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David's Macro Blog

Analysis and commentary on business, economics, real estate, financial markets, and other fun topics

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Archive for November, 2009

Classical economics teaches that an economy, if properly managed, will remain in a state of equilibrium. This is because economists assume a perfect market place with rational actors who maximize their returns through their uniform access to all information.

As we know, the REAL world is much different from economic equations.

Instead, the real world economy moves through market cycles. These market cycles fluctuate between boom and bust as the market participants move through cycles of fear and greed and all sentiments in between.

The past 10 years have seen some amazing bubbles which were not sustainable because the asset prices got out of line with the underlying fundamentals supporting the market.

Let’s review the bubbles in our recent memory.

2000 Nasdaq index over 5000 – 9 years later the index is still off 60% from its peak.

2007 Real Estate Bubble – In just 2 years some markets are off 60% and the average is off 30%.

2008 Oil Price – The price per barrel peaked around $150 but then fell to under $40 in less than 2 years.

2009 US Treasuries??? If the future holds inflation then this may be just as large as the 2007 real estate bubble. However, if we continue with deflation, then maybe current yields are the new normal.

So, what bubble are we in now?

Please comment below and let me know what you think.

You might also like these posts on similar topics:

During our last visit in Scottsdale, Amber and I toured 3 houses purchased at the Maricopa County trustee sale auction in October 2009.

You can watch all 3 videos below.

Related Posts:

You’ve probably read about the Marshmallow Test or at least heard it referenced with regards to delayed gratification and success in life.

Recently, Stanford scientists replicated a classic experiment from the 60s, in which they tested children’s ability to delay gratification. Researchers gave each child a marshmallow and told them that they would receive a second marshmallow — if they were able to wait until the researcher left and returned.

Recent Stanford Reproduction of the Orignal Test

Marshmallow Test Reproduced by Dr. David Walsh

The original marshmallow experiment was conducted by Walter Mischel in the 60s. Afterward, Mischel followed the children’s progress through adolescence – finding that those who were able to wait without eating the marshmallow were better adjusted, “more dependable”, and got higher SAT scores too.

The lesson: Kids who wait — later in life do great! Or perhaps you’ve heard it this way: “Good things come to those who wait.”