TABLE OF CONTENTS

WHAT IS A BUBBLE 2

FIVE STAGES OF A BUBBLE 2

DISPLACEMENT 2
BOOM 2
EUPHORIA 2
PROFIT-TAKING 2
PANIC 2

FINANCIAL BUBBLE IN THE TIME OF CORONA – AMERICA 3

EXPLAIN AND JUSTIFY THE STAGE THAT THIS BUBBLE IS CURRENTLY IN 3

ANALYZE HOW FINANCIAL MARKETS AND THEIR PARTICIPANTS CONTRIBUTED TO THE FORMATION OF THIS BUBBLE 3
SUMMARIZE AND JUSTIFY THE FACTORS THAT WILL CAUSE THIS BUBBLE TO MOVE TO THE NEXT STAGE 4

CONCLUSION 5

REFERENCES 6
What is a Bubble
A “Bubble” in the financial realm is a situation where the market price of a financial asset,
individual stock, or even an entire sector, asset class, the market is seen to be exceeding its inherent
value by a large market. This is generally caused by speculative demand that drives the price up rather
than the inherent worth of the asset item. And such bubbles often quite dramatically burst and result in
a massive dip in the financial position of the market the bubble was involved with causing severe
economic distraught like recessions and depressions.

The damage done by a bubble depends on the number and the type of economic sectors it is
involved in. Also on the fact about the industry or market or the company being strictly local or
international. The Japanese real estate bubble of 1982-1992 caused a long period of no growth in the
Japanese economy. It is often regarded as the “lost decade”. The 2008 housing bubble burst in the US
market caused a severe recession.

Five Stages of a Bubble

Hyman P. Minsky explained the formation and development of financial instability and its
correlation with the economy, He wrote a book called “Stabilizing the Unstable Economy” in 1986 in
which he mentioned 5 stages of an economic bubble.

Displacement
This usually happens when investors and market participants are enamored by an innovative
new thing like brilliant technology or extremely low-interest rates.

Boom
Boom refers to the sudden increase in the prices of the commodity or the asset. This growth in
prices starts slow but it increases as much as many investors start taking part in that market. During
such a period the asset is generally attractive towards media coverage. Many people are motivated by
fear of missing out on making big bucks and easy money by just simply plundering more money into the
market.

Euphoria
Boom sets the premise for Euphoria which is a stage that refers to asset prices skyrocketing and
caution being inadvertently thrown out of the window. Valuation methods are tweaked into catering for
such bubbles to justify their sheer price hike. “The greater fool” theory, if asset price goes up no matter
why, it will always attract more investors applies here.

Profit-Taking
At this point, the smart ones start selling their assets to make profits out of the bubble ahead of
it bursting. Estimating the exact time of a bubble burst can be a very difficult time so this stage lingers on
for a while and many people don’t sell their assets thinking it will still go up.

Panic
Like a balloon filled with air, it only takes a minor, small event to burst it out. And similarly, like a
balloon, once an economic bubble bursts it does inflate itself again. It’s the panic stage, asset prices
show exact opposite trends and descend as rapidly or even faster than they had originally increased.
 Many investors start selling their stock and as a supply for an asset increases asset prices decline
sharply. Such a scene was witnessed during 2008 when Lehman Brother declared Bankruptcy and many
other markets collapsed. In that month the S&P 500 dipped almost 17% and lost a staggering 9.3 trillion
dollars.

Financial Bubble in the time of Corona – America

Bubbles mean sharp inclines in the value of an asset is an economic market that hasn’t shown
such greater trends in the past. A situation that closely resembles this is currently formulating in the
American Stock Market, which is going through an extreme rise in the value of companies that are hi-
tech in nature and surprisingly this sudden increase is happening in the times when America is
experiencing the sharpest declines in its GDP (it has dropped down by 30% in 2020’s second quarter)
and America is also projected to have a budget deficit of around negative 15.5 percent.

Analysts are buzzing about the American stock markets have shown disconnection with real-life
events for a time that too long to not notice and think about. Despite the extreme volatility and
uncertain environment following the events of the Covid-19 pandemic and George Floyd strikes and
then factory shutdowns, the US market indexes continued to climb especially in the second quarter of
2020 where shares had their best value in over 20 years.

Explain and justify the stage that this bubble is currently in

There are still a lot of factors that haven’t come to light. It is still unknown what the true value of
financial assets should be in December 2020 and the severity of this lack of information is much worse
than that of the 2008 recession. The risk profile cannot be accurately measured as yet as there are too
many unknowns about the pandemic that will eventually unfold and how that will impact the financial
stability of assets and their effects on the overall economy. But what we do know is that investors know
that current valuations of the assets in the American market do not match the market prices but taking
into consideration the gradual increases in the number of people that do not come from financial
backgrounds is increasing. Which makes a slight hint into the direction of Stage 2, the Boom. It checks all
the boxes as well. Because the increase in the easiness of investment opportunities allows a lot of people
to wrongly invest in assets that are overpriced which causes them assets’ prices to inflate even further.
Several increases in the retail investors are seen happening in the OTC market and the OTC market is
generally filled with less-informed investors which causes the stock price to not reflect the true value of
the stock as such uninformed investors get tricked or overwhelmed into investing in overpriced assets or
commodities.

Analyze how financial markets and their participants contributed to the formation of this
bubble
A lot of capital is being poured into the tech firms and many analysts believe that the easiness of
user-friendly investment apps like “Robinhood” that is used by millions of Americans has skewed the
market a lot. An increased Market price to the inherent price ratio indicates the lack of knowledge of
savvy market investors. And this seems to be one of the cases with the US economy right now.

1. Foreign investors are pouring money in the US market since non-US citizens are concerned
about their currencies devaluing and this motivates them to purchase dollars as they believe the
US dollars depreciate lesser than their currencies. According to Goldman Sachs, “Foreign
investors bought 187 billion dollars’ worth of equities in the second quarter alone of 2020
making it the biggest purchase in the recent bear market.
 2. The US federal reserve came up with several strategies to overcome the economic distress
caused by COVID-19, one strategy involved the purchase of exchange-traded funds and moving
them into individual issuance of company debt. That strategy kept the economy afloat. The fed
has been flooding the markets with liquidity and the risk with doing this is that if they persist in
keeping on flooding it will cause the greater financial bubble ever.
3. The soft monetary policy governing the current debt structure of the US economy: Investment
and business activities have almost zeroed down in America but the stubborn US dollar which is
considered to be a very important value reserve for a lot of people refuses to decline. The US
national debt increased from 22.7 trillion dollars to 26.7 trillion dollars in just 9 months resulting
in a massive 4 trillion-dollar increase. This is considerably the largest increase In the US national
debt ever.
4. The current OTC market in the US is experiencing a boom and many investors believe it to be
similar to the 2000 dot-com bubble that burst.
5. FAANG stocks, Facebook, Apple, Amazon, Netflix, and Google and their shares soared through
the 2010s and outperformed the market but similar rallies in their prices are evident now as well
with a major inclusion of “Tesla” an electric-tech company run by Elon Musk, this price rally is
just happening against the current condition of the US.
6. increase of retail investors who invest heavily in OTC markets to seek short term profits invest in
these tech companies with large sums to make profits bigger which inflates the prices of these
company assets even more.

Historically, financial bubbles have formed when the world got overwhelmed with whatever new
revolutionary tech came out in the market and many such great technology pieces have rolled out in the
fourth industrial revolution, tech pieces being smartphones, 3D printers, and advancements in the fields
of AI which has massively increased automation in fields.

Summarize and justify the factors that will cause this bubble to move to the next stage
Any sort of correction on the market that could be done by increasing interest rates to recover a
debt can trigger a trickledown effect on the market. People will have to sell their equity to have a liquid
source to repay the debt the US people have accumulated over the period and such an increase in stock
selling can cause the burst of the bubble that the US economy is currently speculated to be going
through.

1. Widespread media communication: Information has never been shared as much as it is done
today, and this can play a VERY HUGE role in pushing the US economy to the next stage that is
Euphoria. Fear of missing out can also play a huge part as many people will fear losing the
money they never had if they do not invest.
2. Constant purchase of US currency and stocks by foreign investors: US equity has experienced
the biggest increase in their purchases made by foreigners and as this trend grows not only will
it push the bubble to the next stage it will make it catastrophic as it will become a global
phenomenon. Currently, investors from more than 132 countries hold some sort of American
equity or currency and any sort of burst will cause all these investors to lose money even if their
own country is performing greatly. Such a dramatic outtake will cause a huge toll in international
waters causing a greater increase in the collateral that bursts will cause.
 3. Ever-increasing trading apps: With increasing trading apps more and more sections of the
people have started taking part in financial investments and such a surge will make the problem
worse by pushing the bubble into the phase of Euphoria where caution is thrown out of the
window and valuation companies will be forced to change their valuation models and shape
them around to justify the price rally.

Conclusion
Since bubbles are hard to predict when they burst, it is the opinion of a lot of people that it's not
an economic bubble while others strongly believe that it is. But the evidence is mounting that points to
the fact that the general public should take more info into account when investing in the market. As it
has been proven that just trends and historic prices do not necessarily predict the future accurately.
REFERENCES
 Stein, Jeremy C., 2014, “Incorporating Financial Stability Considerations into a Monetary Policy
Framework,” Remarks at the International Research Forum on Monetary Policy, Washington DC,
March 21.
 Thomas, Gordon, and Max Morgan-Witts, 1979, The Day the Bubble Burst (New York: Doubleday
& Company).
 Surz, Ron, 2020, “Four Causes of the U.S. Stock Market Bubble”, contributing on NASDAQ
financial advising, New York, NY, September 10. Available via Internet:
https://www.nasdaq.com/articles/four-causes-of-the-u.s.-stock-market-bubble-2020-09-10