2/24/2022 - Economy and Finance

What are the financial bubbles?

By Gustavo Neffa

What are the financial bubbles?

The formation of a speculative bubble on some financial assets occurs when the market price is increasingly far from its real value, or also called intrinsic, that is, the value it should have.When this occurs is in the presence of a financial, market, economic or speculative bubble; all terms applied to Drive investors when inflating prices beyond reasonable. The objective analyses are not right to be, but how it would explain you. The fact that a bulb of a flower called tulipán has validated more than a house? This occurred a long time ago, there by the seventeenth century, was the first known big bubble. But not the last.

The most recent bubble was the price of dwellings that, when exploding, produced in the USA the market crisis of 2008 and the economic crisis of 2009. Another famous – and very “burbuja” – was that of the “point.com” companies of internet companies, succeeded between 2000 and 2002. The financial and real estate bubble of the 1980s in Japan is still present among many operators. Among those who have actually generated terrible effects on the economy is the 1929 stock crack that sank the US economy in the worst depression that is now, deep and extensive in time.

What is required for a financial bubble? It is necessary that different factors converge. First of all, it is necessary to give great increases in the price of an asset - or class of assets - due to a large generalized enthusiasm of the investor public about these increases. It also requires a great media repercussionWhich calls more investors to deposit their money into something they see going up, which they don't know why, but which powerfully calls them attention not to let go. In turn, new evaluation methods are needed to justify these high prices, that is, traditional methods are not applied, but some gurus explain that it is wise to pay these exorbitant prices, because they continue to give them that the asset would be in price or that it will increase even more. To all these characteristics in common, We have added the easy availability of credit and its low cost that increase the effects of a crisis. This phenomenon is much more frequent than many think and gest in financial markets and scholarships, largely due to speculation: begins with an abnormal and prolonged suba of the price of an asset, which tends to explore at some point of time. It is the so-called crash in English.Behind any bubble is always present the theory of the “larger act”: Investors, overly optimists who develop in a market ( fools) buy overvalued assets anticipating the sale to more foolish speculators still at a much higher price. That is,The new buyers of a financial asset do not buy it by the economic foundations, but do so to sell at a higher price in the future.

As it is often impossible to determine the intrinsic values of the goods or businesses behind some companies, or the new one that are or difficult to assess, Bubbles are often identified expost, i.e. retrospectively when prices have already fallen.The future funds flow discounted at the relevant discount rate, as an asset should be evaluated in practice, is not used at any time, because investors don't inject more money into that kind of losing assets.I cierro the note with a very well-known phrase, but that we should not forget: it is important to know that there was and there will always be bubbles, but that at some point explode. The spiral of continuous subas causes the price of the asset to reach absurdly high levels until the bubble ends up exploding, due to the start of the massive sale of the asset when there are few buyers willing to acquire it that can even take it at lower prices than that of its level of balance.

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gustavo neffa

Gustavo Neffa

I'm Gustavo Neffa. Director of Economics and Finance at FinGurú. Partner and director of Research for Traders, leading a team of market analysts. I spent the last 24 years in the financial sector in both domestic and foreign entities, having occupied the post of Senior Research Analyst in Macrosecurities of the Banco Macro and the BBVA Banco Francés, as well as economic analysts with the economist in chief of the BBVA Banco Francés. I am also a professor in Corporate Finance, Investment Portfolio Management, Financial Asset Valuation, Valuation of International Investment and Finance Projects in various MBAs and postgraduate courses in Buenos Aires and in the interior of the country and professor of the MBA of the UNLP and the UNNE of Financial Asset Assessment and the postgraduate degree in the UBA Capital Market in agreement with ByMA. Co-director of the UNLP Advanced Finance Programme.

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