The Common Denominator of Asset Bubbles Throughout History 

Asset bubbles share several common denominators, regardless of the era or the specific assets involved. Understanding these elements helps identify and avoid future bubbles. Here are the key factors:

1. Excessive Speculation:

– Speculation drives asset prices far beyond their intrinsic value. Investors buy not based on fundamentals but on the expectation that prices will continue to rise.
An example is the Dot-Com Bubble, in which investors poured money into internet startups with little regard for their business viability.

2. Easy Credit and Leverage:

– Low interest rates and easy access to credit fuel asset bubbles. Borrowing to invest amplifies gains but also magnifies losses when the bubble bursts.
Example: The Housing Bubble (2000-2007), in which subprime mortgages and high leverage led to a dramatic rise and fall in housing prices.

3. Mass Psychology and Herd Behavior:

– Investors’ behaviour is often driven by emotions rather than rational analysis. Fear of missing out (FOMO) and herd behaviour lead many to buy at inflated prices.
Example: Tulipmania (1636-1637), during which time the price of tulip bulbs skyrocketed due to a speculative frenzy.

4. Innovative or New Asset Classes:

– Bubbles often form around new, innovative, poorly understood asset classes promising high returns.

5. Regulatory Failures and Lack of Oversight:

– Inadequate regulation and oversight can contribute to the formation and growth of bubbles. Lax standards and poor enforcement allow risky behaviour to proliferate.
– Example: The financial crisis 2008 was partly due to insufficient regulation of mortgage lending practices.

6. Economic and Monetary Policies:

– Central bank policies, such as low interest rates and quantitative easing, can inflate asset prices by making borrowing cheaper and increasing the money supply.
– Example: Covid-19 Mania (2020-Present), where extreme monetary and fiscal policies led to significant asset appreciation.

7. Disconnect Between Prices and Fundamentals:

– Asset prices become disconnected from their underlying economic fundamentals, leading to unsustainable valuations.
– Example: The South Sea Bubble (1720), where the stock price of the South Sea Company vastly exceeded its actual value and business prospects.

Over the past 30 years, I have cataloged all the asset bubbles in history, including a chart of every bubble going back to Tulipmania.

Covid-19 Mania (2020-Present)
The appreciation of these questionable drugs directly resulted from extreme monetary and fiscal policies in response to COVID-19. 

We will revisit these bubbles individually in future posts, breaking them into finer details. You will recognize familiar patterns and signs that preceded their bursts. Stay tuned as we explore the old faces behind panic-selling candles and uncover why these bubbles were destined to burst.