| Hi Taylor:
I saw the term "superbubble" the other day in reference to the stock
market and it seemed to have a pretty bad connotation. Can you explain?
Hi Ginessa: Happy to break down the horrors that are a "superbubble."
To the best of my knowledge, the term was coined by a big hedge fund
manager and used to describe a confluence of financial events that
will take us toward a worse-than-normal crash. Because there are bubbles,
and then there are superbubbles.
You've probably heard the housing market crash of 2008 described
as a bubble. The bubble analogy makes sense as we think of a floating
ball of soap that suddenly explodes and is gone, but the finance
behind it is a touch more involved. The root of these so-called
bubbles is when an asset or market sector experiences massive
gains beyond expectation. In the housing collapse, it was the
overheating subprime mortgage market. The money outgrew the assets,
and suddenly people were left holding notes with no actual value.
Bubble = burst.
2. Superbubble. When you have multiple bubbles at the same
time, that's when you start hearing this superbubble term. The
bubbles in question are A) real estate, where housing prices have
been climbing tirelessly for years; B) "Meme stocks" things
like NFTs, electric truck makers, and Gamestop and AMC trading,
where a lot of money comes into play before the actual value of
the asset is settled; and C) declining wealth within blue-chip
and speculative stocks, indicating that a lot of investors are
stashing their capital in safer places. If we see a big sell-off
as interest rates go up, that could be the beginning of the aforementioned
3. Will it happen? I try to stay away from lofty predictions.
I want to be ahead of the curve, but I'm not going to declare
something as harrowing as a superbubble that upends the American
economy. I believe that what goes up must come down, and I expect
that with as hot as the markets have been running for the last
three years, we shouldn't be surprised by a significant decline.
At that point, we get to reassess and buy a lot of stocks and
assets at a discounted rate before the market starts to claw its
way back up. As long as you don't have all your wealth tied up
in unproven commodities, it's not time for an all-out panic.
or no, the market always ebbs and flows. We've seen a lot of growth
in the last decade and had low interest rates for a number of years,
and those are good things to keep in mind as you invest and track
the markets. Thanks for the question, Ginessa!
© Taylor Kovar
March 22, 2022
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