Explaining the “Bubble” Phenomenon
I can be a bit goofy sometimes; I have to be, I work with teenagers. One day, I was doing the dishes and for some reason, I didn’t squeeze the soap bottle hard enough, and little tiny bubbles popped out. I was either tired or incredibly bored, and I just started to laugh. Mind you, I’m in my mid 20’s, so I had to have looked quite ridiculous standing in my kitchen, by myself, and laughing at this. Now, that’s not the type of bubbles I’m talking about, but it makes for a good laugh on Monday morning, doesn’t it?
“Bubbling” is a phenomenon that I mentioned briefly on Friday when I was talking about 5 events that occurred during the last decade that had a negative effect on our economy. Today, we’re going to look at that concept in a little more detail.
In short, bubbling is when a certain sector of the economy, which in recent years has been technology, gets an immense amount of confidence in it due to consumer expectations and innovative changes in the industry itself. The stock market explodes with people buying stock in those companies, effectively making a “bubble” that is larger than other industries with available stock. Now, this sounds like a good thing, and sometimes it can be. But other times it can be totally detrimental to the economy on the whole.
- 1. It causes investors to make snap decisions that they may not have otherwise made. “Oh, the technology sector involved with making tablets is having a good month in the stock market? They’ve gained $100 or more? Let’s buy now!” Then, all of a sudden, they level out or they start to dip… which leads to the second reason…
- 2. The “burst” is often detrimental for consumers. That’s the thing about bubbles. They eventually burst. And usually, when they burst, they make a mess. The same thing happens to these stock market bubbles- they eventually stop growing so quickly, resulting in a “burst“ that could potentially make a mess for investors.
Now, bubbles actually stimulate investment. But it’s at a high cost to investors at times, the money that they invest is lost in the shuffle and they can’t invest it somewhere else. It’s also unfortunate that certain sectors get those investments: Think about it, most of the strongest stocks at the moment are in technology or industries related to them. The further removed a company is from technology, the less likely they are to be doing well.
Bubbles can result in what’s called a boom-bust cycle, which is what many economists speculate we are in the midst of currently. In the 1990’s and early 2000’s investing was accelerated and people were overusing their easy-to-get credit. Many times, this results in what we’re seeing now, the “bust” part of the cycle, where consumer mistakes result in stock market recessions and, in the worst-case scenarios, depressions.
So, in the long run, bubbles aren’t the best thing, but because of the herd mentality many investors have (tendency of amateur investors to invest in similar industries), they’ll continue to happen. We’ll just have to hold out and see how long this bust part of the cycle lasts. Until tomorrow, spend smart, save smart!
