Monday, July 16, 2012

A Bubble No One is Talking About

Bubbles form over time, and the majority of the media and investors are aware of the bubbles as they grow. However, despite the realization of the bubble – speculators continue to drive up prices for a seemingly long time before the bubble bursts. As we have seen in the past 20 years, bubbles that form always pop – and are violent when they do. There is a new “stealth” bubble that is going on right now in the markets. The difference between this one and the others from the past is that no one is talking about it or giving notice. I am calling this new bubble the “Hope Bubble”. It seems that with each passing day we receive negative news out of Europe, the global economy, or even the U.S. economy. What happens when we get this news? The stock market goes up in value. Investors are “hoping” for two things. The first is that the world’s central banks will ramp up stimulus measures thereby giving a pop to riskier assets. The second “hope” is that the global economy as a whole will have a “soft” landing and avoid recession. In order for the “Hope Bubble” to stay inflated and continue to get even bigger is for BOTH of these hopes to stay intact. If stimulus comes from central bankers, that will keep the bubble going. However, if the global economy starts to show evidence of a moderate to severe recession (which I believe is just a matter of time) – this “Hope Bubble” will burst and markets will plummet from all of the “Hoper’s” exiting the market.

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