May

30

 I'm fascinated by bubbles and crashes. They have a romantic feel, with all the theatrical elements reflected in a simple chart: enthusiasm, greed, madness, drama, fear, despair, and deception. My website has an entire section devoted to this phenomenon; I really believe that the study of these extremes can help us better understand the normal behavior of markets.

But enough theory! Japan small caps together with the GCC markets were the first bubbles to pop in 2006, and they haven't recovered since. The Mothers Index is probably one of the most manic-depressive of all markets I'm aware of. Since 2002 it has managed to climb from 500 to 2500 before falling back to 1500 in 2003, climbing back to 2500 in 2005, to finally loose 70% and counting. If you're looking for low correlations markets don't look further! But wait, I forgot to tell you that the bottom of 2002 was the terminal slot of a 90% freefall off its stratospheric 7500 peak in 1999!

Is this a sign of things to come in our part of the world? In spite of my general bullishness there are warning signs of sporadic irrationalities. How else can you name a struggling ex-dot com such as Artnet (Germany) that has an EBITDA of Euro 1 Mio and is valued at Euro 100 Mio?

But that's precisely the beauty of bubbles; they have this unmistakable flavor that brings out the best and worse of human beings. In the early stage you don't participate because you have decided that they are irrational. Then, after a rise of 50% you are still congratulating yourself, but you do have a little remorse for these opportunity costs. Then, after another +100% rise the elixir makes its way to your most greedy brain corners, and finally you decide to jump in (after finding the rational of course!). One of the most intriguing aspects of bubbles is that you make the highest returns precisely when nearing the peak.

Another fascinating aspect of bubbles is how they managed to fool everyone. Look at a chart of Deutsch Telecom since the late 1990s. What the Germans used to call the "Volksaktie" (the people's stock), looks more like a comedy than a romantic act. Actually, the chart does remind us of an inverted "V."

I wish I had kept all these useless analysts' reports on Deutsche Telekom (among others). They would have made for a great laugh today. But strangely they all disappear under some rug, no more trace in Bloomberg or anywhere. Maybe it's the invisible hand!


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