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How to identity a bubble
By Tan Kin Lian  •  January 14, 2009
[caption id="attachment_1529" align="alignright" width="150" caption="Photo by strelitzia"]Photo by strelitzia[/caption] Someone asked, "How to identify a bubble?" The answer: "Nobody knows". Alan Greenspan, the former chairman of the US Federal Reserve Board said that one knows a bubble after it has burst. This is not helpful. It turned out to be disastrous, as the bursting of the US housing bubble has led to the global financial crisis. Is there a rule of thumb to identify a bubble? Nobody has dared to stick out his thumb. But I shall try. You get a bubble when the current price is 50% or 100% higher than the average price for the past 5 years. Maybe, we should look at the actual statistics and see if 50% or 100% is a better indicator. For example, the average oil price during the past 5 years prior to 2008 must be around US$40. When it exceeded US$80, it was a bubble. After it burst, it returned to US$40. When the high end property prices in Singapore doubled in value in 2008 compared to the past years, it was a bubble. It burst soon after. Source: tankinlian.com
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By Tan Kin Lian
Mr Tan Kin Lian (fomer NTUC Income CEO) started his insurance career in 1966 in a local life insurance company. He has also worked in various positions as a computer programmer, organisation and methods officer and consulting actuary. Mr Tan writes daily in his blog. The information in his blog is transparent and has an open approach.
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1 Comments

One response to “How to identity a bubble”

  1. ming xu says:

    It’s tough to identify a bubble objectively. Can Mr. Tan prove his rule of thumb to identify a bubble? I mean those kind of proving academically.

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