Bursting Bubble

[joshuanip]

Originally Posted by Tyruscobb

I agree. The increasing heard number only increases the heard mentally and its adverse effect when the selling starts.

Herd aka crowd effect, is a signal that most of the entrants have jumped in the pool and are drinking the coolaid. But crowdedness doesn’t cause the bubble to pop. Bull markets don’t die of old age, they get murdered. The 2000 bubble popped because people were using relative price/sale valuations on companies with no earnings and poor fundamentals (like today’s SPACs). The 2008 financial crisis was caused by systemic risk in the financial system brought by greed and lipstick pigs, aka private-label, securitized liar loans.

This current bubble has shades of it all. The dot com valuations of 2000, the inflated home prices of 2008, and the possibility of a 70’s Nixon style inflation that killed the nifty fifty back in ‘73. Interesting that the nifty fifty, or the country’s fastest growing large caps is analogous to FANG/tech. Which is plausible as we move away from zero bound discount rates, impacting growth company valuations the most (as their terminal out year values are shrunk by a rising discount rate). If you were wondering why growth underperformed value (dividend/materials/energy/financials), this is why. This may not happen, we may continue to get a Goldilocks economy for a little longer because the economic disparity is creating a very unbalanced economy not conducive to sustained inflation. But the risk is still there.

Long winded way of saying herd mentality is a signal on how much juice is left to squeeze, but not necessarily for a top or end of the bull run. FOMO and herd mentality can last for a while - exemplified in this 12+ year bull run in the market.

“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” - John Templeton

And yet I find it interesting outside of the MDs, none of the analysts have been around the last time there was a bear market...