The rational bubble

I was taught that the first thing to do when confronted with a bubble is to buy into it. The second: to understand why it is unsustainable. Understanding its fallibility assists with timing one's exit.

Investors are today confronted with a bubble and are "rationally" participating, knowing that should global financial markets plummet again, governments and central bankers the world over will underwrite any short term losses in order to prevent a drawn out period of 1930s-style debt deflation.

When confronted with the collapse of the global financial banking system, personified by Lehman Brothers but including the likes of HBOS, Merrill Lynch, RBS, Wachovia and AIG, investors (rightly) priced in the financial armageddon, driving asset classes to multi-year lows. 

At the time we were confronted with (still) high valuations by historical standards and a once-in-a-generation peak in consumer indebtedness.