The markets tend to follow some rationality in the long term, but there are no guarantees in the short term. This is because investors invest based on the future. And it’s relatively easy to manipulate expectations by making big promises and creating fantasies. The narrative does not have to be true or false. It just has to be popular for it to work. If many people believe that something is going to rise in price, that something will find demand and, consequently, it will rise in price, be it a gold coin or snake oil.
Faith is what moves the markets (in the short term). And no one promises more than the one who is not going to fulfill. Utopia sells a lot during the anticipation period. Because, during the anticipation, everything is magical and possible. There it captures the imagination of investors. And that’s when people are willing to give their money.
When the market falls under the spell of illusion, there is no argument that makes you doubt. The market falls in love with your vision of the future. And he only sees what he wants to see. It is the confirmation syndrome… But you are not alone. The environment is also haunted. Any appeal to good sense is badly received… Because the spell generates demand. And demand raises prices. So: What’s wrong with the critics? Can’t they see that the price is going up? Don’t they realize that utopia is real? But we know that this story is older than hunger and misery. In fact, it is repeated constantly, because greed and stupidity are never lacking in this type of tales.
Financial bubbles are those situations where the prices of certain assets shoot up to the sky and then crash to the ground, leaving investors empty-handed. They are not something new. They already happened centuries ago, when the financial markets began to work. But people never learn. And I am not referring to those who take advantage of the irrationality of others to make money. I mean those who still believe that this time is different… That this time we are going to reach utopia… That this time the flying pigs do exist…
Let us cite some famous examples. The South Sea Company, for example, was a British company that gained a monopoly on trade with the Spanish colonies in America in the 18th century. The company promised great profits to its shareholders, but actually had very little real business. Tesla, is that you? However, andthat did not prevent its price from skyrocketing thanks to a skillful publicity campaign and investor speculation. Eventually, the bubble burst, when the company was unable to meet its obligations and the government had to intervene to prevent the collapse of the financial system. Could there be anything negative to say about the company during the period of euphoria? Of course not.
We also have the case of John Law. Law was a Scottish financier who had the brilliant idea of creating France’s first central bank and paper currency in the 18th century. He also founded the Mississippi Company, a company that exploited the French colonies in America. Law convinced the king and investors that his plan was the solution to the country’s economic crisis. But it was all an illusion. The company was not as valuable as Law claimed, and paper money had no real backing. The bubble burst and Law had to flee France. Could there be anything negative to say about the genius John Law during the period of euphoria? Of course not. By then, John Law was an Elon Musk.
Tulipomania was a collective fever that gripped the Netherlands in the 17th century. Tulips became an object of luxury and social prestige, and their demand grew exponentially. Some bulbs were worth more than a house or a boat. But the madness was short-lived. In the end, many speculators were ruined and the country entered an economic crisis.
The dot-com bubble was an explosion in the valuation of Internet-related companies at the end of the 20th century. Technological development and innovation created great expectations about the potential of the network as a source of income and growth. Many companies went public with public stock offerings that attracted millions of investors. However, many of these companies did not have a clear business model or real benefits.. The bubble burst in 2000, when the Nasdaq index lost more than 75% of its value and many companies went bankrupt or were taken over by others.
Now, the bubbles have common elements: an innovation that creates a new business opportunity, a narrative that seduces investors, demand that outstrips supply, a collective euphoria that ignores risks, and an abrupt correction that causes panic and disillusionment. Bubbles can also have serious social and political consequences, such as increased inequality, popular discontent, and institutional instability.
People are very susceptible to falling into the seduction of the unreal. Because the unreal can be molded at will. There is always someone willing to believe in fantasies… convenient. This happens in religion, in politics and in finance. The will to believe is very strong. The promise of unlimited riches has great appeal. It sells and sells a lot. It is the charm of the El Dorado.
But the unreal also has a price. Sooner or later, reality prevails and undoes illusions. Those who believed in the unreal are left empty-handed and heartbroken. Those who sold the unreal take the loot and disappear. This also happens in religion, politics and finance. Deep down, the will to believe is very weak. The promise of unlimited riches turns into a nightmare. It does not sell and it does not sell anything. It is the disappointment of El Dorado.
In the end, those who win out of these stories of dreams and failures are the cynics and skeptics, who do business without being emotionally or sentimentally involved, chasing profitability at every opportunity and point.. In these cases, being too gullible can lead you to fall into traps and deceit, to lose your money and your dignity. Being more pragmatic and a bit suspicious can protect you from these risks and help you achieve your goals. Where are the bubbles? Bubbles are everywhere.
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