This Is How You Know When the Stock Market Is in a Bubble

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Joe Weisenthal (0:26)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:31)

And I'm Tracy Alloway.

Joe Weisenthal (0:33)

So Tracy, I have to admit, I have a certain pet peeve about other financial journalists.

Tracy Alloway (0:39)

Just one, just one, Joe.

Joe Weisenthal (0:40)

Actually, a lot. Haven't you been complaining that I've been attacking financial media too much, like at work and stuff like that? Well, good, because now I have an entire setup to an episode that's basically me just venting about other people in our field.

Tracy Alloway (0:55)

This is exactly what I wanted.

Joe Weisenthal (0:58)

No, you know what really annoys me? The prevalence of people to say that there is a bubble in everything.

Journalists are always calling things a bubble. If you go back to any market at any time, you could probably find someone who is stroking their chin and trying to sound smarter and more wise than everyone else and saying, oh, this is a bubble, it looks like to me, because they want to be the wise, skeptical one that didn't get caught up in the hype.

Tracy Alloway (1:23)

Right.

I mean, I get the complaint, but isn't that sort of like our goal in life is to be the watchdogs with the potential disaster scenario always ready at hand? Shouldn't we be warning people?

Joe Weisenthal (1:37)

We should be. I think we should be judiciously warning people. But I mean, the goal should be right, to be right, not necessarily. And there are other ways to express concerns about development rather than calling something a bubble all the time.

Tracy Alloway (1:52)

Immediately say bubble. OK, I'm with you that the term bubble might be overused, yes.

Joe Weisenthal (1:57)

That being said, it's kind of timely now because just talking about the stock market, the stock market is at highest level or very close to its all-time highest levels. Many traditional valuation measures are arguably stretched.

And there was a survey recently done that showed Americans are more bullish about the stock market than they have been at any time since the tech bubble.

Tracy Alloway (2:22)

Right. Americans and also their fund managers, right? Everyone seems to be super optimistic at the moment.

Joe Weisenthal (2:28)

Exactly.

Tracy Alloway (2:29)

At least about equities.

Joe Weisenthal (2:30)

Yeah, at least about stocks. And you know, there's that just that alone would be cause for some reason to perhaps be concerned. But then, you know, you sort of layer on top of that, the sort of volatile political environment. And you certainly have a lot of people right now who are starting to throw around the B word again, with regards to stocks.

Tracy Alloway (2:52)

The B word. But I mean, when you hear a statistic like people are the most positive on stocks since the year 2000, you immediately remember what happened in the year 2000 or shortly thereafter.

Joe Weisenthal (3:05)

No, you have to immediately say, well, that might be a bad contrarian signal. But rather than just speculate and rather than just throw out random statistics and say, ooh, scary, the last time this happened, markets plunged right afterwards.

How about we actually talk to someone whose expertise is in identifying when the market is in a bubble or not?

Tracy Alloway (3:26)

You sure you don't just want to like stroke your chin and pontificate?

Joe Weisenthal (3:31)

We could do that a few more minutes and I can just rant some more. But I don't know, maybe we should actually talk to someone who knows what they're talking about.

Tracy Alloway (3:37)

Okay, let's do it. Who is it?

Joe Weisenthal (3:38)

So today, we are going to be talking to Robin Greenwood. He is a professor at Harvard Business School.

And as part of his research, he looks into what are the true characteristics of stock price bubbles. What do they have in common? How do you distinguish between what is a bubble and what's just a rising boom?

Tracy Alloway (4:02)

He sounds perfect. Let's bring him on.

Joe Weisenthal (4:04)

He is perfect. Robin Greenwood, thank you very much for joining us.

Robin Greenwood (4:17)

Hi Joe, hi Tracy.

Joe Weisenthal (4:18)

So, let's just start with a question. Why is it so hard to call bubbles? People, as we were just talking about, people do it all the time. Sometimes it seems really obvious that something must be in some irrational price. Actually, you know what, here's the question.