Same Bubble, Different Script

Lately I feel like I’ve been living in a reality-TV show. The script reads like the housing bubble of the late 2000s when over-leveraged, highly speculative activity in real estate and the unwinding of massive debt collided with crashing home prices to create one of the biggest economic shocks the US had experienced since the Great Depression.

But today’s reality script is also a bit reminiscent of the late 90’s dot-bomb bubble, when companies that sold everything from pet food to groceries discovered that just by putting up a .com website and taking their company public that they could get investors to pump up their stock prices. All of this…without ever making a profit. (And a lot of investors lost a lot of money).

Investment bubbles may share similar traits, but selling techniques have changed significantly over the decades. Now you can pay celebrity influencers to pitch your investments, and instantly millions of people can see them on social media. In the past you had to use chat rooms and websites to spread the word, and way before that you had to dial for dollars by calling lists of people to hawk your investments one-on-one. These new social media selling techniques may be causing new bubbles to grow much more quickly just because of the sheer number of eyeballs that social media can reach in minutes.

And what about leverage, does leverage make a difference in how investment bubbles form or end? The use of leverage in today’s bubble-prone investments – think things like crypto, SPACs, and meme stocks, for example – has the ability to cause a quickly-inflated bubble to pop even more violently, leaving investors little time to get their money out before they lose all or most of it. Why? When investors use leverage in highly-volatile investments and the market turns on them, some of them may be forced to quickly liquidate investments, and forced liquidations can cause even more selling as prices drop. In other words, the use of leverage in certain market conditions may cause a chain reaction of downward price spirals.

The bubble script feels different this time. The newer investment bubbles seem to inflate much faster than the old ones, and they “pop” instead of just deflating.

Where we go from here is anyone’s guess. Will the current bubbles become more contagious, and bleed into the economy like last time? Or will the consumers’ financial parachute – less debt and more savings – allow the economy to slowly drift down to the ground instead of falling like a rock?

Only time will tell… I’ll be glued to the screen until the final credits to see how this one ends.