Bubble Anatomy/Bubble Anomaly

Market bubbles are called bubbles for good reason. They form, they inflate, they grow to an unstably distorted size, and ultimately they undergo the effects of rapid decompression in search of equilibrium. In a word … they pop. And generally speaking, the bigger the bubble the bigger the bang.

Global Macro Fund

Most of us are pretty good by now, we think, at spotting bubbles. After all, we know what they look like; we recognize their characteristics, don’t we? Maybe. Maybe not. Not all bubbles look or act the same.

Market bubbles are most commonly identified by the destabilizing speculation that accompanies them—a Gold Rush mentality, one might say. They are often described as manias, crazes, financial orgies in which the only direction appears to be up, and no one wants to be seen as the last to jump on the gravy train. Think here of the typical investor in 1999 as the dot-com insanity neared its zenith. Think of the leveraged home-speculating and flipping frenzy that peaked in 2006—aided and abetted by the invention of the securitization sausage machine, the latest enabler of Wall Street avarice, which ground out subprime-mortgage-backed securities that author Michael Lewis later described in The Big Short as “towers of crap.” Those were classic “bubbles” all right: mad money bidding up the prices of increasingly riskier assets far beyond their actual worth. But what about now? Is there a bubble inflating again?

If so, it lacks the signature fervor described in the two instances above. Sure, the popular market indices continue their march into new all-time high ground, extending an advance of 159% that began 4½ years ago, with no interim correction greater than 22%. But the telltale signs of emergent retailinvestor, greed-driven speculation are conspicuous by their absence. If anything, whipsawed investors may be more reticent and wary than euphoric or intoxicated by Keynesian “animal spirits.”

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