Bubbles are not rare accidents: they are a constant of financial history, from the Dutch tulip mania of the seventeenth century onwards. The scenery changes; the script never does.
The unchanging anatomy of a bubble
The economist Hyman Minsky described the phases: a genuine innovation creates legitimate enthusiasm; easy credit amplifies the movement; prices disconnect from fundamentals; the general public piles in, drawn by other people's gains; then a trigger (often minor) reverses the flow, and the exit jams.
A few historical landmarks
- 1929: massive retail leverage, then a decade of depression.
- 2000, the internet bubble: the Nasdaq lost nearly 80%. The internet really was a revolution: a genuine technology is no protection against a false price.
- 2008, subprime: risk was held to be “dispersed and therefore contained”. Correlations converged towards 1 and everything fell together.
The most expensive sentence in financial history
“This time it's different.” It has preceded every bubble. The justifications are always brilliant and often partly true — which is precisely what makes them convincing.
The signals to watch
- Valuations with no link to earnings, justified by new “metrics” created for the occasion.
- Widespread use of leverage and borrowing to invest.
- The general public piling in and discussing returns at dinner parties.
- Open contempt for those urging caution: “they just don't get it”.
The real lesson
Nobody can predict the top of a bubble: many have ruined themselves betting against one too early. The useful lesson is not to forecast the crash: it is to build a portfolio that survives it without forcing you to sell at the worst moment.
À retenir
- ✓Bubbles always follow the same script; only the scenery changes.
- ✓A revolutionary technology never protects against an absurd price.
- ✓The aim is not to predict the crash, but to survive it without panic-selling.