Google Knol #2 — The Bull Market Caused the Economic Crisis

I’ve posted my second Google Knol. This one is called The Bull Market Caused the Economic Crisis.

Juicy Excerpt: There is a simple and compelling explanation for our troubles that is rarely discussed. The bull market of the late 1990s pushed stock prices to three times fair value. That translates into $12 trillion of funny money. Presuming that stock prices were always fated to revert to the mean (Vanguard Founder John Bogle describes Reversion to the Mean as an “Iron Law” of stock investing), we set ourselves up for the loss of $12 trillion in spending power once the bull market came to an end. It’s not hard to understand why that would bring on an economic crisis. So why not pay heed to Occam’s Razor and accept the obvious explanation as the most likely one?

A strong case gets stronger when you take into account the message of the historical stock-return data. Yale Professor Robert Shiller reports in his book Irrational Exuberance that there have been four times in the history of the U.S. market when stocks reached insanely dangerous price levels: (1) the early 1900s; (2) the late 1920s; (3) the mid-1960s; and (4) the late 1990s. On each of those occasions, we experienced a stock crash. We have never experienced a stock crash of lasting significance starting from a time when stock prices had not gone to insanely dangerous levels. And on each of those occasions (and not on any other occasion) we also experienced an economic crisis. The correlation is perfect.


  1. Evidence Based Investing says

    It is amazing how much of that knol, which purports to be about the bull market and economic crisis, is about you and your internet activities over the past few years.

  2. wtf? says

    Your reasoning is astoundingly unclear/incoherent.

    You seem to believe that the economy reacts to the stock market and not the other way around.

    This is a wrong and childlike interpretation for so many reasons. Using Occam’s Razor like this is a bit humorous – to defend a simple but more importantly, entirely WRONG idea.

    There are several other simple explanations, which meet Occam’s Razor requirements, for each crash you mention that are actually right.

  3. Rob says

    You seem to believe that the economy reacts to the stock market and not the other way around.

    Yes. That’s an oversimplification. But you are at least hinting at a key distinction between the Buy-and-Hold perspective and the Rational Investing perspective, wtf.

    Those interested in learning more about this particular aspect of the question might want to check out RobCast #13, “Recessions Don’t Cause Market Turmoil, Market Turmoil Causes Recessions”:

    I don’t generally tolerate the bullying tone that you employ in your comment here, wtf. I approved the comment because I felt that the substantive point being made was important and the bullying tone was not entirely out of hand. But you’re going to need to take it up several notches if you are going to continue to participate here. I’d like to hear from you more often IF (the biggest word in the English langauage) you are capable of reining in the negativity enough to be a positive and constructive force here.


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