Bubbles are round, soapy and full of air… Economic bubbles are not soapy, nor round, nor full of air…. but full of cash !! Times of growth when liquidity is abundant and rates of return are high are prosperous for creating bubbles because why would an investor put money on a 4% savings account when you can invest, say in technology or real estate and get a 10-15-20% annual return!!!
Does this mean states should limit inflation by increasing lending rates? Isn’t this the most promiscuous way of then creating a bubble? The fundamental financial definition of a bubble is a state in which the company’s floating equity exceeds its book value assets. Of course, the difference takes into account band value, future potential, patents, ideas etc… . Fundamentally, all long term investors always avoid stock in which this situation occurs. Of course, they will miss out on extremely high return for 2,3,4 years however their “safe” position will eventually mark the underlying of the investment market.
Today’s market has touched rock bottom (or near there anyway). This is an ideal time for investment, safe long term investment in which individuals can get good rates over 5-10 years. In today’s market, many quoted companies have share values far below their asset value and – sometimes – even paying a dividend higher than the stock price !! How can this not be a win-win situation? The issue is always finding them, but you cannot get something for nothing, so time must be spent looking at the stock market and its companies.
In any case, Bubbles are understood and explained, and yet, every 10 year or so, the whole market is ‘tricked’ again and appears surprised that the new trend, which they invested in, collapsed and left them penniless. Growth cannot come without risk and without an underlying reason… The Coca Cola brand value was not created over 1 day, week, month or even year so if a company’s stock takes off, either find a sensible reason, or forget it!! It’s a Tit for Tat situation: if everybody did the sensible thing, Bubbles wouldn’t be!