A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation. Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior.
Or as I call it, a self-working Ponzi scheme, where everybody who bought at too high a price tries to convince everybody else to buy at even higher prices.
I came late to this party. I only realized that we were in a bubble when I heard last year that big corporations sitting on mountains of cash were using it mostly to buy their own stock back, not to create new products or open new factories. That's the general rule:
When companies can make more money fiddling their stock prices than by competing on price and quality, we are in a bubble, and a crash is coming.
When prices for some class of asset rise solely because they have been rising, not because there is a demand to use it, we are in a bubble, and a crash is coming.
If they tell you, "This time is different," run. A crash is coming.
Various sane economists and financial analysts.
The classic example is the Dutch Tulip Mania, but there have been many, many bubbles and crashes. They have tended to come every 20 or 30 years for centuries now, so that economists used to waste enormous energy trying to prove that that was "normal". It was just the "Business Cycle" and nobody could do anything about it. Even Keynes fell into that trap (reference below).
If you haven't already, it's time you read The Big Short: Inside the Doomsday Machine, because it's happening again, and because it explains what some people did about it. Not enough people, but we need to see about changing that.
Oct 27, 2017 - Watch leading economic indicators and have a bear market plan in place just in case. ... cyclically adjusted price-to-earnings ratio, which is a favorite metric of Nobel Prize-winning economist Robert Shiller, suggests stock prices are higher than any other time in history other than the dot-com bubble of 2000.
If you don't understand how the stock market works, get your retirement and any other investment accounts out of stocks NOW.
If you do understand and have the resources to do so, consider shorting the market. There are companies that can manage the process for you, some of them described by Michael Lewis in The Big Short. Do your due diligence, and don't just sign up with whoever promises you the biggest profits. Legitimate companies in the shorting part of the industry will also do due diligence on you.
BTW, this is a great time to short coal, too, and has been for years. Experts can sometimes short oil or gas, but that is not for the novice at all. It is the nature of the business that shorters lose money several times between huge payoffs.
You can profit if you do it right, and you would be doing all of us a favor by bursting the bubble just a teeny bit sooner. If enough of us did it, like major pension funds or university endowments, we could conceivably stop it before it got any further out of hand. But they very likely can't under the current rules.
Reflections
Bubbles and crashes are the worst part of Capitalism, apart from wars. They are also nearly the worst part of Communism and Fascism, and of every other economic system that has been tried in which the business owners write the rules. The only system that has worked is to have non-captive economists write the rules under the direction of the public. In other words, FDR-style regulation, which Reagan set out to destroy, sometimes with Democratic help. Elizabeth Warren is the kind of economist we need more of.
-
Bill Clinton was complicit in deregulating finance, and still brags about his bubble, the Tech Bubble or Dot.Com Bubble, as though he single-handedly balanced the budget with fictional money, and the inevitable crash was W's doing.
-
W then produced one of his own, the housing bubble and crash. But he keeps his mouth shut now.
-
Obama somehow kept the economy growing without steering it into a bubble. Could that have something to do with putting some of the regulations back? Maybe. But we didn't prosecute the fraudsters.
-
Well, however that may be, Trump individually and Republicans collectively are bragging about their own bubble non-stop.
I am not the one to tell you when it's going to blow. Nor is anybody else. I just have a feeling that we don't have more than one or two years before the catastrophe. Which means that Trump doesn't have until the 2020 election. I'm sorry to be the one to say it this time, but
'Tis an ill wind indeed that blows none good.
I do know that the Republican tax cut has made the bubble much worse, by giving corporations more mountains of cash to fiddle the markets with, and that they have no plans to stop there in wrecking the economy.
Top Stories
There is far more where this came from. I can provide only a sample.
The stock market is on fire. What could possibly go wrong? — CNNMoney
Stock market booms don't last forever.
History shows that inevitably, something derails the good times on Wall Street.
When Bitcoiners say that a market is too speculative, we are in trouble.