An economic bubble is “God’s Will.”
It’s a natural phenomenon of the economic cycle — innovation, growth, death and then rebirth — just as winter is a time when things die, but is always followed by spring, when life is renewed.
Economic bubbles are a primal force that functions in the same way that sex is irresistible, because it forces human beings to continue the survival of the species.
They are part of nature, but they’re also a harsh truth that a lot of people can’t seem to handle.
When I was lecturing in Australia in February, I had endless debates over the real estate bubble there. No one seemed to be clear about whether it was a bubble or not. And back in the U.S., I have endless debates in the media about stock market bubbles.
Is it an economic bubble or not?
There’s one clear way to understand bubbles: If it “looks like a duck and quacks like a duck… it’s a duck.” Period!
As part of an economy’s natural evolutionary process, bubbles are made to burst. Only then can the economy flourish and run its natural course.
However, it seems that economic bubble blindness is an inherent part of human nature. Perhaps we’re afraid of change, especially exponential change.
And to extend the bubble-sex theme, an economic bubble is very much like an orgasm — they build and grow in intensity before they pop, or burst… creating the fertile ground for the next economic season… moving us from winter into spring.
So there’s nothing mysterious about big economic bubbles. It’s just that they only occur once in a lifetime in major markets, like the Wall Street crash of 1929, which continued to crash into 1932… or Japan’s real estate bubble that peaked in 1991.
Did anyone think that real estate could crash 60% and never recover… not even 23 years later?
Like I said: If it looks like a bubble and quacks like a bubble… it’s a bubble.
There has not yet been a major real estate bubble burst in the U.S. — and if you’re thinking about the subprime crisis of 2008, that was just a prelude of what’s to come — so this kind of bubble is even harder for people to get…
They just don’t understand bubbles when they occur, and they don’t see the bubble burst coming — until it’s too late.
I explain in full in the April issue of my Leading Edge newsletter why most people fail to see and recognize these bubbles, and how they play a major role in our economy’s natural progression.
But for now, let me say this: Bubbles occur most when new technologies are moving mainstream. They’re aided by falling interest rates, which spur higher rates of economic growth and encourage many new businesses to experiment in new business models. However, most of those fail.
Speculation from falling interest rates and high growth create bubbles that must pop. That is the winter season that follows every fall bubble in history, just as it did in the 1930s…
And, amid the absence of financial bubbles, it’s these winter seasons that clear the decks of debt and provide the economy with greater scale and efficiencies to create the next boom. Consumers are then in a growing spending cycle again, just as they were between 1942 and 1968 in the last spring season that followed winter of 1930 to 1942.
Winter economic seasons shift market share to the businesses that did the right things — by strategy or accident.
Now, with the rapid rise of globalization and historic trends in home-buying and low mortgage rates, we have seen the greatest bubble boom in modern history.
And this bubble must burst for the next younger generation to be able to afford homes again, and massive government and private-sector debts must also be shed.
Everyone acknowledges the tech-stock bubble that occurred between late 1994 to early 2000. So why are they blind to this current bubble?
Look at the chart below, which reveals the similar trajectory of the last bubble with the trajectory of the current bubble.
If it looks like a bubble and quacks like a bubble… it is a bubble.
The fact is that bubbles don’t correct, as you might expect in normal bull markets — they burst.
And when they burst, they go back to where they started or a bit lower — with few exceptions.
Bull markets can’t sustain such rates of growth in the short-term, and they burn themselves out — I cover this topic in Chapter 5 of my new book, The Demographic Cliff.
When this stock bubble bursts — it gained from the original bubble that started in late 1994 — the Dow will retreat to 3,800 or lower — a 73% fall from recent highs. And if you think real estate is recovering, prices could fall another 40%-plus from present levels when that bubble bursts.
All bubbles burst once they become exponential.
So rather than sitting and waiting for this burst to happen, I recommend you adhere to an investment strategy that prepares you for the burst to come.
While I provide fundamental and economic analyses for long-term trends, our Chief Investment Analyst Adam O’ Dell looks at short-term trends and holds an industry-best track record of providing actionable investment strategies in both Boom & Bust and Cycle 9 Alert.
Take my word on this: This is a bubble and it will burst… sooner than later.
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