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What to do in times of “irrational exuberance”?

September 1, 2020

Chasing bubbles is not a science, it is an art. Unfortunately, there is no precise instrument that can tell the exact day of a crash. Bubbles are very easy to identify in retrospect, but very difficult to predict. However, if we stop looking for precision for a moment, we can say that bubbles are generally enveloped in a certain air. Euphoria is breathed into the atmosphere. There are many new people, day traders and gullible speculators. They all feel like geniuses for making some money. These are the signs that the days of the bladder are numbered. The end is near.

Alan Greenspan was President of the US Federal Reserve from 1987 to 2006. The man was a force. He was nominated by Ronald Reagan. And he ran the Fed during the Reagan, Bush Sr., Clinton, and Bush Junior administrations. Today he’s a legend, but while he was in office he was also a legend. Of course, he will be remembered today as one of those responsible for the 2008 crisis. During his tenure, he allowed the excessive diffusion of financial derivatives and deregulation in many areas.

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What to do in times of “irrational exuberance”?What to do in times of “irrational exuberance”?

Many of us gasped when we heard the now-retired almighty Alan Greenspan, a lifelong staunch libertarian, a close disciple of Ayn Rand and an avowed neoliberal, with his tail between his legs acknowledges that there are many There has been excesses and certainties regulation was required. His post-crisis statements were like the conversion of an atheist on his deathbed after a life of unbelief. However, his expression “irrational exuberance” is not new. In fact, it was used by Greenspan during the stock market boom of the 1990s. This legendary phrase was used in 1996, not near the zenith of the dot-com bubble. And 22 years before the 2008 crisis.

The tulip crisis is considered to be the first major speculative bubble in history. In the 17th century, buying exotic tulips became fashionable in Holland. Prices reached exorbitant levels and amid the euphoria, people were doing a lot of crazy things like selling their homes and land to speculate in the tulip market. However, one fine day in 1637 someone wanted to sell and nobody wanted to buy. Probably because the money was gone or because there was a moment of clarity. The bubble burst and the Dutch economy went bankrupt.

Another famous bubble from history is the South Sea Company bubble. The South Sea Company had absolute control over trade with the Spanish colonies in Latin America in the 18th century in England. The company began its first trade route with the region in 1717. Over time, the stock’s value skyrocketed due to the hype surrounding his “wonderful” expeditions into the new world. The country fell into a speculative frenzyBut eventually prices fell when the company was found to have no real profit. Even the great Isaac Newton lost money in that bubble. Leave for the ages this great sentence about the stock market: “You can calculate the motion of the stars, but you cannot calculate the madness of men.”

The 1929 crash was the largest crash in Wall Street history. It came after the boom of the 1920s. In the 1920s, many people first started investing in the stock market. Many went into debt to buy stocks. And everyone thought that the boom would last forever as Wall Street became an international place. And they got orders from Europe and other parts of the world. However, that bubble also burst.

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Of course, many of us still have the dot-com bubble and the mortgage bubble on our minds. And I’m afraid history repeats itself very often. During a bubble, we always have two great characters. The naive speculator and the “stupid” conservative. I declare. New people arrive during the optimism phase. They tend to make money on their first trades amid the bullish boom and already consider themselves experts. In a short period of time, they are taking more risks and looking for more profit in no time. In general there is no basic research or study. His strategy is rumor and instinct.

The Robinhood platform has 13 million users and 3 million of them opened their accounts this year. Most are young people in their 20s. And they’re like piranhas. They buy at the very bottom and their goal is to make big money fast. Now Reddit forums are all the rage. And what you read are sentences like “You only live once.” It’s the same atmosphere as in a casino. How can you explain that following the Hertz car rental bankruptcy, shares have skyrocketed?

After the resourceful speculator, we have the “stupid” conservative. This character is actually not stupid. He only admits there is a bubble and says so publicly, but is branded a fool by others blinded by greed. The greedy see caution as idiocy. Warren Buffett, for example, is a typical “stupid conservative.”. The greedy like to ridicule him in every crisis. In conclusion, the presence of Robinhood dealers and the intensity with which the warnings of seasoned investors are mocked confirm the existence of the bubble.

The Buffett Index tells us that the market is overvalued in relation to gross domestic product. However, as long as inflation stays at the bottom, injections of liquidity will continue to fall from the sky and keep stock market prices up. The bubble continues to grow in size and has so far found no reason to burst.

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However, What can we do? We basically have two options. One is to ride the wave and the other is to do nothing. In other words, we can try to make a profit. As we near the zenith, we can sell a little and keep the rest. As the bubble gets bigger, we can liquidate more positions. But it is also important to do nothing. Just wait It is held and the bubble is expected to collapse and then buy on the bottom.

What not to do Falling into the trap of greed is not a good idea. In other words, trust the feeling of the moment, depend on rumors, and think that bullish cycles are forever. It’s not a very good idea. Better listen to a little more “stupid” speakers and a little less Reddit forums.

With Bitcoin, greed also goes through the roof. They all have an optimistic forecast. Eye! The same old rules apply here. Do not invest with money borrowed. Do not invest with the money we will need. Buy in the background. Build with a long term vision. Be skeptical of professional fortune tellers telling us what the price will be for December. Realize that the friend’s friend who supposedly knows a lot doesn’t really know what he is talking about. Bubbles always explode in the midst of euphoria. When the euphoria comes, you have to be very attentive.

The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You must do your own research when making a decision.

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