If you are used to dealing in the markets, you will have heard a warning about a real estate bubble, stock market, or Bitcoin bursting before, but you have not investigated the majority of these warnings, and it seems that asset and stock market bubbles are not always preceded by “enough” warnings.
Dan Suzuki, an expert at Richard Burnsent and America Merrill Lynch, points out that stock bubbles do not naturally occur and are expected (at least broadly), 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 the one that witnesses the collapse of the value of an asset or stock by more than 50% within a short period of time, not exceeding a year or two, with sharp price fluctuations during this downward curve due to the prevalence of “panic selling” on the one hand, and speculative attempts to benefit from than it on the other hand, or even by less than 50% but in a short timescale.
For example, the Nasdaq index of technology companies crossed the level of 16 thousand points (a record level) in November 2021, before returning to record levels below 11.5 thousand points this month (September 2022), which means that it lost nearly 30% of its value within 10 Months.
In general, the rapid decline in this way can be known as a bubble, especially in light of expectations that technology stocks will return to a level below 10,000 points if the recession hits the American market. consecutively.
What is noteworthy here is that the decline in technology stocks almost presents a similar curve with the digital currency Bitcoin; Where the latter recorded a record high of more than 68 thousand dollars in November 2021, before it collapsed and lost about 75% of its value within months, before settling in mid-September 2022 at levels ranging around 21 thousand dollars.
Here, it can be said that there is a “bubble” in some way for high-risk assets during the current stage, and there is no doubt that this bubble will be confirmed and its explosion will become more severe if the US interest rate hike continues, and if the US economy stagnates.
for bubbles smoothing
The witness is that bubbles do not erupt out of nowhere, but are usually preceded by a prelude or causes that the majority of market dealers and observers do not see any problem in, and there may be “laudable” measures at their time, but the size of these measures and maintaining them for longer periods than they should turn the matter into A bubble that hits the market severely.
Perhaps one of the most important examples of “laudable measures” that eventually led to a resounding bubble was the US Federal Reserve’s cut in the interest rate from 6.5% in mid-2000 to 1.2% in an attempt to evade the economy from the threat of recession that followed the Asian financial market crisis that erupted in 1998 and hit Repercussions for major economies around the world.
This led to a drop in mortgage interest in 2003 to the lowest rate in its history, with the interest on its loans for a period of 30 years reaching only 5.23%, which later caused the American mortgage crisis that caused the global financial crisis in 2008 and led to the bankruptcy of many institutions and banks grand.
The witness is that the interest is so low, with measures to facilitate obtaining real estate interests (within the former US President Bill Clinton’s program to facilitate families’ access to housing) (as the property itself is a guarantor of the loan, which makes obtaining other guarantees not as vital as the US Federal Reserve estimated At that time, estimates were later confirmed wrong) led to an increase in the demand for real estate purchases.
The purchase of real estate increased, even among families that could not meet the financial requirements to purchase it, which led to the emergence of wide stumbles and created a large supply of real estate that did not find buyers, causing a real estate crisis that the whole world suffered from because of what was 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 continues to rise and not because there are facts on the ground that justify this rise, and with this theory prices continue to rise until he decides Too many “take profits” and the bubble bursts.
Perhaps the real estate crisis that Japan witnessed in the late eighties of the last century is the best example of this theory, as the price per square meter in one of the administrative headquarters in Tokyo amounted to 139,000 dollars in 1989, and after only two years the value of this property declined by 95% after the bubble burst and in general the value of the property declined Most of Japan’s commercial real estate increased by 90% within a few years.
The concept of exaggerated prices and the “biggest fool” was blatantly repeated in the “dotcom” bubble. With what the presence of the Internet and its applications on a large scale provided to consumers, many began to see it as the optimal investment at the end of the last century, and specifically since 1995, investments in Internet companies increased dramatically. Great, because of the “fascination” with what it offers.
And it came to the point that 39% of new investments in 1999 were in the Internet and its companies, which is a very large percentage on the volume of Internet applications at this date, prompting Alan Greenspan, then President of the US Federal Reserve, to warn against “exaggerations in the evaluation of some companies”, while Count a bubble warning, but the markets haven’t listened to it.
The crash 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, technology stock prices experienced very violent fluctuations, and some suicides were even linked to stock changes in that period.
Explosion vow
And before the bubble bursts, there are often some signs that indicate this, including the fact that the P/E of some companies reached large records, and in the “.com” bubble, the P/E exceeded 100 for the majority of companies connected in one way or another to the Internet.
Far from what economists describe as the “buying fever” that afflicts some in the event of a bubble formation, which leads to their purchase of shares at any price, but some bought some shares as a “bet on the future,” that is, on some innovations or inventions that will increase the value of the company significantly. They hold the shares as their value continues to rise.
One bet on the future, for example, is that the P/E of Tesla’s stock always remains above 100 (it reached 109 on September 18 last), a bet that electric car sales will continue to rise in general, and the famous car company 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 bet seems rational at first glance, on the other hand, the presence of new and large competitors to “Tesla” cannot be neglected, which makes the attempt to portray its monopoly status completely incorrect, and betting on breakthroughs in the field of batteries is not possible. Control it or even estimate it accurately.
The witness is that “rational” investors are the ones who sell stocks first and before the bubble bursts, in light of the multiple indications of exaggerating the value of a company, and some of them contribute through sales to calm the rise at some point, or make the bubble burst loud if sales are at the beginning of an explosion The bubble or their withdrawal from the market before its collapse.
Sources: Arqam – Trading Icons – CNBC – Forbes – The Washington Post