The Law of Boom and Bust (Boom)
A speculative, hyper-growth market is a man-made fiasco. It is a belief system that is based on valid facts as well as artificial ones. The later are invented to inflate the artificial wealth created by bringing in the herds who will be driven by sheer greed and stupidity. There are 6 ingredients of a speculative, hyper-growth market that I can think of:
- Valid core beliefs that are based on facts, such as the value of the Internet during the dotcom boom, which drove early participants into the market. [Fact #1: The world runs on energy -- meaning oil before a viable and profitable alternative is developed. Fact #2: A great deal of consumer products are made of petroleum derivatives. Fact #3: The world now has a growing population of consumers and middleclass who will continue to motorise things and want to eat better and live better.]
- Invalid, fictional beliefs that are invented by those who will benefit the most from the growth. This generally includes the middlemen, owners of capitals/lands, politicians, and government regulators, who will defend the extreme price increase beyond the level justified by the core beliefs. [Note #1: Beware when a politician or government regulator is telling you that a particular stock or asset can only go up! Note #2: Instead of telling you that commodities as an asset class can only go up, government regulators are throwing everything they can come up with to suppress them! Note #3: They said commodities will tank when the USD makes a rally -- we at bhc investment have been citing that commodities are largely driven by supply and demand . The recent rally in the greenback didn't tank agricultural commodities -- they went even higher instead! Note #4: Talks of speculators driving up prices of commodities make no sense  if you pay attention to the situations in Gold and Silver, in which the central banks cartel is now responsible for over 60% and nearly 80%, respectively, of the open interest [2, 3]. You will not hear this reported by the media!]
- A well-developed system of sales, marketing, and distribution, which includes the newspapers, magazines, TV, etc, and employs an army of analysts, consultants, lawyers, accountants, etc -- who first bought into the core beliefs and later accepted the fictional beliefs. [Note #1: Just because they are a professional doesn't mean they are smart. Note #2: We are nowhere near this when it comes to commodities. The constant questions I get are: “how can I invest in commodities?”, “what broker do you use?”, etc.]
- A duration that exceeds the early warnings by months or years. [Note #1: How many times have you heard that the growth of the Chinese stock market was not sustainable before the recent collapse? [4, 5, 6]]
- The human desire to get rich, quick!
- Extreme popularity and super positive sentiment -- the belief that the price of a asset can only go up, such as Internet stocks in 1999, US housing in 2005, the Chinese stock market in 2006, etc.