Dalio: How to Spot a Bubble

Are We In A Stock Market Bubble?

Source: LinkedIn



I mentioned Ray Dalio’s Bubble post yesterday, and I thought it was worth a few minutes to put some more flesh on the bones of the work that Bridgewater has done in this space.

As you can see here, I have been thinking about this for a long time. I even came up with a checklist to assist in identifying bubbles in real time.

My approach was qualitative and therefore subjective. What really like about Dalio’s bubble assessment are his six metrics which are combined in the chart above:

  1. How high are prices relative to traditional measures?
  2. Are prices discounting unsustainable conditions?
  3. How many new buyers (i.e., those who weren’t previously in the market) have entered the market?
  4. How broadly bullish is sentiment?
  5. Are purchases being financed by high leverage?
  6. Have buyers made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains?

That is as good a measure as any. We will see if the backtest results in a real time indicator when if this turns into a full blown bubble and when that bubble pops.

I like a squishy, imprecise measure of a bubble — namely, when otherwise rational people go mad in the greed-laden pursuit of easy riches:

Bottom line: More of a bubble than 1 year ago, still less of a bubble than 1999-2000.



Bottoms Are Easier to Spot than Tops (February 17, 2021)

No, It Is Not a Bubble (Yet) (February 27, 2020)

Trump: The Economy is in a Bubble (No, its not) (December 21, 2015)

Checklist: How to Spot a Bubble in Real Time (June 9th, 2011)

Bubbles (TBP)


Are We In a Stock Market Bubble?
Ray Dalio
February 22, 2021

Stock Market Bubble?
Ray Dalio
Bridgewater, February 2, 2021

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