A lot of people are talking about a top or a crash on the horizon. Most bull markets end in a Euphoria phase. This phase is not really impacted by fundamentals or political events.
Bubbles are about emotions. Granted the central banks are a contributing factor. Their monetary policy has been to print too much money and keep interest rates too low for an extended period of time. But, the main cause, is human emotions.
When markets go up for a number of years people convince themselves that this is normal, expecting prices to continue to rise. They watch people around them making money and they want to do the same. This should remind you of the tech bubble in 2000 and the real estate bubble in 2006-2007.
This is called herd mentality. Perhaps it might be useful to look at Bitcoin for an example of that mentality and the bubbles that come with that kind of thinking.
What is Bitcoin?
Bitcoin is a new currency created in 2009 by an unnamed person using the alias Satoshi Nakamoto. Bitcoins can be used to buy merchandise anonymously. Transactions are made with no middlemen, meaning no banks. More merchants are accepting them. International payments are easy and cheap because bitcoins are not tied to any country or subject to regulation.
Small businesses like them because there are no credit card fees. Many merchants convert immediately to traditional currency through the Bitcoin Exchanges. This suggests skepticism about the ability to replace traditional currencies as a medium of exchange.
You can also invest in Bitcoins
You will hear many excuses as to why bitcoin will never go back down in price. However, Bitcoin is exhibiting all the sign of a bubble. It has rallied over 400% in the last year and its price is very stretched above its 200 day moving average.
This is all a sign of emotions and not fundamentals driving the market for bitcoins. You’re thinking that everyone is making money in bitcoin and that you can as well. Prices move higher and people chase it higher because they want what other people have.
This move will end just like every other bubble. At some point, the bubble move runs out of buyers. Prices collapse in a waterfall event and people lose all of their investment. Governments are not going to allow people to create their own currency. We may have already seen the top. When the bubble breaks investors may lose everything and those investors are going to demand restitution.
Governments will come into regulate and eventually will put a stop to this scheme and that will be it for bitcoin.
Now Back to the Stock Markets
Analysts are saying that the market is topping, that valuations are too high. North Korea is going to start a war, the market has been rallying for years….
But the fact is, we haven’t seen the kind of sentiment that would indicate that we are near a bull market top. Most tops take time to develop. There is a distribution phase where market insiders unload their stock on unsuspecting investors and that takes time.
Bull markets top when you start to see the kind of sentiment that is showing up in bitcoin. At market tops, mom and pop investors flood into the market. They see their neighbors getting rich and they want to be apart of that.
At times like this, you start to see sentiment extremes!
Sentiment was very extreme during the tech bubble in 2000 and the real estate bubble in 2007 compared to where we are now. We are nowhere near the sentiment that would indicate that the bull market is over with. We are not at the point where neighbors are chasing neighbors.
You will hear from the “experts” all of the reasons for the bull market to end. None are valid until we run out of buyers. We are not going to get a top because the fed is going to raise rates, or because North Korea is shooting missiles or that valuations are too high.
We need to run out of buyers
We should see a move in sentiment similar to 2000 or 2007, remembering that the bubble in 2007 was in the real estate market.