My dear Friends,

If you recently discovered your first grey hair, you probably suspect that there is some truth to the rumours about a financial market bubble building, and whether this could Burn Capital because you made a Ruinous Mistake.

The pandemic left many with unspent money, too much time, and a growing appetite for speculation. Suddenly, everybody seemed to invest in crypto, tech stocks, NFTs, property, or anything else wrapped in excitement and hyped expectations—all to survive lockdown boredom with a little adrenaline and the promise of effortless returns..

Expectation Bubbles begin with a hype, wrapped around an innovative idea, a shortage, a clever technology, or something suddenly considered impossible to ignore. FOMO replaces judgment, due diligence becomes a nuisance, and retail investors enthusiastically pour money into the booming new trend. Et voila, the Expectation Bubble inflates steadily.

So, before you make your next investment, and to prevent truly Ruinous Mistake being made, let´s find out more about bubbles and why Expectation Bubbles Burn Capital super fast.

Anatomy Of A Bubble

Bubbles need a combustion triangle to explode: Oxygen, heat and fuel, all three components must be present at precisely the same moment.

A financial bubble bursts if there is high market activity, easy access to credit and political or economic disruption.

Generally speaking, a financial bubble is an unsustainably high price for an asset class over a period of time. Once the bubble bursts, lots of money is lost, and economies or industries can be endangered.

Warning Signs

Once investments reach FOMO status, none of these indicators feels alarming anymore, and the bubble steadily inflates. While the hype lasts, the investment feels exciting, fashionable, oddly persuasive—and then there is the social proof, of course. This gratifying sense of being part of something really great.

How It All Happened

Throughout 2021, many economists raised their voices, warning that the zero-interest-rate policies of central banks in developed economies could lead to high inflation, distorted stock markets, and dangerously inflated real estate prices. At the time, those warnings sounded rather dramatic to some investors. After all, markets were booming, portfolios were growing, and almost every asset suddenly appeared to move in only one direction.

The markets have been flooded with “cheap” money for well over a decade. Quantitative easing programmes and extensive bond-buying by central banks pushed bond prices higher while yields drifted close to zero. For investors seeking meaningful returns, traditional savings and conservative investments have become increasingly unattractive.

Japan was the first country to implement a zero-interest-rate policy after the collapse of its asset price bubble in the 1990s. However, with limited success. For almost two decades, the Japanese economy remained trapped in deflation and weak growth, creating what economists describe as a liquidity trap.

Following the Great Recession (2008), the FED, the Bank of England, and the ECB lowered interest rates and launched extensive bond-buying programmes to keep the global economy afloat. When the COVID-19 pandemic began, governments and central banks intensified these measures further to soften the economic pressure from lockdowns and uncertainty.

The result is an environment where borrowing money becomes astonishingly cheap and remarkably easy. Risk suddenly feels less intimidating, speculation starts looking sensible, and huge amounts of cash—borrowed or otherwise—begin searching for investment opportunities almost anywhere. Institutional and retail investors alike pour increasing sums into markets with few opportunities and already struggling to justify their valuations.

Cheap Money. Inflated Confidence. Ruinous Mistake

Plenty of cheap money was made available, followed by extensive government investment packages designed to keep economies afloat during the pandemic. The result was a strange financial atmosphere in which markets continued to rise despite weak economic conditions, industry disruptions, and enormous uncertainty. Easy access to money fuelled optimism, speculation, and increasingly inflated expectations about what markets could realistically sustain.

Another side effect of cheap money was that many companies started buying back their own shares. There are several reasons for this. Share buybacks can increase shareholder value, improve financial ratios, and make a company appear more attractive to investors. However, in an environment flooded with liquidity, buybacks also helped push already elevated stock prices even higher, adding more fuel to an increasingly overheated market.

But it was not only cheap money driving this new wave of speculation. Fintechs and social media platforms created an entirely new type of retail investor. Trading suddenly became a game, entertaining, and available to almost anyone with a smartphone and some spare money. Investment apps removed traditional barriers to entry and transformed trading into something that felt less like long-term investing and more like participation in a fast-moving game.

When the times are good and when you’re making money, it all feels great. And when the times are bad and you’re losing, you can evaluate it like that and say, you know, ‘I don’t have a consistent paycheck.’ There’s no way to guarantee my future doing this.

AJ Vanover a lucky amateur trader who bought GameStop options and became a fulltime investor. Since November he’s discovering the challenges of giving up a regular paycheck.

Lockdown measures left many people with spare time, unspent money, and a growing appetite for excitement. Social media platforms filled the gap instantly. Financial influencers, online forums, TikTok “experts,” Reddit communities, and viral stock tips created a culture where market speculation became entertainment, identity, and social proof all at once. Investment decisions were increasingly driven by trends, online hype, memes, and the fear of missing out rather than valuation, research, or financial understanding.

This environment gave birth to the meme stock phenomenon. Shares of struggling or heavily shorted companies suddenly exploded in value—not necessarily because the businesses had improved, but because large online communities collectively decided to buy them. The excitement itself became the investment strategy. In some cases, prices rose to astonishing levels simply because enough people believed they would continue rising.

And that, my dear friends, is usually how a thoroughly questionable investment suddenly starts looking irresistible. Once investing becomes social entertainment and social media, the financial adviser, a Ruinous Mistake, is rarely far behind.

Titbits

A financial bubble is an unsustainably high price for an asset class over a period of time

Fintechs and social media platforms create an entirely new type of retail investor.

Piles of borrowed cash search for investment opportunities

Performance is no longer the benchmark, but pricing is driven by hope, momentum, and inflated expectations.

Stock prices rise faster than company profits

The bubble´s combustion triangle: high market activity, easy access to credit and political or economic disruption.

The rule: Every market high is followed by a low. This is called self-regulating

No reason to panic: Not every investment in a portfolio sits inside the bubble

Do not listen to panic-mongers, but stay calm, informed, and vigilant

Just Bubbles Or Already Froth?

A little over a year ago, stock markets seemed almost unstoppable. Following the dramatic pandemic crash in 2020, major indices recovered at astonishing speed and climbed to one all-time high after another. By 2021, however, the atmosphere had started to feel increasingly overheated. Meme stocks, NFTs, cryptocurrencies, and speculative tech shares dominated conversations, headlines, and social media feeds alike, leaving many investors wondering whether markets were still driven by fundamentals—or simply by excitement.
At one point, almost a quarter of all global bonds carried negative interest rates. Investors were effectively paying to lend money, a situation that would once have sounded entirely absurd outside a particularly experimental economics seminar. At the same time, Tesla’s market capitalisation surpassed the combined value of traditional car manufacturers in Japan, Europe, and the United States.

Apple, Alphabet, and Microsoft became the world’s most valuable companies, with market capitalisations reaching astonishing levels. Throughout 2021, it was largely tech companies pushing the S&P 500 to repeated all-time highs, reinforcing the belief that markets could continue rising almost indefinitely.

The IPO market at the New York Stock Exchange became “hotter” than ever before. Newly listed companies achieved average first-day gains of around 40%, while SPACs suddenly turned into the investment world’s newest obsession. Investors poured billions into these blank-cheque companies, often driven by little more than optimism, hype, and the promise of future disruption. In 2020 alone, SPACs raised more money than during the previous ten years combined.

Cryptocurrencies followed a similarly spectacular trajectory. Bitcoin increased its value fourfold within just a few months, while countless other crypto assets and trading platforms attracted enormous investor attention despite extreme volatility and limited regulation. Suddenly, highly speculative investments were no longer discussed as risky side bets but increasingly as portfolio essentials.

But as a rule, every market high is eventually followed by a low because markets tend to reach a self-regulating level. Economists, bank strategists, and the one-eyed amongst the blind start voicing doubts, and suddenly everybody tries to reverse what only months earlier looked like anything but a Ruinous Mistake. Another reliable feature of these moments is the return of the fearmongering “expert,” enthusiastically predicting “the most extreme financial bubble in history” or warning that there is not just a bubble but thick froth and everything will inevitably end in a major economic disaster.

Bye, Bye Hoorays

Throughout 2021 reality caught up with investors. Throughout 2021, reality slowly started catching up with investors. Questions that had been conveniently ignored during the market euphoria suddenly returned to the table. Will economies really bounce back to pre-pandemic levels? How long will inflation stay? Can supply shortages, rising energy prices, and labour gaps continue without consequences? And how will central banks react once cheap money is no longer an option?

At the same time, investors were paying increasingly extraordinary prices for future growth, particularly in tech stocks and cryptocurrencies. In many cases, valuations drifted far beyond what companies were actually earning or realistically worth. Markets were no longer rewarding only performance, but increasingly pricing in hope, momentum, and inflated expectations.

Bank of America strategist Savita Subramanian pointed out that the S&P 500 had reached its lowest earnings yield since 1947. In simple terms, . Negative real earnings are rare and have historically appeared shortly before significant market downturns, including the internet bubble’s burst in 2000 and twice during the 1970s and 1980s. A negative yield means a company is not earning enough to keep up with inflation, but the share price is high.

This is usually the moment when the cheerful market hoorays start fading rather quickly. Once investors remember that valuations, profits, and economic reality still matter, Expectation Bubbles can Burn Capital with surprising speed.

The Combustion Triangle – Is The Bubble Going To Burst?

Various central banks in developed economies have started raising concerns about persistent inflation, and many economists feel a stock market correction is long overdue. The US Federal Reserve was among the first to signal a rise in interest rates, and other central banks are expected to follow. After years of cheap money, even a modest rise in borrowing costs could spark a market correction back to reality.

So here we are again, asking the uncomfortable question: Can this Expectation Bubble Burn Capital? The best-case scenario would be a gradual market slowdown and correction, something many experts consider both healthy and overdue. As Mark Zandi of Moody’s Analytics rather dryly observed, “So far, I view this as therapeutic.” Markets occasionally need reminding that gravity still exists.

Superbubbles are considered by quite a few to be the most exhilarating financial experience of a lifetime.

Jeremy Grantham, Grantham, Mayo, & van Otterloo

Cryptocurrencies remain particularly vulnerable. Much of their value still depends on speculation, optimistic expectations, and the assumption that regulation will remain relatively relaxed. Jeremy Grantham, co-founder of GMO, notes that “nobody wants to believe the stock market is overdue for a broad pullback because it’s a bummer.”

Rather than succumbing to total panic, we need to remind ourselves that not every stock sits inside the bubble. The greatest risks seem concentrated in speculative tech, cryptocurrencies, and companies priced more on wishful thinking than actual earnings.

Hyperbole And Crystal Bowl

John Hussman, president of the Hussman Investment Funds, built a reputation for identifying speculative excess long before markets were willing to admit it. He warned about the dot-com bubble in 2000 and the housing bubble in 2008, which naturally means investors now listen to him with equal parts curiosity and mild dread.

Hussman argues that for tech stocks to return to more sustainable valuation levels, the S&P 500 would need to fall dramatically. In his view, today’s elevated valuations are setting investors up for disappointing returns over the coming decade. Ironically, he also believes future investment opportunities improve considerably once the bubble finally bursts and markets return to more realistic pricing.

“Taper doesn’t necessarily mean downside risk to stocks, but it definitely indicates a slowing or a plateauing in this bull market.”

Savita Subramanian, Strategist, Vabnk of America

Savita Subramanian, strategist at Bank of America, shares some of these concerns. She believes growth expectations remain excessively optimistic and warns that future returns may struggle to justify current valuations. One important factor supporting markets in recent years has been the shrinking number of publicly traded shares, driven largely by extensive share buybacks. According to Subramanian, this trend may slowly fade as cheap money disappears, and more companies will go public.

Perhaps that is the real lesson behind every bubble. Nobody rings a bell at the top, speculation always sounds convincing while it lasts, and hindsight suddenly makes everybody look brilliantly intelligent. The trick is not to avoid every mistake perfectly, but to recognise when excitement, hype, and inflated expectations begin to replace fact-based valuation—before an investment decision Burns Capital and turns into a genuinely Ruinous Mistake.

THE VERDICT: STAY INFORMED, STAY VIGILANT, STAY CALM

Once investments reach FOMO status, your alarm bell should start ringing because the combustion triangle is reaching performance time, with a bubble bursting any time. While the hype lasts, the investment feels exciting, fashionable, oddly compelling – but chances for a super Risky Mistake are high.

Stay calm to stay afloat in times of a rumoured Expectation Bubble. Volatility will be high, and it is essential not to make a long-term decision in panic mode. Never forget investments are long-term, and there is always light at the end of the tunnel.

There is always much panic and hasty decision-making amid speculation about a bursting bubble. Stay calm, do not fall into that trap. Never forget the media needs to sell headlines, and people bored by everyday headlines love fear-mongering sensations.

Before we call it a day:

It doesn’t matter if you have a little money or a lot, go fund yourself first!

– Yours, Harper