FrameworkCase studyCrises and market historyMarketsMacro and rates
Every bubble runs displacement, boom, euphoria, distress, revulsion
Charles P. Kindleberger · Manias, Panics, and Crashes
The idea
Kindleberger read four hundred years of financial crises and found the same shape in all of them. Something new arrives, a technology or a policy, and makes a class of assets genuinely more valuable: displacement. Credit expands to buy them: boom. Buyers stop caring what the assets are worth because they expect to sell to someone else: euphoria. Then a few insiders sell, prices stall, and the credit that funded the boom demands repayment: distress and revulsion. Once you have the sequence you start seeing where a live market sits in it, which is more useful than deciding whether it is a bubble.
Ask where a market is in the sequence rather than whether it is a bubble; the stages are more recognisable than the verdict.
When it works
Any market history question, any debate about whether a current theme is overdone, and macro interviews.
When it may fail
The sequence is a description, not a timing tool; euphoria can last years. Boom and Bust adds the preconditions, marketability, money and speculation, which help say whether the sequence can run at all.
How to use it
Take a current theme and write one sentence for each stage: what the displacement was, where the credit is coming from, what the euphoric behaviour looks like, and what would trigger distress. The stage you cannot fill in is the one to watch.
Where it came from
Book Manias, Panics, and Crashes · Charles P. Kindleberger
What the source says. The anatomy of a bubble, repeated across four hundred years: displacement through to revulsion, a sequence you start seeing in live markets.
Connected ideas
Takes it further
A bubble needs marketability, money and credit, and speculation togetherCheck all three legs, marketability, cheap money and a population buying for resale, before calling something a bubble.
Says something similar
Beware of geeks bearing formulas: a model built on calm history cannot see the stormAsk what period a model was fitted to, and whether that period contained the event you are worried about.
Concepts
Put it to work on L3VLUP
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