What is the current, or the next, balloon ?
When will it burst ?
When will it burst ?
Typical traits of those wild market moves
Never heard a price bursting like a hand grenade?
Or falling noisily to pieces like a cookie jar on the floor?
Market bubbles and crashes are extreme
market price evolutions.
Here we talk about prices typically jumping from 1 to 2 or more
or plummeting from 1 to .5 or less
Such massive and excessive market anomalies affect not only prices
but also returns.
No magic here as, for an asset holder, the (positive or negative) return
includes the price variations.
Typically, when those events strike, prices get multiplied or divided by
2 or more in a several months or several years period.
Such extreme variations tend to occur from time to time in any type of
asset markets.
They are typical of bubbles and crashes, which are available in all tastes.
The assets involved can be:
Or falling noisily to pieces like a cookie jar on the floor?
Market bubbles and crashes are extreme
market price evolutions. Here we talk about prices typically jumping from 1 to 2 or more
or plummeting from 1 to .5 or less
Such massive and excessive market anomalies affect not only prices
but also returns.
No magic here as, for an asset holder, the (positive or negative) return
includes the price variations.
Typically, when those events strike, prices get multiplied or divided by
2 or more in a several months or several years period.
Such extreme variations tend to occur from time to time in any type of
asset markets.
They are typical of bubbles and crashes, which are available in all tastes.
The assets involved can be:
- Equities, bonds, investment funds (*)
- Commodities, currencies (foreign exchange)
- Real estate, and even collectibles.
- Various kinds of "derivative contracts"
based on the future price of those assets.
A market bubble occurs when a bull market gets happily ...wild.
The
price uptrend has persisted unabated (except for temporary
corrections) for a long time (several years typically) until reaching
excessively high quotation levels.
corrections) for a long time (several years typically) until reaching
excessively high quotation levels.
A market crash is a sudden and large price fall.
It might follow a bubble and signal the start of a bear market,
a downtrend that will lead to extremely low prices.
a downtrend that will lead to extremely low prices.
More details on bull and bear markets are given in the
market trends and cycles article.
Yes, bull and bear markets tend to alternate in a kind of "cycle"
(*) In financial asset markets, stock markets for example,
herding / herd instinct
(trying to buy or to keep the assets when
seeing price rises, and to sell them when seeing price falls) is stronger than in
other markets.
Excesses might increase for a longer time in financial markets than, for example,
in commodity markets in which the law of offer and demands works better.
Here herding has a shorter life: after a while, price rises make demand fall and
price falls attract more demand, just because the "physical users" (except
maybe some wishful thinkers among them) make cost calculations.
market trends and cycles article.
Yes, bull and bear markets tend to alternate in a kind of "cycle"
(*) In financial asset markets, stock markets for example,
herding / herd instinct
(trying to buy or to keep the assets when seeing price rises, and to sell them when seeing price falls) is stronger than in
other markets.
Excesses might increase for a longer time in financial markets than, for example,
in commodity markets in which the law of offer and demands works better.
Here herding has a shorter life: after a while, price rises make demand fall and
price falls attract more demand, just because the "physical users" (except
maybe some wishful thinkers among them) make cost calculations.
Some causes
Too much pressure?
Those extreme market prices and returns, that usually stray from economic
fundamentals, are mostly caused by collective misreactions and other
behavioral biases - often emotional ones - that affect market players.
Factors seen in bubbles.
Those extreme market prices and returns, that usually stray from economic
fundamentals, are mostly caused by collective misreactions and other
behavioral biases - often emotional ones - that affect market players.
Factors seen in bubbles.
In such cases people tend to speculate with few own capital, by getting
loans or using financial derivatives.
A persistent inappropriate monetary, credit and budget policy can create
not only the heating fuel (availability of cheap and abundant money), but also
an artificial belief in relentless prosperity, or ...a flight from money by enticing
to hoard other assets.
loans or using financial derivatives.
A persistent inappropriate monetary, credit and budget policy can create
not only the heating fuel (availability of cheap and abundant money), but also
an artificial belief in relentless prosperity, or ...a flight from money by enticing
to hoard other assets.
- Often also in the case of bubbles, there is a widespread
illusion that
speculation (whether called "trading" or "active management") can be riskless,
Players might fancy that "stochastic" financial models allow to get "alphas" (high
returns non correlated to risk).
The alchemical illusion based on the belief that ordinary lead can be safely turned
into gold entices the believer to more risk-taking.
The craze usually ends in a bad way once it has contaminated the whole financial
system.
Players might fancy that "stochastic" financial models allow to get "alphas" (high
returns non correlated to risk).
The alchemical illusion based on the belief that ordinary lead can be safely turned
into gold entices the believer to more risk-taking.
The craze usually ends in a bad way once it has contaminated the whole financial
system.
Factors seen in crashes
Crashes can be due to external shocks which are:
* either fortuitous
* or voluntary (credit squeeze by central banks that understand, a bit late,
that the party is getting wild).
* or voluntary (credit squeeze by central banks that understand, a bit late,
that the party is getting wild).
But most often, the factor is that investors suddenly realize that
* the debt burden has become unsustainable
* and/or that asset prices have become excessively, even madly, high.
* and/or that asset prices have become excessively, even madly, high.
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