10 Bubble Rules You're Going to Want to Know

There’s a golden thread that weaves its way through all that’s happened to us and will happen to us.

It boils down to one word: bubbles. Yet one economist and analyst after the next are announcing that there is NO bubble… or at least not yet. And they give their reasons (none of which make any sense).

Even Janet Yellen, the Fed chairman, is of the opinion that we’re not in any kind of bubble.

Here’s the thing…

That is exactly what happens when bubbles form.

People from all backgrounds — the smart and dumb, the educated and the educators — deny the existence of that bubble.

I can understand why they do it. Most of them benefit from the free ride they’re enjoying as a result of the bubble, they don’t want it to end.

What they fail to realize, in their delusional states, is that bubbles don’t correct. They burst. And the aftermath is brutally painful.

The fact that so many people are defending the Fed’s policies and arguing why we’re not in a bubble is the best sign that it is in fact a bubble.

By just stepping back and being objective, this fact is obvious.

The trajectory of the market, especially in the last year, has been classically bubble-like in its pattern.

The Dow Jones has seen a larger point gain than in the dramatic late-1994 to early-2000 bubble. It is up over 140% in a little less than five years, and there has only been one bull market since the early 1950s that has lasted longer than that without at least a 20% bear market pull back.

The last bubble that burst saw the Dow rise 100% in five years, then crash by 50%!

The Fed is creating one bubble after the next by its policy of pushing down short-term and long-term interest rates, which leads to massive speculation and returns chasing.

The consequence of unprecedented quantitative easing and money printing has not been inflation in consumer prices (as I’ve said for years it wouldn’t be), but inflation in financial assets.

Here’s the thing, from decades of studying all the bubbles in modern history, I’ve identified 10 rules that such phenomena follow.

Knowing them helps you to identify bubbles when no one else can, and it helps you know what the aftermath will most likely look like when the manure hits the fan.

The 10 rules that bubbles follow are:

Rule #1: All growth, progress and evolution is exponential, not linear.

Rule #2: All growth is cyclical, not incremental.

Rule #3: Bubbles always burst; there are no exceptions.

Rule #4: The greater the bubble, the greater the burst.

Rule #5: Bubbles tend to go back to where they started or a bit lower.

Rule #6: Financial bubbles tend to get more extreme over time as credit availability expands along with our incomes and wealth.

Rule #7: Bubbles become so attractive that they eventually suck in even the skeptics, like a succubus ensnaring unwary men.

Rule #8: No one wants the “high” and easy gains of the bubble to end, so everyone goes into denial, especially in the latter stages.

Rule #9: Major bubbles occur only about once in a human lifetime, so it is easy to forget the lessons from the last one. The last bubble of this magnitude that burst was from 1922 to 1929: the Great Depression.

Rule #10: Bubbles may seem fruitless and destructive when they burst, but they actually serve a very essential function in the process of innovation and human progress (more on that another day.)

Learn why the Dow will plunge to 6,000!


Harry Dent