One of the scenarios that investors fear the most is the so-called economic bubble. Not surprisingly, it is a process that leads to important dips in the markets variable income. They are not frequent, but when they emerge you will have no choice but to be away from any position in the bag. Cuts in the prices of actions they are very intense and can drop to minimal levels. To the point that they can be taken advantage of by the most speculative investors.
However, not all small and medium investors know its true meaning. Well, so that you have it clearer from now on, you should know that an economic bubble, also called financial, is a performance stock market that occurs when there is a serious impact on financial markets. Either way, and this is more serious, the bubbles appear even without uncertainty and without speculation scenarios. Although in the latter cases they are more complex to detect by the different financial agents.
Another factor that you should know now is that this economic phenomenon is becoming more common with the processes of price coordination. Something that is better understood as in the specific case of the so-called real estate bubble, so sensitive in Spain in recent years. On the other hand, it is the reflection that emerges as a consequence of a period of splendor or economic boom. After a period of economic expansion it almost always precedes the scenario we are talking about in this article.
Bubble: can end in a crack
A very interesting fact about the economic bubble is that it can end in a financial crash that can destroy a large amount of wealth in a country. As has happened in recent years with the Great Depression of the 1930s and the housing bubble in Japan in the 1990s. These are examples that explain very well this financial movement that worries investors so much. Among other reasons because they can lose a lot of money in their operations on the stock market. Beyond other technical considerations and even from the fundamental point of view of financial markets.
Regarding their nature, they have different modalities and that materializes in the following division that we point out for you: rational, intrinsic and even calls as contagious. Although the latter have more of a psychological component above other macroeconomic approaches. It is characterized because this fact is preceded by a critical stage. Where buyers begin to be scarce, and some investors begin to sell their positions in the financial markets. To end up in the dreaded outbreak or for a term you may know them better as crash, although with bad memories for investors.
How to detect the outbreak?
When the so-called economic bubble is generated there are a series of signs that indicate that we are facing this delicate state in the economy of a country or globally. They are easy to recognize and above all it is based on the following signs that we expose you below so that you can have a little clearer this special economic movement.
- General fall of the equity markets, with levels that can be very intense and that are accompanied by a high level of contracting. In a few weeks, the value of the shares is significantly reduced.
- El consumption decreases notably to the point that it can put the economy of a country or geographic area at risk. Users spend less money buying service goods, take out fewer mortgages and spend less money on their regular purchases. With a promotion of saving above other considerations.
- The growth of the economies falls to levels that can be considered as very dangerous. Not surprisingly, it is very common that they are in negative growth for several trimesters or even years as in emerging countries. It is the most devastating factor in financial or economic bubbles.
- El arrest it grows when this economic situation occurs, in some countries with percentages that can be very difficult for governments to assume. Especially where there are problems considered as structural, as for example in Spain. With levels above 20%, as happened in the last economic crisis, in 2007 and 2008.
- The turbulence in the currency markets It is another of the common denominators of these very problematic scenarios in the economy. With differences between its maximum and minimum price in a single trading session that can exceed levels of 10% or even with more intensity in the most pronounced movements of these financial assets.
Effects of these movements
There is no doubt that the economic bubble can have pernicious effects on society in general. This is mainly due to the fact that abnormal and prolonged rise The price of certain shares or real estate triggers a spiral of speculation that ends up destroying the economy. The economic bubble does not have a fixed duration. If not, on the contrary, it can last from a few months (although this scenario is not frequent) to many years and destroy the international economy or at least some nations on the planet.
On the other hand, it is very common that when we are talking about this characteristic economic movement it seems that we are referring directly to the crisis or real estate bubble. But the ban is that they do not necessarily have to coincide, far from it. Although they coincide in its origin since it has very well defined constants that can be analyzed by the financial analysts with the greatest prestige in the markets. Not surprisingly, the origin of financial bubbles is usually speculation. Speculating consists of acquiring an asset or product with the main purpose of selling it later at a higher price.
Law of supply and demand
In any case, there are a series of signals that can give you some tool in its interpretation. As in the specific case that financial bubbles are an economic phenomenon that consists of a strong mismatch between supply and demand. When this occurs, it is generating a very important impact on the economy of a country or on a global scale, as is happening in recent years with economic crises. They do not affect a specific country, but rather very large economic areas, as for example it could be in the euro zone.
Another aspect that must be considered from now on is based on the fact that, to a certain extent, such sharp movements in international economies can be anticipated. Because in effect, it is a strong growth in price, which could seem like a typical takeoff of a financial bubble, it will not necessarily correspond to a bubble. From this approach, it entails a series of problems for a correct diagnosis of what a bubble of these characteristics is. Beyond its most basic signs and that can be confused with other financial movements of special gravity but that do not become a financial or economic bubble
Market trends
In any case, you should know from now on that the stock markets show trends that correspond to financial bubbles. According to Dow, the creator of the New York Dow-Jones index, the stock market exhibits three trends: the primary trend, the secondary trend and the tertiary trend. It is in the latter where the bubble we are talking about can occur. Not surprisingly, it is characterized above all because in the tertiary trend it corresponds to the fluctuations in prices produced during the same session on the stock market.
On the other hand, it should also be noted in this regard that the fact that a financial market is overrated and sales are imposed with special forcefulness is another of the signs by which this kind of bubbles can be collected or detected. Where there is sharp falls and panic among investors, to the point that they will sell their positions in the equity markets even at the cost of losing a lot of money on their investments.
Other reasons for its appearance
However, there are other sources of analysis that explain this important fact or economic event. As for example, it is a irrational analysis, based solely on the earnings obtained in the recent past of the asset. Without at any time taking into account the part of the fundamental analysis of financial assets. And that can lead to unwanted effects on the part of small and medium investors. Beyond other technical considerations and even from the fundamental point of view.
Where it is also possible that in overvalued markets, and with an environment of tremendous optimism, it can lead to the opinion of investors that these situations will not change for a long time. To the point of creating scenarios that are not at all favorable for the actions of small and medium investors. Where they have more to lose than to gain.