Macquarie University – Risk Day Conference Blowing Bubbles Michael McCarthy - Chief Market Strategist CMC Markets and Stockbroking

Blowing Bubbles

Blowing Bubbles Bubbles and positive risk A behavioural approach The 3 conditions of a bubble

Positive risk

Positive risk In one year………. 1623 trades 38% profit from single best trade 75% profit from top 6 trades Non-trivial

Positive risk Why traders love bubbles…… Source: CMC Markets Next Generation platform Traders love bubbles that are about to burst

A behavioural approach “Consumers are rational agents maximising utility…….”

What are the behaviours? 3 conditions What are the behaviours? How are they observed?

1st condition Prices must: Rise steeply, for a considerable time

2nd condition It must be….. “…..different, this time..” A divergence from traditional valuation

Price increases become exponential, heading into a “blow-off top” 3rd condition Price increases become exponential, heading into a “blow-off top”

Silver 5 April 2011 Prices must rise steeply, for a considerable time Source: Bloomberg Prices must rise steeply, for a considerable time

It must be different, this time..” Silver 5 April 2011 Source: Bloomberg It must be different, this time..”

Silver 25 April 2011 Price increases become exponential, Source: Bloomberg Price increases become exponential, heading into a “blow-off top”

Silver 5 June 2011 Source: Bloomberg

Where’s the bubble? Source: ABS / CMC Markets

Blowing Bubbles