Something doesn’t smell right. More than a decade on from the last global crisis, financial markets are looking decidedly weird. Hordes of day traders are flooding the system with big bets on ropey companies. Crypto-currencies are rising and falling and rising again. Companies are able to stretch the truth through sneaky financial engineering. All of this weirdness indicates one thing: we’re in bubble town, and it looks like bursting.
The most famous historic example of a financial bubble is the Tulip Mania of the early 1600s. This began, rumour has it, when a Dutch botanist brought tulips back from Constantinople, looking to conduct research on the multicoloured flowers. His neighbours began stealing the exciting plants and selling them on to others in Holland. As the demand for tulips increased the price began to surge, reaching a peak in late 1636. And then in weeks it collapsed in spectacular fashion.
This pattern has often rippled through the financial markets. An asset becomes desirable. Everyone wants a piece of that desirable thing. The mood changes and sentiment sours. That souring becomes contagious, much like the desirability was. Suddenly no one wants bloody stupid tulips anymore.
Bubbles are likely to grow when there hasn’t been a financial crisis for a while, when people are at their most gung-ho with their money. They are really easy to spot retrospectively, but have historically been trickier to gauge as they are developing. But right now the world is not short of signs.
Bubbles thrive when assets are bought on faith rather than analysis; where stories are more impactful than financial results; in which charismatic leaders are trusted above all else; where critics are derided as people who just don’t get it; in which money is treated frivolously. It seems remarkably similar to the climate we’re in right now.
Here are a handful of signs we’re in a big fat bubble.
Everyone’s a trader
Since the pandemic began, there’s been a surge in people working from home, grabbing their phones and getting into trading stocks. Anecdotally speaking, everyone seems to think they are pretty bloody good at it. But obviously it’s very easy to be ‘pretty bloody good at stockpicking’ when the market is positive.
The day traders don’t act like the white-collar investors. They hunt in packs. They can stomach much more risk. They tend to eschew complex financial analysis for ‘what smells right’. The subthread on Reddit WallStreetBets, which defines itself as ‘like 4chan found a Bloomberg terminal’, became the day traders’ favourite place to share ideas.
