Calling this a bubble would make the word bubble meaningless. Alan Greenspan said "irrational exuberance" in December 1996. He may have been right, and we may be in a similar period now. But when most people talk about the bubble they mean the period of total insanity from around 1998-2000. I think "rational exuberance" better describes today.
Two things:
1. The key distinction: when investors invest they think "I'm gambling and I hope I win, but there's a chance I won't." When bubble people buy assets they think "I'm buying something that is guaranteed to go up in value. Free money!" If bubble people aren't buying then it isn't a bubble.
2. When sophisticated investors make wild bets in first rate companies (amazon, ebay, facebook, twitter) and those bets payoff in a big way it might lead to less sophisticated investors making wild bets in more mediocre companies. That would be "irrational exuberance" and we're (maybe) not even there yet. THEN when those bets payoff in a big way then non-investors might start buying to get some of the free money. That's the bubble.
tldr: Valuations are irrelevant. All that matters (for bubbleness) is the psychology of the buyers.
This feels a lot like 1995 or 1996 to me. New technology (WWW then, mobile phones and cloud computing now), just beginning to get mainstream adoption. Coming out of a recession that had been a 4-year funk. Fairly loose monetary policy. A couple hot stars beginning to IPO, but nothing terribly crazy.
People said there was irrational exuberance in 1996, but it took 5 years before the bubble actually burst, and it went up a lot in the meantime.
Ask me in 5 years, and I think then we'll be in a bubble. Now, we're just in a recovery, but not everybody knows it yet.
Me too. Ergo it could produce another bubble. But here's why I'm doubtful:
1. Wild prediction: our free money era will be over in 3 years. Last time the money got cheaper as the bubble got bigger, due to the fear of Y2K.
2. No thundering herd of new retail investors. And it wasn't just that etrade and datek opened up the stock market to thousands of novices. They were novices who had watched the market rise for decades and never really go down.
The Fed's the giant wildcard today. Bernanke claims that he has a plan to mop up the excess liquidity in the market. If he starts tightening, I'd predict a sharp double-dip (like 81-82), followed by sustained 80s-style prosperity. If he doesn't tighten or tightens too late, I think we'll get another bubble like the late 90s.
Look at the price of gas. Last time it was this high, it was february of 2008. In 4 months, gas shot up to its peak, and we all know what happened right after that.
Second dip is coming. Lots of layoffs, even in tech industry.
Aside: Here's an example of what "new paradigm" language actually sounds like. This from the real estate bubble (and Bob Toll is Bertrand Russell compared to what the "new economics" people were saying in the tech bubble). New York Times:
In the past couple of years, Toll and his deputies have begun analyzing European housing data to see if they hold any lessons for a maturing American housing market. Toll has been talking up the research to stock analysts and the financial press for the past year. His conclusions carry a whiff of new-paradigm thinking, but he nevertheless seems convinced that Europe's present-day reality is America's destiny. I asked Toll what our children - my kids are both under 8, I told him - would be paying when they're ready to buy. "They're going to live with us until they're 40," Toll said matter-of-factly. "And when they have their second kid, then we'll finally kick them out and make them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income."
I grew alarmed. Was he kidding? He assured me he was not. "It's all just logic," Toll said. "In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half." The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they're going to get only half as much. "And that average, million-dollar insane home in the burbs? It's going to be $4 million."
...
One idea that shapes the outlook of real-estate economists is the notion that cities, in a rough conceptual sense, are replacements for one another. A city is founded, and residents and industries settle there; over time, that city and its metro area might reach a population of a million residents. As demand to live there increases and the supply of good land diminishes, housing gets more expensive. But lo, another city arises nearby, where land is cheaper and jobs are plentiful. Residents can now leave the first big city, if they choose, and move to the second, smaller city. Until, that is, the second city becomes large and crowded and expensive as well. Then another city grows nearby, and so on. As pressure on prices and land builds, a new city can act as a pressure release.
It's possible that this model has broken down over the past few years. A small cadre of economists, in fact, has begun to ask whether the irrepressible inflation of home values in many coastal metro areas actually reflects a deeper logic based on the straitened land supply in these cities. Boom-time rationalists always run the risk of earning a black mark of infamy like that worn by the Yale professor Irving Fisher. (Just before the 1929 stock-market crash, Fisher declared that stocks had reached "what looks like a permanently high plateau.") And it is virtually impossible to find an economist - or a home builder, for that matter - who thinks the recent growth rates in home prices are sustainable; even the most sanguine among them predict more moderate appreciation over the long run. Yet almost without exception these thinkers, though they come from different political persuasions and even different research specialties, have attributed high home prices to zoning. Further, they have amassed a fair amount of data to support their arguments.
Two things:
1. The key distinction: when investors invest they think "I'm gambling and I hope I win, but there's a chance I won't." When bubble people buy assets they think "I'm buying something that is guaranteed to go up in value. Free money!" If bubble people aren't buying then it isn't a bubble.
2. When sophisticated investors make wild bets in first rate companies (amazon, ebay, facebook, twitter) and those bets payoff in a big way it might lead to less sophisticated investors making wild bets in more mediocre companies. That would be "irrational exuberance" and we're (maybe) not even there yet. THEN when those bets payoff in a big way then non-investors might start buying to get some of the free money. That's the bubble.
tldr: Valuations are irrelevant. All that matters (for bubbleness) is the psychology of the buyers.
The original bubble: http://en.wikipedia.org/wiki/Tulip_mania