I'm currently reading the third edition of Robert Shiller's masterpiece "Irrational Exuberance." He updates where we are today in the cycles for stocks, real estate and bonds. I'll have more discussion coming on the book as I work through it, but I found this piece in the introduction particularly worth noting:
"Once you draw your attention to the risks people are not so confident during a growing bubble. (Confidence) was actually exceptionally low at the all-time U.S. stock market peak in early 2000. People were certainly aware at some level of risks.
Moreover, in a survey of home buyers that Karl Case and I have been conducting over the years, we pose the following question to recent home buyers directly: Buying a house in this area today involves:
1. A great deal of risk
2. Some risk
3. Little or no risk
The answers are puzzling. In 2004 when the housing market was showing its fastest price increases, only 19% said "little or no risk." It is not as if everyone thought that "home prices can never fall" during the bubble, though they are often accused of having thought that. In the 2009 survey, at the depths of the worst recession since the Great Depression of the 1930s, the percentage of respondents choosing that option was 17.2%.
During bubbles, it seems that the psychological ambiance is rather one of public inattention to the though prices could fall, rather than firm belief that they can never fall."
As we look around the world today that last sentence sums up the bond market perfectly. Investors are not holding cocktail parties discussing their incredible bond portfolio returns or opening up day trading accounts to trade bonds around the world (as we imagine them doing at bubble peaks). They are simply not paying attention to the fact that bond prices are sitting at all time record highs going back to the 1800's, just as they were for stocks in 2000 and real estate in 2006.
More from Shiller:
