The 10 Principles of Bubbles Show Why the Whole Planet’s on Crack

Harry_headshot-150x150The global markets just reacted to another 7% plunge in Chinese markets – the biggest bubble of our time.

Go on the Internet and look up any article about China’s economy. Nine times out of 10 they’ll acknowledge the problems in overbuilding, real estate vacancies, rising debt and everything else.

But they always take the position that China will be able to have a soft landing. Through government guidance, they’ll be able to transition to a consumer-driven economy like the U.S. instead of a government-driven infrastructure and exporting one.

Meanwhile, very few analysts in the financial media think that stocks are in a bubble, when this rally since early 2009 looks exactly like every bubble in history.

And that’s the problem – when it comes to predicting the future, humans are invariably almost always wrong.

When bubbles get going, everyone gets “high” and no one wants the high to end… so we go into denial.

I recently shared a chart showing the human model of forecasting. At the top, we think we’ll never have another recession – that we’ve reached escape velocity. When it all starts to topple, we assume it’ll be a soft landing. And when it all hits the floor, we think things are so bad they’ll never get better again.

Every time!

We project in straight lines, when reality is cyclical.

The truth is, we don’t like cycles. We love it as the getting gets good, but we hate the downside. So when you start hearing that it’s going to be a soft landing – that is a sure sign that everything’s about to hit splat against the pavement!

That’s why I thought it was a good time to remind you of the 10 principles of bubbles from Chapter 5 of The Demographic Cliff, after the recent reminder of the fragility of global markets.

  1. All growth and evolution is exponential, not linear.
  2. All growth is cyclical, not incremental.
  3. Bubbles always burst; there are no exceptions.
  4. The greater that bubble is, the greater it’s going to burst!
  5. When bubbles burst, they tend to go back to where they started or a bit lower.
  6. Financial bubbles tend to get more extreme over time, as the available credit that fuels them expands as our incomes and wealth expand.
  7. Bubbles become so attractive that eventually they suck in even the skeptics.
  8. No one wants the “high” and easy gains to end, so we go into denial as the bubble evolves, especially in its latter stages.
  9. Major bubbles occur only about once in a human lifetime, so it is easy to forget the lessons from the last one. (And the last one’s my favorite.)
  10. Bubbles may seem fruitless and destructive when they burst, but they actually serve a very essential function in the process of innovation and human progress.

So make no mistake – it’s a bubble, damn it! And worse, it’s a global bubble. It’s saturated the whole frickin’ planet to the point where hardly anyone can see it, because you can’t get out of it!

From stocks, to real estate, to bonds – it’s all caught up in the euphoria!

The commodity bubble has already burst, and China’s stock bubble has peaked and will continue to burst, despite government intervention with hundreds of billions to prop it up.

It already fell another 7% Monday and global stocks along with it (though not as bad), as the world’s finally waking up to the fact that China ain’t all it’s cracked up to be – it, like all other markets, is just on crack!

Bubbles don’t correct – they burst! Sure, U.S. stocks might have climbed out of the August correction. But too many small- and mid-cap stocks are in the red to say “the coast is clear.” And these growing divergences in the market are showing that we are very, very close to bursting.


Harry

Follow me on Twitter @harrydentjr

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Categories: Cycles

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.