The Bubble blowing contest

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

One element of Bullshift that I cannot help but notice is how the finance business has selective and self-serving definitions and explanations that abound when explaining the business to the public.

We’ve already discussed how a 10% move downward is called a “correction”,  but there is no term for a 10% move upward.  Is that an “incorrection”?  Who decides what is correct or not, anyway?

The related term that I often find a bit amusing is the word “bubble.”  Before reading further, take a moment to reflect on what you believe the word means when used in an economic context.  Have you got it?  Don’t read further until you have a firm definition and / or example of ‘bubble’ in your mind.

According to Wikipedia:

An economic bubble or asset bubble (sometimes also referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania, or a balloon) is a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Advisors usually acknowledge bubbles after they burst

In my experience, advisors generally only acknowledge bubbles after they burst.  Here’s a fictional story to illustrate that conditional acknowledgement.  Let’s pretend a pair of 12-year-old boys are in the world championships of bubblegum blowing.  The one with the biggest bubble wins, provided the bubble is generally accepted by judges without bursting first.

Three esteemed economists have been hired as judges in the contest. The boys get their gum, chew it and begin to blow their bubbles.  In short order, the bubbles become remarkably large.  Unbelievably large.  And identical in size …. there’s nothing to choose between them!  The judges can’t decide which of the bubbles is bigger … and yet they get bigger still.  Eventually, one of the identical bubbles bursts and the kid with the unburst bubble holds his position for a couple of seconds for the judges to acknowledge that his remains intact: and then inhales the gum back into his mouth, thinking he has won.

In the end, both bubble blowers are disqualified.  The first is disqualified because his bubble burst; the second is disqualified because he never blew a bubble.  Wait… what?  You say he actually DID blow a bubble?  Well, the economists huddled to discuss what they think they saw and come to a swift agreement that if it doesn’t burst, it’s not a bubble.  They also believe that if a tree falls in the forest and there’s not one there to hear it, that tree doesn’t make a sound.

Bubbles, according to contemporary finance, can only be identified as bubbles after the fact: meaning after they burst.  If you don’t think the recent Gamestop experience, SPACs, NFTs, current real estate prices and the like aren’t based on implausible or inconsistent views about the future, I don’t know what to say.  We’re in a bubble.  Now.  This very minute.  As we speak.  It may burst in a week or month or a quarter or a year, but it will almost certainly burst.

We are absolutely in a bubble now

“But” ask the cynics and critics, “what if it doesn’t burst?”   I’m no Kreskin, but what I know is this: by any reasonable standard, we are absolutely, positively in a bubble now.  That’s the reality.  Bursting is what we need to guard against and beside the point.  We need to be careful even if there are false alarms where the market inhales and averts a burst: for the time being, at least.

Whether market bubbles burst sooner or later is not really the issue.  Industry Bullshift is implicitly geared toward accurately timing markets, which includes calling tops.  That’s not accurate.  In reality, the financial advice industry is about the comprehensive stewardship of wealth and prudent risk management.  Those are the sorts of things that need to be done all the time.

Bubbles come and bubbles go.  Whether they burst or not is neither here nor there: especially if advisors are doing their job conscientiously.