Our forecasts and hence policy are becoming increasingly driven by asset price changes. Isn't that what we do with the BMW Method?But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums. Sounds like GreenSpeak for manias and bubbles and their bursting aftermath.My next door neighbor bought some Florida swamp in the seventies and he had basically given it up for lost. Last week a visitor offered him $85,000 for the1/4 acre lot, a price considered outrageous by most people just a short time ago. Could this be the prelude to the real estate bubble bursting?Denny Schlesinger
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