Brainteasers You have a gold bar. You can cut the bar twice. You have to give your worker exactly 1/7 of a bar of gold per day. How do you cut the bar of gold so you can pay him? Tickle Your Brain

Market Update Stock market started a sell- off Fed tapering by another $10B /mo (Now at $65B) Month of surprising earnings Argentina crashed after the peso tanked, leads to EM worries The last few months

Quantitative Finance Society Bubbles

What is a Bubble? How not to look at a bubble – Using a price chart

The mechanism of a bubble Multiple expansion – People are willing to pay more per dollar Products with higher yield has higher demand in a low yielding market 1 – Multiple Expansion

The mechanism of a bubble Cost of capital decreases – Future cash flows are worth more than they ‘should’ be worth Interest rate driven 2 – Discount Contraction

The mechanism of a bubble Irrational buying driven by price increases Ignoring downside protection / risk 3 – Unsustainable Price Increase

Where do you start? Bubbles are – Credit driven – Sentiment driven Bubbles are NOT – Fundamental growth driven – Foreign investment / export driven Where most people get it wrong

In plain English please… Spotting bubbles are not difficult – Screening for large scale growth areas – Excluding areas where growth is driven by fundamental causes Spotting a bubble burst however…

The Burst Why does a bubble burst? – Credit crunch – People waking up When do people wake up? Activism at the policy / politics level Sometimes, investors can burst a bubble (Soros)

Checklist for a burst Bubble was created by easy access to leverage People jump onto the growth train Newspapers talk extensively about growth Credit tightening becomes a reality Price does not respond to credit shrinkage Demand outstrips supply, massively

History of Bubbles Beautiful flowers, high demand – Lull in the 30 years war Price rises, people want to buy more Tulip Mania

History of Bubbles Internet starts to catch on in the 1990s. Investors start to get enthusiastic over the “new economy” Basic plan was to build market share and then monetize later – Growth over profit 1999: 457 IPOs and 117 doubled in price on first day of trading 2000: MSFT declared a monopoly Companies start reporting huge loses / filing for bankruptcy 2001: 76 IPOs and none doubled Dotcom Bubble

Other Bubbles Lots of these

Let’s Practice

Different types of credit we are all familiar with

Sign In Please Bit.ly/quantfsnyu bubblepop