Damned! It seems Flo and I will never truly disagree about anything.
Let me summarize our agreement: A fully rigorous definition of fundamental value is “the expected value, conditional on the information available today, of the discounted sum of future cash flows”. Fundamental value is equal to the equilibrium price we would get in an efficient market. That’s the efficient market hypothesis (which is a misnomer, because it’s not just a hypothesis but a true theorem). Hence what we mean, conceptually, when talking about a bubble is the deviation of the actual price from this hypothetical equilibrium price. And these deviations can come from a) people being stupid in the sense of not taking into account all the available information and/or b) market imperfections like transaction costs or costs of information gathering.
Our disagreement is that, while Flo thinks there could be reliable ways to detect bubbles in the real world ex ante, I don’t. There’s only one way to find out. I can “predict” 50% of all bubbles merely by chance (e.g. by flipping a coin). So this must be the benchmark for any bubble spotting strategy. Let’s see whether credit growth can successfully predict the next 5 bubbles. Under the null hypothesis that credit growth has no better predictive power than a coin, the probability of guessing 5 out of 5 bubbles right is 3,125%. If Flo can do it, we can reject the null at a reasonable level of significance. Or, if you prefer, we can also reject the null if credit growth is able to predict at least 15 out of the next 20 bubbles (p-value 2%).
Fancy a bet, Flo?