Financial assets as a percentage of economy hit all time high

“This time it’s different,” say supporters, as they did in 2000. Dot-com stocks, it was said at the time, could go to the moon and beyond because the Internet will continue to expand for decades.

The assertion that the Internet would continue to expand was correct, but the assumption that this growth would send stock prices into an inexorable bubble was incorrect.

Once again, reasonable-sounding arguments are being used to justify forecasts of unstoppable stock price increases.

What hasn’t changed is that humans continue to experience extremes of emotion, such as manic euphoria, herd behavior (a.k.a. FOMO, or fear of losing out), and panic / fear.

All bubbles pop, despite promises to the contrary, since they are dependent on human emotions.

We try to justify them by referencing reality, but the truth is that speculative manias are manifestations of human emotions and the feedback of running in a herd of social animals.

Here is a graph of financial assets as a percentage of GDP

Note: Financial assets were about 3 times GDP during the postwar period of broad-based prosperity.

Financial assets are now 6 times the size of the “real economy” (GDP), an extreme beyond all previous extremes.

This represents the financial assets’ domination, which is built on massive debt, leverage, and speculation.

Extremes in sentiment, value, and other factors may cause the red warning light to flash for a long time.

Asymmetry is common in speculative bubbles: those that spike higher appear to fall in a mirror-image of the manic rise.

As manic greed gives way to doubt and then panic, the popping of a bubble is symmetrical.

Remember, when all the positive news has been released and priced into the market, the next piece of news is likely to be negative and unpriced.