Professional investors aren’t really fooled by bubbles. They know they’re driving a bubble, but bubbles keep increasing prices much faster than normal, meaning their potential profits increase day after day.
Though at the same they have to pretend there’s no bubble to maintain confidence for as long as possible. And that’s despite their pride meaning they want to admit it’s a bubble so as not to look stupid when it bursts. But such admissions would cause one of two events. The bubble would burst instantly before it can be either too profitable or too disastrous, or the government has to step in to stop such idiocy.
They’re effectively playing the most expensive game of chicken ever. The aim for all players is to get their money out the instant before the collapse to maximize their profits.
So, the longer the bubble grows, the more they can make. But at the same time, the more they can lose. And they become more sensitive to that balance every day. For every day the bubble increases, the chance of it continuing to grow shrinks and the chance of it bursting increases.
Until one day, for someone just big enough to matter, their fear of losing grows larger than the excitement of winning and their nerve breaks. And as they race to get their money out, enough of the rest bottle it and pop goes the bubble. Leaving the smart, brave and stupid holding on in the hope they picked one of the winners that will survive the crash and go on to dominate.
It sounds crazy, because it is crazy. The growth is senseless, but it allows for senseless profits that could take many years more to achieve in a rational market. And that’s how the wealthy roll. Any opportunity for senseless wealth will make them largely senseless.
And why wouldn’t it. After the dot-com bubble burst in March 2000, by the following year end, the poorest 50% of Americans saw their wealth share fall by 6.25%. But the wealthiest 10%, the wealthiest of who drove the bubble, saw their wealth share drop by just 3.13%.
And after the real estate bubble burst in September 2008, by the end of 2010, the poorest 50% of Americans saw their share of US wealth drop by two thirds to just 0.4%. Yet, the wealthiest 10%, many of who again caused the burst bubble, saw their wealth share increase to 68.9% at the same time. And before you suggest they had a bigger share of less wealth, nope, US wealth grew by over 3% in that time, so they won on both metrics. And the poor lost on both.
So, are the poorest 50% of Americans the ones being fooled?
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