Re: Re pension funds

[Doug Henwood <dhenwood@xxxxxxxxx>]

Oliver Kamm, aka Dr Pangloss, wrote:

>Sure there is, though I would question your use of the term "bubble",
>which assumes
>what it is you're trying to prove. If new information becomes available
>that causes
>the consensus of investors to revise their judgement of the stock market's
>value
>radically, then huge and rapid price movements will result. Consider what
>happened to
>the UK stock market when sterling left the European Exchange Rate
>Mechanism - not a
>bubble, but a rational response to new information.

By coincidence, I just got in the mail and promptly read "Asset Market
Hangovers and Economic Growth," Federal Reserve Bank of New York Research
Paper #9704, by Matthew Higgins and Carol Osler, February 1997. (You can
order it from the FRBNY's web site; the full text, however, isn't online.)
The paper explores the issue of whether an asset price bubble developed in
OECD countries from 1984-89 that broke, and led to the bear markets and
weak economies of 1990-93. Their answer, cautiously, is yes. This is
interesting not only in itself, but for the very fact that the New York Fed
is studying the relations between bubbles and the real world. Given that,
and Alan Greenspan's Congressional testimony yesterday, I'd guess that our
central bank is quite worried about bubbles and their real world effects.

A bull market in UK stocks following the withdrawal from the ERM is a very
bad example of a bubble, since that withdrawal led to British economic
recovery. A bubble happens when asset prices get far out of line with
fundamentals, but a rise in UK stocks was correctly anticipating an
improvement in the fundamentals.

Doug