Asset prices: Not fully inflated

TALK of bubbles is in the air again. The Dow Jones Industrial Average has hit an all-time high. A loss-making technology firm (Twitter) has floated its shares on a flood of investor demand. Private-equity groups are buying companies using amounts of debt not seen since 2008. A record price (more than $50m) has just been set for a penthouse in Manhattan. A triptych by Francis Bacon became the most expensive piece of art sold at an auction when Christie’s flogged it for $142.4m last month. Robert Shiller of Yale University, who correctly identified bubbles in tech stocks in the late 1990s and in property in the 2000s, has expressed unease about giddy American share valuations.All this suggests that wealthy investors have become increasingly confident. The question is whether they are right to be. Under certain circumstances, fast-rising asset prices are justified. New industries can emerge and create corporate giants (Microsoft, Apple and Google, for example); countries can change their economic policy and grow rapidly (Japan in the 1960s, China in the 1990s). How, then, do you tell a bull market from a bubble?Mr Shiller describes a bubble as “a psycho-economic…

Link to article: www.economist.com/news/finance-and-economics/21591191-many-investments-are-becoming-expensive-there-little-sign-mania?fsrc=rss|fec

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