What's a Bubble?
Some popular financial phrases have a precise definition. Bear market, for example, has the strict meaning of a stock-market loss exceeding 20%, in addition to the informal sense of "it seems as if every day is down." Similarly, leverage can be used generally to convey a high level of exposure to an asset, or it can be calculated to the percentage point.
Bubble, on the other hand, resists such precision. To paraphrase former US Supreme Court Justice Potter Stewart, as with pornography, a bubble cannot be measured; instead, we are supposed to know one when we see it. Of course, we often see things in different ways. For example, per some critics of the bond market, the US is now in the midst of a bond bubble, while for other critics bonds are not a bubble, they are merely expensive.
This week, Cliff Asness of AQR offered an update on the definition. A bubble, he said, occurs when there is "no plausible defence for a security's price." Thus, technology stocks in 2000 were a true bubble. There was no credible story that could support NASDAQ's peak price of 5,000. No matter what tricks one played in attempting to defend the stocks' valuations--and trust me, there are always tricks, always different accounting measures to be selected, different comparables to be used, and different analogies to be made--the numbers didn't work. A company here and there could prove to be a good investment, but the industry overall could not be. For NASDAQ to justify its valuation, every tech company had to become the 
Apple (AAPL) of its industry.
I like Asness' definition. It limits the use of "bubble" to the appropriate rare occasions, and it works. Yes, the definition does require strict policing. You can't count Jim Cramer as a plausible defence for a security's price. (Laugh now, but back in the day Cramer was taken quite seriously.) You can't count think tankers who author best-selling books (Dow 36,000) as plausible defences. You can't count growth-stock managers who are defending their purchases. Bubbles can't be measured by arguments from authority; they are to be measured by the arguments themselves.
And by that standard, the US is not in a bond bubble. There is a real, nontrivial possibility that the US could echo Japan by sinking into a long-term period marked by sluggish growth, stagnating asset prices, low inflation and low bond yields. (This observation comes from Rekenthaler Who Listens to Economists, as there is no Rekenthaler the Actual Economist.) Asness believes that bonds are overpriced and a poor current investment at today's prices--but he concedes that it's possible he is wrong. So it's not a bubble.
Failing Grade
This week I received in my email the cheerily entitled media clip, "It's Morningstar That Deserves the 'F'." The headline, found in Canada's Financial Post, is from the Canadian fund association, protesting the F that Morningstar assigned to Canada's fund fees for this year's edition of the Morningstar Global Investor Experience Report (in which the UK earned a C+).
Reword that headline to Rekenthaler deserves the F, as I publish the Report. No worries. Given that Canada's equity mutual funds check in with a 2.4% annual expense ratio, as measured by an asset-weighted median (meaning that the presumably cheaper big funds count for more in the calculation than do the small funds), it's not as if the grade could be too far off the mark. One can reframe and reshape the discussion, as the Canadian fund association does (naturally, the association can't respond, "Yes, Morningstar is correct; our funds are very expensive."), but that will never make 2.4% cheap.
Read previous editions of the Rekenthaler Report here.
