[_rohan]

I see a lot of people talking about the market being in a bubble, and that they’re holding cash waiting for a crash.

Even if that’s true, I recently read about the bubble potentially “bursting up”: instead of prices coming crashing down, prices stay stagnant or grow slowly, while earnings grow quickly. The net result is the same (P/E ratios stabilize), but you lose out on a lot by staying out of the market.

[hiq]

> instead of prices coming crashing down, prices stay stagnant or grow slowly, while earnings grow quickly

Do you have a link where I could read more about this? As a layman I fail to understand how this would work, and I couldn't find a page explaining it.

My naive understanding is that a bubble pops when investors lose confidence in the market, and instead of anticipating growth, anticipates a correction and create a feedback loop down to a certain level (at which some counter feedback stabilizes the movement).

How can earnings increase when investors have lost confidence?

[_rohan]

The market is overvalued when the price-to-earnings ratio is too high (ie, valuations outweigh the actual money that a company makes). When it gets really high, investors can panic, and sell stocks, driving prices down and hence reducing the PE ratio.

The alternative I’m describing is one where panic selling doesn’t occur. Earnings can continue to rise (because earnings reflect consumer spending and other similar trends), whereas prices don’t go up as much because market speculation reduces and people are less bullish. It doesn’t have to devolve to panic selling.

[lottin]

Bitcoin has no earnings so I don't know how that could possibly work in the case of the bitcoin bubble.

[frankbreetz]

I think growth in value could be substituted for earnings in the case of something like Bitcoin or a stock without dividends

[lottin]

I don't think so, because we're using earnings precisely to assess if the observed increase in value is justified. Stocks without dividends are not a problem, because businesses always have earnings regardless of whether they distribute dividends or not.

[hiq]

I think OP was talking about a possible market bubble, not Bitcoin.

[shrimpx]

It seems like the unlikely alternative. What would motivate everyone to keep money in assets that aren’t moving, or barely moving? Perhaps if there are zero alternatives — nothing is growing faster — then yeah... That’s hard to imagine.

[kirse]

I think the other practical issue is that a "bubble" can go high enough where a 70% downward correction could still land above where you originally decided to cash out. I made this error back in 2016 thinking that Obama had juiced things for 8+ years and there'd be no way for Trump to keep the party going. And that taught me a hard lesson on the foolishness of trying to time the markets.

The other issue we are dealing with now is also asset inflation, where the number on the screen does not reflect any intrinsic value, but moreso the ongoing devaluing of the dollar we hold in our pockets.

I personally think this whole "modern monetary theory" is a game where the smart folks at the Fed realize that rather than have people watch the number on their savings and 401ks obliterated in a crash, they prefer to keep that number appearing the same and bury the "cost" of the bubble into a deflating dollar. It keeps the masses happy because they see the $s in their savings account still going up, which retains confidence in the system. Who knows when everyone will catch on, but it's been working so far.