10 Rules About Bubbles You’re Going to Want to Know


My new book, The Demographic Cliff, is now available. Have you ordered your copy yet? If not, you can do so here.

That and my recently published forecasts for the year, including the beginning of the next stock crash in early 2014, got me thinking that there’s a golden thread that weaves its way through all that’s happened to us and will happen to us. It boils down to one word: bubbles.

Yet one economist and analyst after the next are announcing that there is NO bubble… or at least not yet. And they give their reasons (none of which make any sense).

Even Janet Yellen, the incoming Fed chairman, is of the opinion that we’re not in any kind of bubble.

Here’s the thing…


That is exactly what happens when bubbles form. People from all backgrounds — the smart and dumb, the educated and the educators — deny the existence of that bubble.

I can understand why they do it. Most of them benefit from the free ride they’re enjoying as a result of the bubble, so no one wants it to end.

What they fail to realize, in their delusional states, is that bubbles don’t correct. They burst. And the aftermath is brutally painful.

The fact that so many people are defending the Fed’s policies and arguing why this is not a bubble is the best sign that it is in fact a bubble.

By just stepping back and being objective, this fact is obvious.

The trajectory of the market, especially in the last year, has been classically bubble-like in its patternrn. The S&P 500 has seen a larger point gain than in the dramatic late-1994 to early-2000 bubble. It is up 177% in a little less than five years, and there has only been one bull market since the early 1950s that has lasted longer than that without at least a 20% bear market pull back.

The last bubble that burst saw the S&P 500 rise 100% in five years, then crash to 58%!

The Fed is creating one bubble after the next by its policy of pushing down short-term and long-term interest rates, which leads to massive speculation and returnrns chasing.

The consequence of unprecedented quantitative easing and money printing has not been inflation in consumer prices (as I’ve said for years it wouldn’t be), but inflation in financial assets.

From decades of studying all the bubbles in modernrn history, I’ve identified 10 rules that such phenomena apply.

The Fed and central banks around the world have created the greatest bubble in modernrn history. Now, their only strategy is to keep the bubble going forever. How insane will that look in the future?

The thing is, when you get right down to it, bubbles follow 10 rules.

Knowing them helps you to identify bubbles when no one else can, and it helps you know what the aftermath will most likely look like when the manure hits the fan.

That’s why I go into these rules in much greater detail in Chapter 5 of my new

book. And it’s why I’ve spent decades studying all the bubbles in modernrn history… so that I can help you survive and prosper.

The 10 rules that bubbles follow are:

  1. All growth, progress and evolution is exponential, not linear.
  2. All growth is cyclical, not incremental.
  3. Bubbles always burst; there are no exceptions.
  4. The greater the bubble, the greater the burst.
  5. Bubbles tend to go back to where they started or a bit lower.
  6. Financial bubbles tend to get more extreme over time as credit availability expands along with our incomes and wealth.
  7. Bubbles become so attractive that they eventually suck in even the skeptics, like a succubus ensnaring unwary men.
  8. No one wants the “high” and easy gains of the bubble to end, so everyone goes into denial, especially in the latter stages.
  9. Major bubbles occur only about once in a human lifetime, so it is easy to forget the lessons from the last one. The last bubble of this magnitude that burst was from 1922 to 1929: the Great Depression.
  10. Bubbles may seem fruitless and destructive when they burst, but they actually serve a very essential function in the process of innovation and human progress. (More on that another day.)

So next time someone tells you we’re not in a bubble right now, slap them and then show them this article.


Follow me on Twitter @HarryDentjr


Ahead of the Curve with Adam O’Dell

Is the Bond Bubble Popping?

The Fed’s unprecedented levels of stimulus have indeed inflated risk assets and perturbed the natural equilibrium in a number of markets.