[quote=4plexowner]
There have been enough financial bubbles on this planet that we can have high confidence that once a bubble bursts, these things will happen:
1. prices will fully retrace to the level where the bubble started[/quote]
This isn’t correct. What we can be “highly confident” of is that prices will retrace to the MEAN long-term trend based on fundamentals. SOMETIMES prices themselves fully retrace to the level where the bubble started, but this is not the norm. See Grantham’s analysis for more data.
[quote=4plexowner]
2. prices will likely overshoot to the downside[/quote]
Yes, prices GENERALLY overshoot to the downside, but this doesn’t happen all the time and can’t be counted on. Again, see Grantham’s analysis of the last 29 asset bubbles for more information.
[quote=4plexowner]
3. the asset category involved will be avoided until people have forgotten the pain of the burst bubble[/quote]
Probably. Historically this has generally been true, but it’s not axiomatic. Plenty of folks still drool over tech stocks despite all the carnage.
The only thing we can say for certain about bubbles bursting is that the long-term trend is re-established… eventually. Everything else – over-correction, etc. – is possible, but far from a certainty.
As I like to say whenever I read a post suggesting certain things “will” [happen], “You seem more certain of everything than I am of anything.”
