying to go into debt by buying automotive bling and the top 10% are trying to ensure their future life styles can keep up with inflation so they must go into stocks.     The Fed said that's what they wanted to do,  and people are doing it.

ForWhomTheTollBuilds's picture

“People are more interested in the concept of a "stock bubble" than they've been at any time since the housing bubble collapsed. But ironically, that very concern could be what prevents another bubble from forming anytime soon."


I once read on book on the monetary goings on during the Reign Of Terror.  The initial debate about whether or not to start printing money was fierce having just been through John Law's bubble.

The ultimate decision to start printing was made on the grounds that France's last experience with moneyprinting was such an incredible disaster that, when you think about it, who better to print money but get it right this time?  There was no one alive with more expertise on the catastrophe of hyperinflation than the current elites of France.


And so they began to print


Sudden Debt's picture

I know a good short!

in Germany they wanne ban all Apply products because thhey're spy sensitive

And in companies like where I work and where we have government customers we got a letter telling us we can't use apple products anymore if we want to keep doing business with government instances.

iphones, ipads... all out... We're switching over to dell tablets and samsung phones.

TBT or not TBT's picture

Establish a good relationship with your iproducts and maybe you will be spared.

firstdivision's picture

ZOMG !  Here's another bubble about to burst, infact its already rolling over

TBT or not TBT's picture

The biggest bubble, govt bonds, is propping up not "clusters of entrepreneurial error" but something epically worse, a central planning enhanced civilisational implosion.

Sufiy's picture

Bitcoin will be interesting to watch - Mother of all Bubbles with very important message, that the world is fed up with FIAT

Peter Schiff: Bitcoin vs. Gold

  Peter Schiff puts together the very compelling case for Bitcoin Bubble "Tulip 2.0" and why nobody should mistaken it with "Gold 2.0" Bitcoin replicates almost all the Gold properties apart from the most important one - Gold's Intrinsic Value. Bitcoin was around for 4 years - Gold was around for 4 thousand years, will Bitcoin be around in the next 4 years? It can be substituted by another cryptocurrency - which are plenty around already - or, maybe, even Gold backed electronic cryptocurrency one day. Time Is To Go For Gold: Bitcoin Just Crashed ... Again – High Above $900 And Just Low at $540 

Herd Redirection Committee's picture

The mania in Litecoin and NameCoin equals or surpasses that of Bitcoin, at the moment.


devo's picture

Yeah but you can say the same thing about gold bugs, who say things like, "only paper gold is going down", sorry, dude, but I can buy coins under spot on craigslist, so physical is actually lower than paper price since the ETFs follow spot.

Pareto's picture

The popular contrarian view is to usually (not always) take the position that if its "party like its 1999", then you take the other side and go short.  If its "there's blood in the streets everywhere", you take the other side and go long.  I admit that is very simplified - purposely for brevity.  But, the popular meme today is, "if everybody's talking bubble, then its not a bubble".  The behavioural implication, according to CNBC et al is to stay long.  I would argue that IF EVERYBODY is saying its a bubble, and therefore, EVERYBODY (by contrarian implication) is saying it must not a bubble (because everyone is saying its a bubble), then, in my opinion, its still a fucking bubble because it begs the question, "why is everybody concerned we are in a bubble to begin with?". Otherwise, the contrarian view becomes an abused and useless meme.  The meme becomes disingenous - almost meaningless.


For, the same thing was occuring in the late 20's.  Everybody was long - but, there were many bubble attitudes about then too.  And, eventually, everybody learned the hard way that it indeed was a bubble.  Now, just like then, the contrarian approach to resolving or reconciling bubble v. no bubble, eventually regresses to a decreasing oscilating range that flatlines to where the contrarian meme defined above is almost meaningless. At which time, I think it becomes a question of real value and math.  And to help us with that, we get the benefit of ZH who provides some calculus that helps to at least differentiate between memes and provide some clarity.  In my opinion, the fact that we continue to hear "taper v. no taper" about 100 times per day, tells me that whether we want to admit it - its a bubble.  Hanging on EVERY word or every minute of the FED to define one's next move - to me - is indicative not of a market, but, of a purely manipulated free lunch play and that ultimatley, EVERYONE knows that its a bubble.  The problem is, right now, everybody smells smoke, but, until somebody races for the exits, the movie for now, plays on.

Clowns on Acid's picture

The Fed is one party that relizes that they are  in a debt bubble. The Indices, particularly the margin constrained high tech companies (forget what you read about moar volume / revenues) are bubbling, but the average man on the street is trying to keep the water below his bottom lip.

Unemployment (and underemployemnt ) is closer to 10% than 7%, no wonder the cab driver is not talking about "stawk market bubbles".

In previous bubbles, everyone was partyin' hard. These days despite a record S&P, the cab business is just mediocre busy.