Deflating the Myths About Bubbles

By David Skarica

Wikipedia defines “economic bubble” (which it also says is sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) as: “trade in high volumes at prices that are considerably at variance with intrinsic values. It could also be described as a trade in products or assets with inflated values.”

In the past 15 years, we have seen a tech bubble, a real-estate bubble, a leverage bubble and probably a government-bond bubble.

Because bubbles have happened so often in recent years, many are quick to call a bubble anytime something goes up in price.

However, true bubbles are once-in-a-generation events. They don’t occur that often. Just because something goes up in price, that doesn’t make it a bubble. A bubble occurs after years of gains, ridiculous valuation and mass public participation.

For example, many want to call commodities or agricultural items a bubble when such products as wheat are up 70 percent to 80 percent in the last few months. And with many emerging markets rallying strongly, many want to call that a bubble as well.

However, when you look at the situation closely, it says otherwise.

Many emerging markets aren’t even expensive: The Peruvian ETF trades at a meager 10 times earnings. Before nearly doubling, wheat was trading at a 200-year inflation-adjusted low. A doubling from a 200-year low isn’t a big deal.

Just because some emerging markets are surging due to strong economic fundamentals — or commodities stage strong rallies while the Fed prints money like there’s no tomorrow — it doesn’t mean these markets are bubbles. Just because a market or sector rallies strongly – that doesn’t make it a bubble.

But what is a bubble is the ever-expanding cluster of so-called experts who are warning about bubbles.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.