Bubbles Are Pretty Until They Pop

Bubbles start innocuously with something that generates wonder, excitement and momentum: tulip mania, Ponzi schemes, dot-com bust, etc.

Bubbles begin to grow when more enthusiasm generates a large number of extremely vocal adherents wearing rose-colored glasses. This is not an example of the Wisdom of Crowds. It is an example of the Madness of Crowds.

Once bubbles begin to form, they are further inflated by at least three or four of the Seven Deadly Sins.

Usually, just before the bubble bursts, you hear the crowd saying in unison, “Yes, but it’s different this time.”

This graph begs the question: Is the real estate market the next bubble about to burst? Yes, I hear you, “It’s different this time.” However, the chart says a lot—we are way off the standard deviation scale. I can’t predict the if and when of bubble consequences, but real estate is clearly in bubble territory. Maybe something will facilitate a soft landing here, but that could be difficult from so high a perch.

Many also predict Web 2.0 companies are creating a second Internet bubble: too much enthusiasm chasing too few revenue success stories. Again, I’m not a bubblemaster, but I think this is less likely. There is some irrational behavior, and some companies might be overpaying for acquisitions, but there is not the breadth and depth of blind mob mentality we witnessed in the original dot-com bust. Fool me once, shame on you. Fool me twice, shame on me.

Watch that real estate one though.