What is an economic bubble?

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Uno de los escenarios que más temen los inversores es la llamada burbuja económica. No es sorprendente que be un procedimiento que conduce a importantes dips in the markets variable income. They are not frequent, but when they arise you will have no choice but to move away from any position in the stock market. The cuts in the price of the actions are very intense and can fall to minimum 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 bag that arises when there is a serious impact on financial markets. In any case, and this is more serious, the bubbles appear even without uncertainty and without speculation scenarios. Even though 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. Algo que se comprende mejor como en el caso concreto de la llamada burbuja inmobiliaria, tan sensible en España en los últimos años. Por otra parte, es la reflexión que ocurre como resultado de un período de esplendor o auge económico. Luego de un período de expansión económica, casi siempre precede al escenario del que hablamos en este post.

Bubble: can end in a crack

A very interesting fact about the economic bubble is that it can end in a financial collapse that can destroy a great deal 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 this is materialized in the next division that we indicate: rational, intrinsic and even such contagious calls. Even though the latter have a more psychological component above other macroeconomic approaches. It is characterized because this fact is preceded by a critical phase. Where buyers start to run low and some investors start trading their positions in the financial markets. To end in the dreaded outbreak or for a term you may know them better as a crash, even if 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 throughout the world. They are easy to recognize and it is especially based on the following posters that we expose you below so that you have a little clearer about 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 drops significantly.
• The consumption decreases fundamentally 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 savings above other considerations.
• The growth of economies falls to levels that can be considered very dangerous. It is not surprising that it is very common for them to be in negative growth for several quarters or even years as in emerging countries. It is the most devastating factor in economic or financial bubbles.
• The unemployment it grows when this economic situation occurs, in some countries with percentages that can be very difficult for governments to take over. Fundamentally where there are problems considered structural, as an example in Spain. With levels higher than 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 the same trading session that can exceed 10% levels 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 increase The price of certain shares or properties 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 (even when this scenario is not usual) 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 talk about this characteristic economic movement it seems that we are referring directly to the crisis or real estate bubble. But the prohibition is that they do not necessarily have to coincide, far from it. Even when they coincide in their origin since it has very well defined constants that can be analyzed by financial analysts with the highest status in the markets. As we might expect, the origin of financial bubbles is usually speculation. Speculation is about obtaining an asset or product with the main purpose of selling it later at a higher price.

Law of supply and demand

Whatever the 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 is a strong mismatch between supply and demand. When this happens, it is generating a very important impact on the economy of a country or on a global scale, as has happened in recent years with economic crises. They do not impact a specific country, but very large economic areas, as it could be, for example, in the euro zone.

Another aspect that must be considered from now on is based on the fact that, to a certain extent, it is feasible to anticipate these very pronounced movements in international economies. Since, in effect, it consists of strong price growth, which might seem like the typical take-off of a financial bubble, it will not necessarily correspond to a bubble. From this approach, it implies 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

Whatever the 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 of which we speak can occur. Not surprisingly, it is characterized especially because in the tertiary trend corresponds to price fluctuations 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 type of bubbles can be collected or detected. Where there are 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

No obstante, existen otras fuentes de análisis que explican este importante hecho o event económico. Como a modo de ejemplo, es un irrational analysis, based solely on the earnings obtained in the recent past of the asset. Regardless of at no time the part of the fundamental analysis of financial assets. And that can generate 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 feasible 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 unfavorable scenarios for the actions of small and medium investors. Where they have more to lose than to gain.