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“The bubble is about to burst.” Why is this notice always late?

If you are used to trading in the markets, you will have already heard a warning about a housing bubble, the stock market or the Bitcoin explosion, but you have not studied most of these warnings and it seems that asset and stock market bubbles are not. always preceded by “enough” warnings.

Dan Suzuki, expert on Richard Burnsent and America Merrill Lynch, notes that stock bubbles do not occur naturally and are expected (at least largely), because expecting them widely would have prompted even inexperienced investors to take precautions against them. With rational choices in buying, selling and holding, which will prevent the bubble from forming in the beginning.

Bubble right now ?!

Dan Suzuki defines the bubble as one that sees the value of an asset or stock collapse by more than 50% in a short period of time, not exceeding a year or two, with strong price fluctuations during this curve at the decline due to the prevalence of “panic sells” on the one hand, and speculative attempts to take advantage of it on the other, or even by less than 50% but in a short time.

For example, the Nasdaq index of technology companies surpassed the level of 16,000 points (a record high) in November 2021, before returning to record highs of less than 11,5,000 points this month (September 2022), which means that it has lost nearly 30% of its value within 10 months.

In general, the rapid decline in this way can be called a bubble, especially in light of expectations that tech stocks will return to below 10,000 if the recession hits the US market consecutively.

What’s noteworthy here is that the decline in tech stocks features almost a similar curve with the digital currency Bitcoin; Where the latter recorded a record of over 68 thousand dollars in November 2021, before collapsing and losing about 75% of its value in a few months, to then settle in mid-September 2022 at levels that are around 21 thousand dollars.

Here it can be said that there is somehow a “bubble” for high-risk assets at the current stage, and there is no doubt that this bubble will be confirmed and its explosion will become more severe if interest rates rise. in the US it continues, and if the US economy stagnates.

to smooth out the bubbles

The witness is that bubbles do not burst out of nowhere, but are usually preceded by a prelude or by causes in which most traders and market observers see no problem, and there may be “commendable” measures in turn, but the size of these measures and maintaining them for longer periods than they should turn the issue into a bubble that hits the market hard.

Perhaps one of the most prominent examples of “laudable measures” that ultimately led to a resounding bubble was the US Federal Reserve’s interest rate cut from 6.5% in mid-2000 to 1.2% in mid-2000. attempt to evade the economy from the threat of recession following the crisis in the Asian financial markets which broke out in 1998 and which affected the main economies of the world.

This led to a decline in mortgage interest in 2003 at the lowest rate in its history, with interest on loans over a 30-year period reaching just 5.23%, which later caused the credit crunch. American mortgages which caused the global financial crisis in 2008 and led to the failure of many grandiose institutions and banks.

The witness is that interest rates are so low, with measures to facilitate obtaining real estate interest (as part of former US President Bill Clinton’s program to facilitate families’ access to housing) (as the property itself is the guarantor of the loan, which makes obtaining other guarantees not as vital as estimated by the US Federal Reserve, at the time estimates later confirmed to be incorrect) have led to an increase in demand for the purchase of real estate.

The purchase of real estate increased, even among households who could not meet the financial requirements to buy it, which led to the emergence of major stumbling blocks and created a large real estate offering that found no buyers, causing a real estate crisis that the whole world has suffered from what were initially described as “laudable measures”.

There is always a “bigger fool”

The main reason for the bubbles is a theory known as the “big fool” theory, which means that some commodities will continue to rise because there are those who constantly think that their price will continue to rise and not because there are facts on the ground that you justify this increase, and with this theory prices continue to rise until you decide to “take too many profits” and the bubble bursts.

Perhaps the real estate crisis that Japan witnessed in the late 1980s is the best example of this theory, as the price per square meter in one of Tokyo’s administrative offices amounted to $ 139,000 in 1989, and after only two years the value of this property decreased by 95% after the bubble burst and in general the value of the property decreased. Most of Japan’s commercial real estate has grown by 90% in just a few years.

The concept of exaggerated prices and the “biggest madman” has been blatantly repeated in the “dotcom” bubble. With what the presence of the Internet and its large-scale applications has provided to consumers, many have begun to see it as the optimal investment at the end of the last century, and precisely since 1995, investments in Internet companies have soared. great, for the “charm” with what it offers.

And it came to the point that 39% of new investments in 1999 were in the Internet and its companies, a very high percentage of the volume of Internet applications to this date, prompting Alan Greenspan, then chairman of the US Federal Reserve, to warn against. “Exaggerations in the valuation of some companies”, while Count is a warning of a bubble, but the markets have not heeded it.

The collapse of the market or the bursting of the bubble came with the Nasdaq index losing 76% of its value between March 10, 2000 and October 4, 2002. During this period, the prices of technology stocks fluctuated. very violent and some suicides were even linked to stock changes during that period.

Explosion vow

And before the bubble bursts, there are often some signs that indicate it, including the fact that the P / E of some companies has hit great records, and in the “.com” bubble, the P / E has exceeded 100 for the most part. part of the companies connected in one way or another to the Internet.

Far from what economists describe as the “buying fever” that plagues some in the event of a bubble forming, leading to the purchase of shares at any price, but some have bought some shares as a “bet on the future” , that is, on some innovations or inventions that will significantly increase the value of the company. They hold the shares while their value continues to grow.

A bet on the future, for example, is that the P / E of the Tesla stock will always remain above 100 (it had reached 109 last September 18), a bet that sales of electric cars will continue to grow in general, and the famous house automotive enjoys a leading competitive position in this market, as well as For the hope that research and development efforts will achieve qualitative breakthroughs in the field of batteries.

Although this gamble at first glance seems rational, on the other hand the presence of new and big competitors to “Tesla” cannot be overlooked, which makes it completely wrong to attempt to retract its monopoly status, and bet on discoveries in the battery range is not possible Checked or even estimated accurately.

The witness is that “rational” investors are the ones who sell shares before and before the bubble bursts, in light of the multiple indications of exaggeration of the value of a company, and some of them contribute through sales to calm the upside to a certain point, or to burst the bubble hard if sales are at the beginning of an explosion The bubble or their withdrawal from the market before it collapses.

Sources: Argaam, Trading Economics, CNBC, Forbes, The Washington Post

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