Fed Chair Powell’s speech in review and what it means for gold and the USD [Video]

Good Bubble, bad Bubble?

Most tv appearing analysts would agree that a bubble market is not only tricky but bad for investment. The narrative for a bubble has been rising; it’s now almost a daily event that someone is talking about an overheated market. Whether the Bubble exists is the most common query that I am seeing, then the link to bitcoin, GameStop Corp, Tesla and the technology sector. These investment vehicles are regularly alluded to as Bubble like, and truth be told, they potentially are. But from giant bubbles come significant opportunities.

If we were to historically look at bubble markets throughout history (maybe not tulips), we could find a common theme. They have a bit of pattern.

• First is the displacement phase; often, rates fall from the graces of normality to ultra-low percentages.

• Then we move into the boom phase; prices rise slowly then as more and more investors pile into the market, it gains momentum. FOMO takes over, and more and more try to get in on the action.

• This is where things get a little crazy, the euphoria phase; the brave or stupid throughout the stop losses and proclaim that their chosen market is unstoppable, it gains media attention, more investors pile in. Valuations get to the value of some small countries and sometimes even higher.

• Fourth, investors in on the action early in the piece start taking the smart money approach; by not picking the top, we start seeing some profit-taking.

• The final phase is an extension of the fourth with one clear difference, panic. All it takes is one seemingly insignificant event; perhaps Mr Joe Blow decided to take all his profits out for no reason. Someone sees this and thinks, ‘I’ll do the same’. And its domino’s, we have mass hysteria spreading like covid-19, and the media freaks out, asset prices plummet more and more as investors try to liquidate their holdings.

After the Bubble has burst from the ashes, innovation becomes a focal point for cash flows.

While the bubble bursting causes unrivalled fear in some investors wary of being caught in the fallout, it’s not all bad. When the Bubble comes, we all want to be a part of it (before we know it is a bubble). Still, this piling style into a particular market creates uneven development in technological advancement. Think of the pandemic, technology stocks with a high degree of specialization focused on using newly acquired funds to further develop the ‘work from home’ solutions.

These companies, given the opportunity, will put the energy into the product that will provide the higher internal rate of return, with the smallest risk profile. While that was what we needed at the time, the ability to innovate at a social level was left sitting with the lights off. So, to a degree, is the lousy Bubble a good bubble?

It is a weird statement, I know, but hear me out. A bubble bursting promotes the flows of investment into broader categories of innovation and social change. Without bubbles, we would not have had the US expansion of the telegram network, usable roads, or even the evolution of the internet. The idea is that some of the best periods of innovation are derived from the aftermath of a bubble environment. If we can harness the opportunity after the show is over, we stand to be on the next cycle’s right side.