Tip of the Icebubble

Economic Bubbles are like gravity, 95% of explaining them is simple, reasonable, easy to identify. The remainder though, nobody really understands. So just as gravity is the attraction between masses that makes small masses like us fall towards a large mass like the earth. Explaining why masses attract eachother through the force of gravity, and why more perplexingly they seem to repel eachother at great distances requires at least some kind of physics degree. Event then, the jury is out on how gravity actually works. Same goes for asset bubbles. Here's the 95% simple part pretty much any economist or finance person can explain - A bubble occurs whenever prices depart the underlying value of the assett. Prices are inflated (hence bubble) with expectations they are not capable of realising. So you have a computer company valued at more than the entire state of California, and it has never turned a profit - bam, easy to identify bubble. The assets are priced far beyond what they are worth. You have property prices that have no basis in the rent generated/saved for the owners, bingo, you have a bubble. But even with an economics degree, nobody can really explain why. At it's simplest, you could pick some staple investment, like a government bond, and take it's returns (the coupon) and compare it's coupon rate to the rental returns on the property price. As soon as the returns from property are less than the returns from putting your money into a risk free bond, then you could say that a bubble has started to inflate. Where economists and finance people start tearing their hair out, is that nothing pulls the speculative assets price back to reality, the price just keeps going up. Crucially what are investors, not people who buy property but bona fide investors meant to do while the bubble is inflating? There are gains to be made on the market by investing in a bubble. But for how long? When will the bubble burst? Catalysts are pretty hard to predict even in hindsight. Even then how long between a potential catylist for a bubble bursting and for the market to catch on that it is bursting. It may take 3 months for mass job layoff to sink in to mortgage holders before they are forced onto the market. When to get out? The problem is, that bubbles occur rising from irrational behaviour by their very nature. There is no bsis for the price, no firm grounding, no reason for them to get so high. What every economist struggles with is how to explain how something that shouldn't happen to begin with, will suddenly stop.