EC Another Way To Look At Long-Term Bubble Cycles

Yes. We are in a stock market bubble. But what if conventional methods of examining market cycles miss a crucial point? While we often talk about parts of cycles (bull or bear), exploring the full-market cycle may provide another way to look at long-term bubble cycles.

The Speculative Cycle

Charles Kindleberger suggested that speculative manias typically commence with a “displacement,” which excites speculative interest. The displacement may come from either an entirely new investment object (IPO) or increased profitability of established investments.

The speculation gets reinforced by a “positive feedback” loop from rising prices. Such ultimately induces “inexperienced investors” to enter the market. As the positive feedback loop continues and the “euphoria” increases, retail investors then begin to “leverage” their risk in the market as “rationality” weakens.

Long-Term Bubble Cycles, #Technically Speaking: Another Way To Look At Long-Term Bubble Cycles

During the mania, speculation becomes more diffused and spreads to different asset classes. New companies get floated to take advantage of the euphoria, and investors leverage their gains using derivatives, stock loans, and leveraged instruments.

Long-Term Bubble Cycles, #Technically Speaking: Another Way To Look At Long-Term Bubble Cycles

As the mania leads to complacency, fraud and manipulation enter the marketplace. Eventually, the market crashes, and speculators get wiped out. The Government and Regulators react by passing new laws and legislations to ensure the previous events never happen again.

Wash, Rinse, and Repeat.


The Full Market Cycle

“‘Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits-a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.’ – John Maynard Keynes

Keynes’s idea of “animal spirits,” which were awakened by consecutive rounds of monetary stimulus on a global scale, has enticed investors to believe that all risks of a market cycle completion have gotten removed.

The exuberance from the financial media and many pundits reminded me of this chart on the full-market cycle.

Long-Term Bubble Cycles, #Technically Speaking: Another Way To Look At Long-Term Bubble Cycles

I have often discussed the importance of full-market cycles.

However, what you should note is that when it comes to investing, what has separated long-term “investing success” stories is when those individuals started their journey. 

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Terrence Howard 3 weeks ago Member's comment

Great read, thanks.

William K. 3 weeks ago Member's comment

Quite an interesting and insightful article, Indeed.

What I have deduced from watching is that the only way to "get rich quick" in the stocks business is to "buy low and sell high", but the brutal truth is that to "sell high" one must have buyers who are willing to buy at that high price. And as soon as that Mania starts to consider the actual price to value relationship it will be much harder to find buyers. So it seems that knowing when to sell is by far the single really important bit of insight and knowledge. The reversal is usually not quite as rapid as an actual bubble bursting, but it may be very close to it. So it is timing that makes winners and losers, no question about that.