When Will The Bubble Pop?
Asset bubbles must have existed since time immemorial. One of the earliest records is of the famous Dutch Tulip bubble of the 1630s where some records show that certain tulip bulbs commanded prices greater than that of entire homes!
Economists over the years have coined terms such as “animal spirits” and “irrational exuberance” to describe zeitgeists of the times. Many times, asset bubbles are built upon narratives that drive prices so high that there is a disconnect between fundamentals. Yale University professor and Nobel laureate Robert Shiller who is also the author of Narrative Economics: How stories go viral and drive major economic events says that stock prices are quite substantially driven by narratives but over time they will revert to reality.
In recent memory we have GameStop Corp (GME) — where retail traders pushed the stock price from sub $1 to over $81. This is an example of how stock prices can sometimes be disconnected from fundamentals and be driven by narrative instead.
Below you can see further examples across history where asset classes have a clear peak, only to come tumbling down:
The trickiest part about asset bubbles is that it is hard to identify one when you are inside it. And even if you do accurately predict that we are in a bubble, we have no idea when it’s going to pop, prices can continue to climb higher for a long time. Perfectly captured in a famous quote by economist John Maynard Keynes —
“Markets can remain irrational longer than you can remain solvent.”
So, are we in a bubble? It shouldn’t matter unless you are concentrated within specific geographies, sectors, or companies.
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