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


The Difference Between a Bubble and a Cycle

A brilliant post by Morgan Housel …

Brace yourself. According to various media sources, we now have at least 14 bubbles. This probably refers to the US media sources and maybe Canadian and European, too. In the Indian context, one can add a few more bubbles in the list.

Read this brilliant post highlighting the difference between a bubble and a cycle.

Brace yourself. According to various media sources we now have at least 14 bubbles

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Is it a bubble?

One of the hallmarks of a bubble is that it’s most easily detected after it has popped. Part of this is because there’s a certain logic to high prices at the time.

I have borrowed the above lines from a blog post I read today. I really liked this superb line from this blog post.

Very often, the investors want to know answer to this question in advance. However, very few have been able to correctly predict it and even fewer have been able to repeat the feat.

This is what I wrote in the book on this subject:

Attendee at a seminar: “There are bubbles in the market every now and then. What are the indicators of the next bubble?”

Expert speaker: “The day you stop thinking of this question, that is an indication of the next bubble.”

Enjoy while it lasts.

#RidingTheRollerCoaster –

Are financial bubbles bad?

Many discussions surrounding financial bubbles conclude with suggesting that financial bubbles are a bad thing. However, here is one blog post that considers otherwise.

I tend to agree with the thoughts. A bubble per se is not bad – many investors lose money in the aftermath of a bubble, but bubbles also shake the established players and bring in new heroes. Without the bubbles, one would not have seen some of the major players of today.

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The seeds of the crash are planted in times of the boom and vice versa

The proximate causes of these successive crisis are very different – emerging market debt problems, the new economy bubble, default on asset-backed securities, the political strains within Eurozone – yet the basic mechanism of all these crises is the same. They originate in some genuine change in the economic environment: the success of emerging economies, the development of the internet, innovation in financial instruments, the adoption of a common currency across Europe. Early spotters of these trends make profits. A herd mentality among traders attracts more and more people and money into the asset class concerned. Asset misplacing becomes acute, but prices are going up and traders are mostly making money.  …

… Yet reality cannot be deferred forever. the misplacing is corrected, leaving investors and institutions with large losses. Central banks and governments intervene, to protect the financial sector and to minimise the damage done to the non-financial economy. that cash and liquidity then provide the fuel for the next crisis in some different area of activity. successive crises have tended to be of increasing severity.

The above paragraphs have been taken from John Kay’s book “Other People’s Money – Masters of the Universe os Servants of the People”.

Different market cycles appear different, but there is a lot of similarity in each. I have written about the anatomy of a market cycle in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” that echoes the above words to a great extent. If you observe, the parallels are often staring you in the eye. However, very often, we choose to ignore the signals.

The seeds of the crash are planted in times of the boom and vice versa. As Lord Krishna tells Arjun in the Bhagvad Geeta

Bhagvad geeta 2-27

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Hindsight is 20:20

Whether it is euphoria or panic, it is often only in hindsight that we can clearly see what it was. At the time, it often appears to be the truth. Every action appears to be rational and based on some fundamental factors.

#RidingTheRollerCoaster – 149

Meteoric rise

Sensex went up from 1957 on 1 January 1992 to 4387 on 2 April 1992 – a rise of a whopping 124% in three months

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