Bubbles are generated when investors drive valuations higher without simultaneously adjusting expectations for future returns lower.

In other words, the defining feature of a bubble is inconsistency between expected returns based on price behavior and expected returns based on valuations. The “Bubble Term” measures the gap between the two.

Unless the Bubble Term is able to grow exponentially larger forever – it shows up as a gap between the long-term return that investors expect in their heads, and the long-term return that investors can actually expect based on the future cash flows that will ultimately be delivered into their hands.

John P. Hussman, Ph.D.