james in his comment claims that I am loose with language. But he does not know that I am a devotee of Lewis Carroll and that I am like Humpty Dumpty in “Through The Looking Glass”:

When I use a word,’ Humpty Dumpty said, in a rather scornful tone,’ it means just what I choose it to mean, neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

Back in my second post on this blog, I defined what I mean by speculation and investment. These are not terms that are well-defined in common usage like, for example, “forty-two”, so, when you use them, you need to be careful. Now “bubble” is even less well defined. If you asked the Supreme Court, you would probably get an answer like the one they gave for pornography, which was that they couldn’t define it but they knew it when they saw it. [Justice Potter Stewart in Jacobellis v. Ohio (1964)]

Do I believe that all speculations are bubbles? No. Sometimes it makes sense to keep corn in a silo, paying the carry. But I do believe that all bubbles are a matter of excessive speculation. So james is right, I should have been clearer, what I was talking about was speculation that involved a whole asset class that is normally thought of as being held for the long term as investments, such as stocks, bonds or real estate. When those asset classes, or significant sub-classes, develop negative carries, then there’s probably a bubble. And bubbles can last a long time, especially when Uncle Al is helping to mitigate the negative carry.

What I wasn’t talking about was the asset classes that are always speculative. Commodities, precious metals, art, etc. And, lest we forget, tulip bulbs. No-one expects them to earn income (yes, I know you can lease them out, but seriously…) and so they pretty much always have a negative carry. Do they have manias and bubbles? Yup. But if you are an investor, you shouldn’t care because you shouldn’t be there.

In order to keep the hype going, analysts are quietly taking down their profit estimates so that companies can “beat by a penny” as they always do. Reuters reports:

Projections for S&P 500 companies’ fourth-quarter earnings swung to a 6.1 percent drop on Monday from an 11.5 percent rise on October 1, in the biggest quarterly move since Reuters Estimates started compiling analysts’ forecasts in 1999.

Car dealers are apparently rolling over deficiency balances in an effort to load down their customers with as much debt as possible.

“The job of a successful dealer is to find a funding package that’s acceptable to the customer,” said Paul Taylor, chief economist of the National Automobile Dealers Assn. “These loans allow them to get a luxury car rather than a more modestly priced vehicle.”

Yeah right, it seems everyone wants to lock down people’s incomes to stream into their pockets. Student loans, auto loans, mortgages, credit cards, does it never end?

Since the end of 1945, according to the NBER, the economy has been in recession 14% of the time, on a monthly basis. On an annual basis, 31% of years have been completely or partially in recession. The average recession has lasted 10 months; the average expansion, 57 months. However, only 3 of 10 expansions have been longer than the 72 months of the current expansion (assuming it lasted through November).

So if you knew nothing about economic data, you would have to say that the probability of a recession next year is around 50-50; prima facie it is 31%, but adding in the age of the expansion increases the probability.

Yet 61 of 63 say, no way, José.  I guess this is why unanimity amongst economists has the reputation of being a great fade.

Anyway,  I guess they didn’t poll Robert Shiller, who warns:

“This is a classic bubble scenario. A few years ago house prices got very high, pushed up because of investor expectations. Americans have fuelled the myth that prices would never fall, that values could only go up. People believed the story. Now there is a very real chance of a big recession.”

How does one identify a bubble in asset prices? It is simple. When the investment return on the asset is less than the carrying cost, then the only reason for the asset prices is speculation.

For example, when rental income will not pay the carrying cost of a house, then the price of the house is driven by speculation. Either the buyer is expecting a financial benefit from appreciation, or believes that the price will rise in the future so that buying now is prudent. In either case, the buyer is a speculator. If the buyer just wanted a place to live, then renting would be the logical and economic choice. But we all know, by now, that residential real estate is in a bubble.

But what others are out there?

• Commercial real estate. Less publicized, but not so visible, commercial properties have been selling at cap rates in the 1.5% to 4.5% range. In many cases, the negative spread between net rents and borrowing costs is even higher than residential properties.
• Shares. Not all, of course, because earnings and dividend yields are all over the map. Even being aggressive and using earnings rather than dividends, not many people or funds can borrow at less than the S&P 500 earnings yield of 5.3%. And many tech stocks, in particular, have earnings yields in the 1-2% range, indicating a high degree of speculation.
• Government bonds. With LIBOR at around 4 3/4%, you can’t borrow to fund a 4 1/2% yield on 30-year Treasuries.

And so on. Of course, you will point out that those of us who have the privilege of borrowing Mr. Fukui’s cheap yen can ignore all these nasty rates. But then there is a new risk, the forex risk, which has to be carried somewhere, and the rising yuan is sending a message about the future of the yen.