The first mistake that investors make when a bubble is in progress: They assume that this time is different and that it is the fundamentals that are driving the markets. You need to know that bubbles are driven by human emotions and not by economic fundamentals.

In the 2000 tech bubble, the rhetoric at the time was that profits didn’t matter that they would eventually come. It seems absurd because we know what happened. (As you follow this discourse you will be able to identify an underlying theme).

During the oil bubble in 2008 the rhetoric at that time was that we had peak oil and that supplies were going to get harder to find. We were looking at a different world and that oil prices were never going to come back down. Strangely enough at that peaking stage, we had so much oil that tankers were stuck in the Gulf with no place to unload their oil.

The reality didn’t match the story. We can see how absurd that was. The fundamentals were not different this time. Bubbles are not driven by fundamentals but are driven by human emotion. In between the tech bubble and the energy bubble we had the real estate bubble.

The rhetoric of the time was that the world was running out of available space to build on. This was the reason why prices were moving parabolic. Those that got caught up in this bubble had created a story to explain the parabolic move in prices. Fundamentals were different this time. Hindsight again shows the mentality was way off base. 

Now we have the Bitcoin bubble.

The story created by those caught up in Bitcoin about why prices are going up and will continue to do so: The financial system is going to implode and that you have to have your money out of the financial system. When the system implodes you will be protected.

When you look at the above chart, any sane person can see that this is a parabolic market! 

They have once again developed a story that this time it is different. The financial system is going to implode any day.

Here is a chart of the banking industry:

There is no indication, whatsoever, that the financial system is under stress at all. There appears to no risk in the financial system. The time of greatest concern with our financial system occurred in 2008. We had a financial system that was massively over-leveraged. It was said that when the housing bubble popped the financial system would fail. Again that story never did match reality.

The impetus for my writing this two-part series was from Gary Savage and his Smart Money Tracker. Gary is a friend and has a tremendous record on calling the markets. I would highly recommend that you subscribe to his service.     

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