I’m telling you guys, “Scott Sumner” is a computer program from another planet, sent to destroy the dollar and soften up Earth for the invasion. Today he writes:
I am constantly amazed that so many highly intelligent economists and finance-types seem incapable of understanding something as simple as an asset price bubble. There seems to be a common perception that bubbles are inconsistent with the EMH, and that you identify a bubble by noticing when an asset price has risen sharply, and then fallen. But suppose that asset prices never fell back after large advances? Suppose that at worst they leveled-off. In that case investors would have a surefire way of making money. Buy assets that were soaring in value. In that case only one of two outcomes could occur:
1. No price change.
2. Further increases in price.
A no lose proposition. That means that if bubbles are big price advances followed by substantial declines, then a world without bubbles would violate the EMH. Which means asset price bubbles do not violate the EMH.
OK, I am virtually certain that Sumner has written that the very term “bubble” is operationally meaningless, unless we throw the EMH out the window. But, I have a high opportunity cost for researching this.
So here’s my offer. For the first person to post evidence in the comments here, I will PayPal you:
(A) $10 if you find an example of what I’m talking about.
(B) $20 if we catch Sumner quite literally contradicting himself. For example, he might try to squirm out of it and say he is distinguishing between bubbles existing versus recognizing that we’re in one, in real-time. Or, he will say, “Ah, but notice in this recent post I said ‘if bubbles are big price advances followed by declines.’ In my earlier post, when I said bubbles were inconsistent with the EMH, I was using a different definition of bubble.”
I will be the final and sole arbiter of which category a Sumner post falls into.
You have your orders. Good luck, everyone.
UPDATE: Thanks to the sleuthing of Dan, we are able to produce the following work of beauty:
(A) “I’m a believer in the EMH and hence skeptical of the idea of bubbles, a least as the term is usually interpreted. But I’m in the minority, the vast majority of people think bubbles exist.” — Scott Sumner, 9/7/2011.
(B) “Next we have to discuss what we mean by ‘bubble.’ Most people mean a sharp rise in prices, followed by a big decline. I agree with most people.” — Scott Sumner, 1/12/2012
(C) “I am constantly amazed that so many highly intelligent economists and finance-types seem incapable of understanding something as simple as an asset price bubble…[My argument] means that if bubbles are big price advances followed by substantial declines, then a world without bubbles would violate the EMH. Which means asset price bubbles do not violate the EMH.” — Scott Sumner, 8/9/2012
I submit that there are only two ways to reconcile (A) through (C):
Door #1: Sumner claims that not just his definition, but the definition of “bubble” used by most people, has changed during the last 11 months.
Door #2: Sumner claims that a “sharp rise in price, followed by a big decline” is quite a different thing from “big price advances followed by substantial declines.”
My work is done here.