Identifying bubbles

Typical characteristics of a bubble:

  • Rapidly rising prices
  • High expectations for continuing rapid rise
  • Overvaluation compared to historical averages
  • Overvaluation compared to reasonable levels
  • Several years into an economic upswing
  • Some underlying reason or reasons for higher prices
  • A new element, e.g. technology for stocks or immigration for housing
  • Subjective “paradigm shift”
  • New investors drawn in
  • New entrepreneurs in the area
  • Considerable popular and media interest
  • Major rise in lending
  • Increase in indebtedness
  • New lenders or lending policies
  • Consumer price inflation often subdues (so central banks relaxed)
  • Relaxed monetary policy
  • Falling household savings rate
  • A strong exchange rate

 

Source: “When Bubbles Burst – Surviving the financial fallout” by John P. Calverley

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