PLEASE READ TO FEEL BETTER

This is what academics waste their time doing. As if we needed an academic study to find this out.

What it does show, however, is how little faith one can put into those bureaucratic reports that purport to know what's going on. For example, the statement that "traditional inflation measures" don't apply to all parts of the economy.

Does that come to you as a real surprise? 

Or the one about making "bursting statements." Followed by this gem: "There's still a possibility that the Fed and government can steer the economy toward a soft landing."

Don't know about you but we feel a lot better now after reading that.

Let’s put all the questions about whether we’re in a bubble to rest. With the market recently hitting new highs, two professors who published a paper in the 40th-anniversary issue of the Journal of Portfolio Management entitled “Can We Predict Stock Market Crashes?” say we are probably in one. But that doesn’t necessarily mean it’s going to burst and create another crisis.

“When you see markets grow at five times the speed of the economy—the current situation—clearly we are in a bubble scenario,” says Sergio M. Focardi, a visiting professor of quantitative finance at Stony Brook University, who co-wrote the paper with Frank J. Fabozzi, a professor of finance at Edhec Business School.

The paper uses what’s known as the Buffett Ratio, which compares growth in market capitalizations to that of the underlying economy. They posit that the economy is one of increasing complexity, where traditional inflation measures don’t apply equally to all parts, and where globalization has made measuring underlying processes more difficult. A flood of money has also been injected into the financial sector, which doesn’t always find its way into the economy.

Focardi notes that “one has to be very careful in making bursting statements.” The reason? “There’s still a possibility that the Fed and the government can steer the economy toward a soft landing.” As to the probability that today’s bubble is in danger of bursting, or when, we’ll have to wait for their next paper.

-- Robin Goldwyn Blumenthal