💥 How To Identify A Bubble

Yes. This is the City Chad, your financial weatherman forecasting a strong chance of success in your ventures. Let’s start sunny-side up!

In this week’s edition:

• Markets:  🌮 Me Gusta!

• Article: 💥How To Identify A Bubble

• News: 🐂 Bitcoin, Is The Next Bull Run Coming?

• Chadette Of The Week: 🛡️ Suella Braverman

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MARKETS: ME GUSTA!

Ahoy dear Chadettes and Chads!

We had another saucily good week in the markets in the past week. Stocks kept steamrolling ahead as did crypto and pretty much all asset classes.

As we discussed last week investors are now counting on the FED to not be raising rates soon. And some new data this week seems to be helping this case.

No one wants a huge recession. But a cooling off in the economy and lower inflation can provide a great space for risk assets (like stocks and bonds) to continue heading higher.

Crypto kept climbing. Is the next Bitcoin bull run coming? Read the News section below to find out more!

ARTICLE: 💥HOW TO IDENTIFY A BUBBLE

TLDR: Investing can be tricky, especially when there's a risk of running into financial bubbles. These are dangerous areas where you can either make a lot of money or lose it. Most likely the latter. Knowing how to spot these bubbles is like having armor against making bad decisions. Chad give you the down-lo on how to spot one without breaking much sweat

• 💭 What is a Financial Bubble?

• 🚀 Hype around new tech

• 📊 The “CAPE” Ratio

• 📉 Weak fundamentals

• 🧐 The Takeaway

Introduction

“Am I in a bubble?”

The question careful investors that just made a load of paper profits are asking themselves every night.

The truth is that financial bubbles can lead you to be filthy rich (if you sell at the right time) or leave you with empty pockets (the most likely outcome).

By identifying them, we can avoid falling into the cliff with everyone else like a lemming.

💭 What is a Financial Bubble?

A financial bubble occurs when the prices of an asset exceed their intrinsic value.

By a lot.

By intrinsic value we mean “what something is actually worth”.

That rise in price is not driven by fundamentals but more often by speculative trading.

Once the enthusiasm fuel burns out... the bubble explodes and prices decline at light speed.

Leaving people broke and a ton of sob stories to watch. Maybe even a movie gets made about it.

Think of the 2008 housing market bubble.

Bubbles can pass under our radar and fool us. Like that friend that said would pay you back. Yeah right.

Although in retrospect it all looks so stupidly obvious. But they often are backed up by media hype and some kind of herd behavior.

And realistically, few are immune to propaganda.

But worry not! Chad is here to help you identify them more easily.

So here are some tips that could show we are in a market bubble.

🚀 Extreme Hype around New Tech

This indicator is the most evident.

But I understand why this happens. Some ideas and the companies behind them can be very promising.

That’s why investors rush to capitalize on whatever the new tech (potential) snake oil is.

This large movement is followed by FOMO, which inflates the bubble even more.

The best example I can think of is the Dot-Com bubble of the early 2000s.

Basically, the internet was super hyped upon, and people started to invest in anything that had “.com” in their name.

We don’t have to go so far to the past to see other bubbles.

It happened with crypto in 2017-2018. 

Although Bitcoin recovered, most other “coins” didn’t.

Now AI and Biotech hypes are everyday bread.

They can even have good fundamentals but still be way overpriced. Meaning that it is unlikely that investors will ever make their money back even if the company does OK.

Be skeptical, be wise and don’t take impulsive decisions.

Remember that saying that goes “Be fearful when others are greedy and greedy when others are fearful.”

A good rule of thumb I use is what I call the “layman test”.

If you hear someone you know has no interest in any type of investing tells you “they just bought X and it’s gonna make them rich quick” you need to sell immediately.

📊 The “CAPE” Ratio

It stands for Cyclically Adjusted Price-to-Earnings Ratio.

Aka the PE10 Ratio.

This is how it works:

1.   You take the earnings from the past 10 years.

2.   Adjust it for inflation.

3.   Obtain the current market price of the stock or index.

4.   Divide the current market price by the average inflation-adjusted earnings to calculate the CAPE ratio.

5.   Compare the calculated CAPE ratio with historical averages to assess whether the market is currently overvalued or undervalued.

Quite straightforward.

A CAPE above historical averages can indicate that the market is overpriced.

While a ratio below historical average can suggest undervaluation.

The CAPE ratio is a great starting point, but keep in mind that it’s not the full picture.

Economics is not a science like physics; well, maybe quantum physics due to randomness.

Things can change from one moment to another.

The CAPE ratio uses historical data and remember that “past results are not indicative future performance.”

Remember that as a holy mantra: these strategies work until they don’t.

📉 Weak Fundamentals

This is something quite obvious, but if it were so evident, people wouldn’t fall for it.

Some things just make no sense.

Even if something is overhyped, it still can have strong fundamentals, or be a good investment.

But some things just don’t add up, and their prices are purely driven by FOMO or hype.

A great example is the GameStop case that we talked about previously.

It increased some people’s wealth and led to huge losses for others.

But GameStop has nothing intrinsic that made them a good investment.

Its rise in price was driven by a communal sense of justice and, of course, greed.

🧐 The Takeaway

Investing can be tricky, and financial bubbles are a real risk.

Now it should be easier for you to spot them.

It is like having armor against making bad decisions.

Keep an eye out for signs like hype around new tech, use indicators like the CAPE ratio, and watch out for weak fundamentals.

Being wise and skeptical can help you avoid potential pitfalls.

NEWS: 🐂 BITCOIN: IS THE NEXT BULL RUN HERE?

They say that no evil lasts a thousand years.

And this seems to be the case with Bitcoin! It seems BTC is shaking off that smelly bear market funk.

I remember as if it were yesterday the ATH of 69k (nice). I also remember the cold crypto winter that has followed.

Now it seems the sun is rising again with this recent rally. Personally, I'm bullish. And the market is too.

Or at least that's what the fear and greed index indicates.

Another indicator is that the next Bitcoin halving is relatively close. This is historically a time where buying Bitcoin has been a good idea.

It will happen in April 2024.

And the increasing likelihood of Bitcoin ETF approval certainly adds to the sentiment.

But let's not celebrate too quickly. Bitcoin is at its highest price since about a year and a half.

I wouldn't be surprised if a couple of whales decided to withdraw their spoon from the plate suddenly.

Really, it only takes a small spark to enter a fear loop and have people start selling.

As we've said before, Crypto is a rollercoaster, with ups and downs. But like in all of them, excitement is never lacking.

CHADETTE OF THE WEEK: 🛡️ SUELLA BRAVERMAN

We are living in a convoluted world and tensions are growing every day.

In this context, having the wrong opinion can cost you a lot.

However, today we feature a woman that doesn’t fear to speak up her mind and condemn what she finds wrong and hypocritical within society.

Recently, British politician, Suella Braverman, publicly criticized what she thinks is a double standard concerning protest in the UK.

She publicly condemned a public pro-Palestine protest, denouncing “sick, inflammatory and, in some cases, clearly criminal chants, placards and paraphernalia openly on display.”

Harsh words, I know, she doesn’t really pull any punches.

That discomforted many, leading Prime Minister Sunak to relieve her of her position. 

Braverman proved willing to point out an uncomfortable truth.

A truth that resides in the minds of many citizens, but they dare not express for fear of censorship.

Suella earns the title of Chadette of the Week for staying true to her ideals and denouncing what she finds unjust, without fear of reprisals.

Sunak may consider himself brave, but Suella is braver, man! Sorry for that terrible pun.

Let's hope things in the UK normalize soon. Good luck, Suella!

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