How to Recognize a Bubble

"Bubbles are invisible to those inside the bubbles" and we have been through one of the biggest economic bubble in history, but none of us saw it because we were inside that bubble. After the "Tech Wreck" of 2000 and other Chaotic Events, you need to be aware of "Bubbles" and the "Stage of the Bubble" in order to get on the right side of the equation and to profit.

Previous Bubbles have included:

• The Japanese "Take Over the World" Bubble of the late 1980's
• The Asian Currency Bubble of the mid 1990's
• The Internet/High Tech Bubble of the late 1990's
• The current Residential Real Estate Bubble of 2000-2005
• The coming Inflationary Bubble caused by the U.S. Government's attempt to mitigate the effects of the crash of these Bubbles and 9/11.
• And finally the Bubble in the money supply caused by super low interest rates while running up record deficits to pay for the War in Iraq and Afghanistan.

How a Bubbles Grow: 12 Easy Steps

1. A believable concept offers a revolutionary and unlimited path to growth
2. Surplus of funds and lack of opportunities lead to buying or investing in anything available
3. Idea is complex and cannot be totally explained or related to an investor
4. Crowd imitates leader. All Aboard! Even the gardener has a tip!?
5. Prices fluctuate from traditional level to overvalued level THEN to all new ground and all time highs.
6. New levels are sanctioned by experts. "We are in a new Paradigm!"
7. Fear of missing the boat takes over. Cloning of the idea occurs as many new overvalued competitors enter the market
8. Lending practices are eased. Money flows like water to anything or anyone with a new idea.
9. Cult figures emerge for the new paradigm. The media promotes lifestyles, not substance.
10. The Bubble lasts longer than expected, critics are dismissed. The last suckers are sucked in.
11. Fraud emerges as partly responsible for the bubble as the first cracks show in the bubble.
12. Finally everyone has a reason why it cannot continue. But nobody dumps but all hold onto profits. No new buyers. Market stalls.

How a Bubble Bursts

1. New supply of lower priced offerings occurs from rising prices. New IPO's get bigger and bigger
2. Rise in interest costs. The Government declares "Excessive Exuberance" and tightens credit too quickly.
3. Prices collapse and everyone heads for the exits at the same time. With no more buyers, prices hit free fall.
4. Fraud is uncovered in many diverse industries, and in monitoring and auditing agencies that leads to more selling.
5. Governments intervene and gives investors time to get out before the real decline.

Rules to Live By

1. Do Not Extrapolate the Future from the Present
2. Trends continue for long term: 2-5 years then suddenly reverse chaotically. Witness the Tech Bubble.
3. Intermittent secondary corrections occur at Fibonacci Levels of 38%, 50% and 62% that result in classic Bull or Bear Traps
4. Bottom picking begins several different times, trying to restart the Bubble to no avail. Massive losses occur to professionals trying to manipulate the markets.
5. Finally everyone recognizes that "Trends go further than you expect, and last longer than expected." Everyone gives up and sells.
6. As volume of the decline decreases, a slow recovery begins.

Interesting Reading on the current real estate bubble

An MIT study with nation wide data; MIT Study

A US Government Study by Location: US Study

The Grubb and Ellis 2005 Real Estate Forecast

San Diego Real Estate Report by Robert Campbell

How to Use this Information

All stocks, commodities, technologies, currencies and real estate are subject to local, national and international Bubble Behavior.

Whenever you are involved in owning, investing or trading anything, review these macro-economic lessons. They may save you TONS of money and make you a TON of money in the long run.

How to invest in real estate with little or no money and minimal risk.

If you would like to know how to protect yourself in a real estate crash,
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