[quote author="usctrojanman29" date=1245424397]Be nice Graph, I think he's been brainwashed by all the talk of green shoots while the residential REOs and commercial real estate troubled loans pile up. Or maybe he's been listening to Jim Kramer a little too much.</blockquote>
<a href="http://www.moneyweek.com/investments/commodities/the-next-big-investment-bubble-green-energy-14911.aspx">Here is an article that discusses the next bubble</a>. With our very own Vernon Smith showing how people will get sucked in not only once, but twice, and a third time when you reduce inventory and increase liquidity, much like what the Fed is doing now and what is happening in RE.
<em>In a recent research note, Montier took a look at the psychology of bubbles. As suggested earlier, you'd think that investors would learn. If they'd seen one bubble, they'd be more careful in future.
And in fact, they do learn. An experiment conducted by joint Nobel prize winner Vernon Smith used an investment game where investors could trade a dividend-paying equity under four different random economic conditions, each of which would result in a different dividend payout.
In the first game, investors at first undervalue the equity, then massively overvalue it, creating a bubble which then deflates. Smith then got the same people back to play the game again. What happened? Well, says Montier, "far from learning from their experience in the first round, participants generally go on to create yet another bubble!" And when they were asked why, "the most common response was they thought they could get out before the top this time!"
However, when Smith asked the same players to play a third time, this time they'd learned. "You end up with a much tighter correlation between the market price and fundamental value," says Montier.
So twice bitten, thrice shy, it seems. And you might therefore expect the current generation of investors to have learned from the two big bubbles of the past decade.
...but they can get sucked into creating them
But that's not the end of the story. Smith found that there was a way to get experienced investors back into bubble mentality. How? He cut the amount of stock available in half, and doubled the amount of cash in the game, "effectively creating what might be termed a massive liquidity surge." This time around, even the experienced investors were sucked back into creating another bubble, although it peaked earlier than the previous ones.
"A massive liquidity surge" is exactly what the world's central banks are trying to create just now. Montier says he has no idea if it will be large enough to "reignite a bubble (and of course another crash afterwards)." But as US fund manager Jeremy Grantham of GMO has pointed out previously, we're currently seeing "the greatest monetary and fiscal stimulus by far in US history". So if that doesn't do it, arguably nothing will. </em>
