National economic development cycle, a short introduction

Ray Dalio has divided national economies into four different stages of development. I will use his assessment, but I will add more to the phase of the country that dominates the world economy. This position encounters few countries and even less often the same country reaches it more than once. Every economy has started from the first or lowest level of development which means that the country is poor and its citizens feel poor. Few countries reach the top level, the dominant economy in the world.

Most third-stage nations do not reach this stage. They jump straight to the fifth. The paths contain similarities and the same cause-and-effect relationships, but no country follows exactly the same path as the others. The levels will remain for decades and their changes will not happen fast. Each phase includes both ups and downs and booms and busts. Psychology contributes to the rise and destruction of nations or to their own level of development. It has five levels:

1. A poor nation that feels poor
2. A rich nation that feels poor
3. A rich nation that feels rich
4. A country that dominates the world economy
5. An impoverished country that feels rich

Stages are estimates of how the government and citizens, on average, see things. In many countries, individual provinces, geographies, cities, and residents do not feel that their state is at the same stage as the majority. Often the capitals of countries are richer than others which can be due to many things like corruption in poorer countries. The definitions are not clear. They are based on the opinions of the person making the assessment, with the exception of the country that dominates the world economy, which is self-evident to almost everyone.

The foreign investor needs to look at the transitions between stages. They last for years or decades. The functioning of a market economy increases as nations develop. The opposite trend is likely on the downside. The cause-and-effect relationships of transitions are not simple. Their effects often last for decades. Moving from a lower level to a higher one can mean a long period of favorable economic development. It is reflected in increased returns for investors. Dropping to a lower level weakens the expected returns. Changes are difficult to detect without visiting the country. This is especially true for lower tier countries. Reality and the outward image are not always close.

A long psychological / socioeconomic cycle part 3. Investing and the cycle

 Why are different phases and archetypes important for the investor? They tell about the rhythms of the past and the future. The time periods are not duplicates, but they have similarities. Phase identification increases the likelihood of estimating what may happen in the coming years or decades. This applies to both life and investing. At the same time, it increases the likelihood of better understanding and better responding to world events. In addition, the outcome of the Crisis indicates that most of the next cycle will follow the outcome. The emergence or non-emergence of totalitarianism determines the opportunities for people, companies and financial markets to produce prosperity.

In the following sections, I review the financial characteristics of different phases that are important to investors, price changes in different asset classes, etc. It is difficult to find historical prices for asset classes beyond a hundred years, so statistical significance is low. Careful interpretation of the historical prices of asset classes must be taken, in order to make better conclusions.

High

The economic characteristics of the High that reflect the Crisis are favorable productivity growth if the Crisis has not led to leftist rule, high taxes on individuals and companies, large infrastructure projects, a new leading economic nation, an emphasis on a unified culture, mostly positive economic growth, and a reduction in stock market volatility. The latter most likely apply to the first decade of the High. In addition, during the High, the largest age groups in the new cycle are likely to emerge, replacing the largest age group in the previous cycle. The departure of the latter will significantly reduce pension liabilities.

During the High, the highest personal tax rates inherited from the Crisis are insane compared to today’s world. They are likely to be well over 50%. The percentages depend mostly on the magnitude of the destruction of the Crisis and the people rising to power. Depending on the nation, corporate taxation of profits can also be more than 50%. High taxes will remain through the phase and the change will then be in a lighter direction until the end of the Crisis. Change may not be slow. High taxation is needed for massive infrastructure projects, such as the possible modernization of energy production and the construction of new roads. Investor tax planning is important during the High. The long-term investment horizon is the most preferred because of taxes.

As the economic winner of the Crisis is allowed to create new rules for the world economy, it will have the greatest influence on the possible change in the reserve currency and the creation of the new worldwide economic organizations. This applies to Crises with global implications. The new reserve currency is most often pegged to precious metals in this phase, which can mean, for example, a fixed price for gold for decades. It can also lead to the decline of precious metals. These can happen during a Crisis, so it is uncertain whether any individual will keep it in storage. Gold may not be eligible for investment.

Of the asset classes, commodities may be more expensive than historical averages in the wake of the Crisis, but their price trends during the High will move downward. In the beginning, interest rates on bonds are usually lower than average, but they are rising. Property prices are special in that they don’t depend much on the stage of the cycle. They are on a sharp rise at some point during almost every phase. The intervals between their peaks are 15-30 years. In a market economy, stock prices rise more evenly than in other stages of the cycle. This is one of the best times for a long-term equity investor. The most favorable development will take place a decade after the beginning of the phase and the average price fluctuations will be smaller than in other phases. This is partly because the memories of the Crisis are strong in the nation and collective insecurity is present.

Companies have good opportunities to succeed in at least the following industries: infrastructure construction, all industries related to children, and all products and services that emphasize coherence. For example, market leaders are likely to increase market share because people want to consume the same products and services as others. The position of monopolies or oligopolies is hardly challenged during the phase. Finding them on the stock market can guarantee higher than average probable returns for a couple of decades. These can be state-owned companies. Equity investments should be considered as long-term investments if it is possible for the age of the investor.

Awakening

The investments and returns of the Awakening will be affected by the events of the High and its progress. One major change is the entry of the largest age groups into the labor market. In this case, the real estate market requires additional investments and at the same time prices may rise. With larger families, larger apartments can be traded better. Infrastructure inputs investments will decline compared to the High. At the same time, prices for construction-related raw materials may rise.

The steady growth that began during the High decline badly at least once during awakening. This has been the case in the United States during the last four Awakenings. Inflationary pressures are rising as large age groups consume more consumer goods and services. Although the last time it was hit by high inflation, it is not the only possible outcome. Deflation can strike. Coupling between the reserve currency and real assets may break. In that case, investing in the latter is a viable option. At the same time, government bond yields are likely to soar for a long time to come.

The Awakening is not the golden age of the stock investor but vice versa. Real dividend income can go into the red. Companies are not seen as an important part of the economy. During that time, companies related to culture, spirituality and drugs are doing well. Mass events can be good investment targets. Intoxicants, both legal and illegal, are more popular than in other periods. It is worth putting your money in the companies that sell them legally. Financial market developments fluctuate.

Unraveling

During the Unraveling, the probability of the economic boom or bubble in a person’s lifetime is the greatest. There may be several, but one of them is larger than others. The largest one is not always related to stocks, although it was during the previous two Unravelings. The stock bubble is not always the most destructive. The absurd consumption of external signs of wealth is the most significant feature of the phase. Consumption binges are visible everywhere. They appear as expensive consumables, expensive individual products, etc. At the same time, the nation can become indebted.

Even in a Crisis, it will take a long time to find out the devastation of the boom or its eruption. The period has far-reaching implications. They appear e.g. as the largest inequality. The devastation can only be solved after the end of the Crisis. Belief in new, life-changing consumer technologies is high and the public can buy them massively. The number of companies related to the boom is the highest. Most new technology companies crash, but the best ones remain. The prices of their shares will fall after the crash of the stock market bubble. Some will return to pre-crash or higher prices, but it will take a long time.

The phase may be the golden age of the banks as individuals become indebted when they participate in the boom. This can be reflected in high property prices. Bank bubbles are possible. They normally burst at the end of the deleveraging, so care must be taken when investing in banks. Bond interest rates may be high at first, but will go down thereafter. When this happens, bonds will be a great investment for a long time. Any asset class can experience a bubble.

Crisis

The whole Crisis may go into the aftermath of the economic problems caused by the boom of the Unraveling. It is accompanied by gloomy economic developments such as collapsing financial markets, high unemployment, deflation or hyperinflation, state insolvency and over-indebtedness of other economic actors, a maximum of economic inequality reflected at its worst in violence, protectionism, poverty and mass unemployment. The problems are great and require significant change. Towards the end, investor tax planning becomes important. Society realizes that economic equilibrium between incomes and costs cannot be achieved without higher taxes. This is especially true during wartime.

Techno-oligarchs are one hallmark. A possible technology bubble has burst and the winners will be able to enjoy the fruits of their labor. Domestic companies are doing better in the internal market thanks to protectionism. This means an increase in market shares in consumer-driven societies. On the other hand, consumption is declining compared to the Unraveling, as the largest and most prosperous age groups are retired and their consumption is lower than during the previous phase.

The regulation of financial institutions will increase through this phase in the event of a banking crisis in the deleveraging. Regulation follows decades of development. Companies with significant tax-deductible losses may be better-than-normal investment targets if taxes start to rise. Healthcare and other industries related to large numbers of elderly people are likely to be a good investment.

The outcome of the Crisis is reflected in the social system of the new cycle. It is one of the most important parts of the success of the national economy, as it affects both productivity and the number of people in the working age groups over the next cycle. Economic growth is, in effect, the sum of the former, although it may be affected by indebtedness in the medium term. In developed countries, the long-term development of productivity growth in an economically viable system is about 2% per year. Productivity growth in less prosperous countries will be bigger than that figure in market economies. The number of workers is affected by both the birth rates and the migration to or from the country. For the index investor, these are the most important pieces of information.

A long psychological / socioeconomic cycle part 2. Phases

The phases of the cycle last 15-30 years. During the Civil War, the crisis lasted only five. The change of phase can be either a clear and eventful event or a gradual and ambiguous event. Each phase leads society towards the next. A new cycle begins after the Crisis. The previous cycle ended at the corners of 1945 and the current cycle then began at the High which ended during 1963. The subsequent Awakening ended around 1983 and the subsequent Unraveling most likely ended in the great financial crisis of 2007-2008. Since then, society has lived through a time of Crisis that is likely to end in the corners of 2030.

The High will begin once the main problems of the crisis have been resolved. The damage caused by the Crisis will be repaired for a long time during it. Society is slowly rebuilding itself. At the start of the High, the majority does not believe in the future. The mood is slowly rising. Faith in the future will improve to the end. The majority despises individuals they consider selfish. Self-confidence is low and group pressure influences decisions more than at other stages. The role of institutions is growing and they are expected to guide society. Birth rates are usually highest during the Peak. Family values are strong and the number of differences is low.

Awakenings are the times of the Cultural Revolution and the spiritual rebirth. People invest the most effort in developing their values. The role of institutions is diminishing and social disorder is growing. Crime statistics do the same. Demonstrations are becoming more common and some of them are causing riots. Children feel insecure and family values are declining. People are the most creative and creativity focuses on spirituality. At the end of awakenings, social orders disappear and individuals believe their inner values have improved. New values have replaced old ones.

At the start of the Unraveling, people are happy. Belief in the future is high, but at the end of the phase it will darken. The rhythm of life is fast and people think about the present. This is a time of abundance and selfishness. Confidence in governance and common institutions is low, as is morality. Spirituality is diminished, but the people are prosperous or feel that way. During Unraveling, the probability of the largest economic bubble in a lifetime is greatest. Often its consequences are corrected throughout the Crisis.

The Crisis often begins with a rumble. The mental state of society is changing rapidly. Inequality peaks. As the Crisis begins, People are divided, but it will not last indefinitely. Unity and peer pressure are intensifying towards the end of the Crisis. People see themselves as a continuation of a group more than as an individual. Institutions are changed and directed against a common enemy. Xenophobia is at its strongest and wars are likely. They are either against an external or internal threat. Civil wars hardly occur at other stages.

During Crises, responses to threats are often extreme, whether external or internal. Every effort is being directed against a common enemy. This creates tremendous destructive power and an extreme end result. The Crisis is the most important stage of the cycle. Its outcome determines the next cycle, creating a new personality for society. The end result is either freedom, totalitarianism or dictatorship. It is difficult to predict. The Crisis is closely linked to both the long debt cycle and the cycle of the leading economic country. The winner of the crisis sets the rules. This applies to internal and external relations, social relations and the economy.

A long psychological / socioeconomic cycle part 1, Introduction and generational archetypes

The psychological state of emotion follows a cycle that changes society. Its driver is the aging of generations/archetypes. History creates and modifies them. Generations age and shape states. In this book, I use the cycles and the generations/archetypes found in Neil Howe´s and William Strauss´book ”The Fourth Turning”. it is a must read to anyone who is interested in this cycle. There are four types of generations and they progress through the same four stages of life and cycle from cradle to grave in their own order. Investing is so much about mass psychology that the cycle cannot be ignored. Generations and stages of the cycle affect the prices of asset classes and their returns. Both affect what kind of companies are most likely to succeed in certain stages. The cycle is intertwined with a long debt cycle. I will go through the basics of the cycle before telling about its impact on investors. The cycle has four different stages from the beginning until the end:

• A High

• An Awakening

• An Unraveling

• Crisis
  
  
  

The cycle lasts approximately the average lifespan. Life is divided into four different stages: childhood, young adulthood, middle age, and old age. They last an average of about 20 years. In addition, during the cycle, there are four different archetypes, which are almost always generated in the following order:

• Prophets

• Nomads

• Heroes

• Artists

I focus on the United States, its stages, and archetypes. In the last few centuries, one archetype has never been born, and this happened during the Civil War, when the Heroes did not have time to be born. The focus on US cycles is due to two reasons: the first is that it is the most important national cycle to the investors around the world, and the second is that it is difficult to get accurate information about China, even though it is almost as large an economy. The US cycle is progressing almost as well as the whole of Western Europe and this phase is likely to overlap strongly with China.

Archetypes affect different stages and different stages affect different archetypes. As the majority of one generation lives in their last years, a new generation of the same archetype begins to emerge. Prophets are the opposite of Heroes. The contrasts apply to the Nomads and the Artists. The same contrasts fit the experiences of generations at different stages of life. For example, parents leave Nomads on their own in their childhood and Artists are guarded like the Fort Knox. A new archetype begins to emerge shortly before the new phase occurs.

The contradictions also follow different stages. Highs are close opposites to the Unraveling and Crises are close opposites to the Awakenings. The destructive power of Crises at the end of the cycle is a necessary evil. It renews social structures and social relations. Destruction is possible when almost everyone who has experienced the previous Crisis has died. Each step is similar to the same step in the previous cycle, although they are different. The dominant archetype at each stage reflects their life experiences. This leads to the progression of the different stages of the cycle. The best signs of change in stages are the increased intergenerational contradictions in the transition from one stage of the cycle to another.

Archetypes/generations

The majority of the archetypes have their own common characteristics. In addition, each archetype has an impact on the others during different stages. Everyone in each sees similar events at the same stages in life. The majority of them think the same about families, the fundamental pillars of society, political leaders, and the future. Majorities of each archetype react to life events in a similar way. The biographies of the archetypes resemble each other.

Prophets spend their childhood less protected during the Peak. They are selfish young adults in the Awakening. Their middle age goes by cherishing moral principles in the Eruption. Old age is mostly led by the Crisis. It is either a significant victory or a failure. Some of them will survive until the new High, but their significance is then minor. Their leadership moments during the crisis will have a significant impact on the next cycle. The younger age groups see them as selfish, proud, and cold-blooded. They focus on dreams, values ​​and spirituality. They affect the Heroes the most. Donald Trump and Steve Jobs are examples of the Prophets.

Nomads spend their childhoods unprotected in the Awakening. They are underestimated as young adults in the Unraveling. In a Crisis, they are acting as middle-aged pragmatists and their role in resolving it is being forgotten. The majority of them are forgotten as the elderly, although some of them are in leadership roles at High. Some survive to the new Awakening. Others see them as pragmatic, immoral, and soulless. They focus on freedoms, survival, and honor. They affect Artists the most. Jeff Bezos and Elon Musk are examples of Nomads.

The Heroes spend their protected childhood during the Unraveling. They help resolve the Crisis as young adults under the guidance of the Prophets and the Nomads. They become brazen middle-aged people at the top. During awakening, they play a strong role as the elderly. Some of them will survive to the new Unraveling, but they will not matter much. Others see them as selfless, capable, and machines. They focus on society, technology and success. They have the greatest influence on the Prophets. Mark Zuckerberg and Thomas Jefferson are examples of Heroes.

Artists spend their overprotected childhood during the Crisis. Careful, young adulthood goes at the High. They are indecisive middle-aged during the Awakening and settle into the position of the younger generations as the elderly in the Unraveling. Some Artists will survive to the new Crisis, but they don’t matter much. Others see them as indecisive, open-minded, and emotional. They focus on professionalism, legal security and diversity. They have the biggest impact on the Nomads. They often have the best opportunities to invest and good pensions because they enjoy the wealth generated by the largest age groups. Their birth rate is low. They are particularly benefiting from rising house prices. Thomas Edison and Warren Buffett are examples of Artists.

National economic cycles

 Cycles related to national economies include the long socioeconomic / psychological cycle, the cycle of economic development, the cycle of the leading economic country, the long debt cycle and the short debt cycle. The first four cycles may be strongly interlinked, as is now the case in the United States. The situation is exceptional and happens about once a century in a maximum of two individual countries. Now it only happens in the United States. A short debt cycle works within a long debt cycle. Economic cycles are most important for index and long-term government bond investors. The more an investor focuses on the activities of individual companies, the less he needs to take care of the national economy and its development.

There are four components to economic growth in advanced economies: productivity, the long debt cycle, the short debt cycle, and politics. In the long run, economic growth is based on changes in productivity and the number of working age population. Policies generally do not play a major role in the short-term productivity of advanced economies. Most political agents do the same things, even if they sell it under a different name. Politics has only a meaning when there are significant forces of change in the social system. This happens on average once in a person’s lifetime. Major changes in the social system follow the socioeconomic / psychological cycle. Birth rates are also wrapped around it.

The long debt cycle is also wrapped around the socioeconomic / psychological cycle, but short debt cycles have little to do with it. They mainly produce fluctuations around average economic growth. This is mainly reflected in productivity. It is impossible for people of working age to be cloned, for now. The policy influences fluctuations mainly by regulating the state and municipal loan taps, but there are no long-term changes in productivity. The main reason why politics doesn’t matter is the basic features of man-made systems. The outputs of political systems rarely change.

The current situation requires further reflection. Therefore, there is also a part in a book which describes how the long-term cycles intertwine. In it, I discuss the similarity between the long-term debt cycle of the United States, the psychological / socioeconomic cycle, and the cycle of a leading economic country. They intertwine in a way that affects the world. It is a pity that no one knows the exact effects in advance. That’s why I focus heavily on the current situation and guess what might happen. I have a better view of the first one. With regard to the latter, it can be said that my crystal ball is fuzzy.

Bubbles, Booms and Crashes part 7. I found one, what should I do?

When a bubble or boom is found, it is clear that most investments are too expensive. It is difficult to recommend any investment. Using leverage is even less recommendable. Extremes can last longer and grow higher or decline lower than anyone thinks. They are unpredictable and not easy to predict. The peaks and crashes of bubbles and booms may seem clear in retrospect, but few succeed in predicting them. Don’t try to time peaks and crashes.

It does not mean that you should not do anything. Bubbles and booms are good moments to consider selling investments that are too expensive. Not everything is worth selling at once. It may make sense to diversify your sales of the most expensive investments. This makes sense because prices are rising higher than expected. Tax consequences should be taken into account. At the same time, people can sell their loss-making investments to reduce taxes.

Uniform proposals cannot be made for all asset classes. For example, more time should be set aside when selling houses. They are not worth buying unless you get them really cheap. The same applies to other real estate. Easy-to-sell assets such as securities require a more individual approach. Short selling, i.e. the sale of other people´s securities, is difficult to recommend because of their negative risk / reward ratio. The profit can be 100%, but the loss can be several hundred percent. Options that take advantage of price reductions are another matter, but my expertise is not enough to make any suggestions.

Once a bubble or boom is identified, the investor´s cash reserve increases, because it makes sense to start selling little by little. The buying should not be rushed. As cash reserves grow, you have to be patient as temptations to participate in the boom increase as prices continue to rise further than expected. You can pay off your debts if you have them. At the same time, it is worth increasing cash position, because sooner or later prices will crash. Then you get good investments with low prices. Lack of cash in a collapse lowers long-term investment returns. Everyone should match their money supply to their needs. For example, the age of the investor matters. The older the investor, the smaller the portion of the assets is worth investing in. There are plenty of other reasons, but I won't go into them in more detail.

The crash is a good time to buy. It may take a long time for the bubble to move from the top to the bottom. Smart money makes sure it gets to sell as much of its bubble-priced assets as possible to others. It can take years to profit from being right. Prices are also falling lower than anyone expects. Crash of more than ten percent or more than fifty percent are normal in equities and in alternative investments such as commodities and currently popular cryptocurrencies. I do not recommend the latter to anyone as they may become worthless.

In crashes, it makes sense not to sell everything fast and it is not worth trying to predict the bottoms either. They can take years or decades before prices return to the previous peak. There is no hurry. Although the rise may be rapid at first, prices will remain far from previous peaks for longer after the bubble. Tax consequences can also be considered during collapses if possible. Cash reserves during crashes are useful, because you might have to sell your best assets during them. Nobody will buy your worst investments during them.

Bubbles, Booms and Crashes part 6. Indicators

 Previously, I listed a few signs of booms such as reflexivity, money supply growth, psychological phenomena, and political factors without their more specific signs or indicators. It should be clarified how the indicators are reflected in national economies and in the prices of investment products. In numerical signals, the rate of change is important. In them, a longer-term decelerating pace of change anticipates a slowdown in bubbles, booms, which lead to crashes. There is no single sign or indicator that predicts the progression. The more characteristics you can find the better you know what you see.

Reflexivity has signs. One is to move further and further away from the average historical return. For example, stocks can be examined in comparison to the trend of ten-year average earnings per share, which has been around 17. The farther one moves from that figure, the more reflexivity is affected. As growth slows, reflexivity decreases. The interest rate of government bonds must be scrutinized because it makes more sense to pay higher prices for shares when it is low. The prices of houses or other share classes can be compared to the average trend growth for the reasons mentioned earlier.

The former is not the only sign. Declining interest rates and the fact that borrowing is based more on collateral values ​​than income are indicative of reflexivity. The first increases the chances of reflexivity and the higher leverage it requires. Higher prices combined with higher leverage increase the likelihood of reflexivity. The latter is an early signal that anticipates reflexivity. Lower collateral requirements and increases in collateral values ​​increase the probability of reflexivity and strengthen it.

In smaller countries, a significant rise in the amount of external money flows and the strengthening of the local currency signal reflexivity. So do loans to locals in foreign currencies. When foreign money notices the higher-than-normal returns offered by the local country, it rushes to the local market. Local incomes are rising and the currency is strengthening further, making the local market more attractive.

Reflexivity works in both directions. The previous phenomena also work in crashes, but they increase the decline in prices. They fall below average trends, increasing the decline, as interest rates rise, prices fall, and declining collateral levels increase borrowers’ willingness to increase collateral requirements. The transition from collateral requirements to income requirements will lower prices as revenue declines. The transfer of foreign currency away from local markets lowers prices, lowering the value of the currency, reducing the value of collateral previously issued, which also affects prices.

Several figures and indices can be examined to notice reflexivity. Changes in the supply of money tell something about it. Different countries have their own statistics. Not everyone is as reliable, but at least the US and eurozone money supplies can be tracked. There are also indices around the world to describe indebtedness opportunities such as the MBA Mortgage Index in the US, the address of the website can be found in the sources. The longer the maturity of the loans offered, the more certain the reflexivity will affect. Long 100-year mortgages or government bonds are a signal. The historically high volume of loans in the stock market compared to the indices indicates possible reflexivity.

Psychological factors are present in bubbles, booms and crashes. Let’s start with social proof and state that at its highest it applies to almost everyone. Everyone in their immediate circle is starting to have one or more people who are quickly enriched with popular investment products or have invested large sums in them, with at least a large amount of assets on paper. They are also eager to recommend their investments to others and say they are stupid if they don’t do the same. The more close colleagues or friends report on their successes and hundreds of percent returns in the short term, the closer the boom and the end of it is. The collapse has begun when the same people don’t say a word about investing or their losses. Social proof is mostly caused by amateur investors.

The progress of social proof can be monitored in Google Trends. There you can see how popular certain keywords have been at any given time. Peak moments don’t directly correlate with prices, but the highest search volumes are in the vicinity of both peaks and bottoms within a few months. The latter may be even better correlated.

Be fast! Buy before it becomes too expensive! The feeling of scarcity and hurry is one sign of a boom. Quick jumps in housing prices or multiple oversubscriptions of investment products indicate a shortage of supply or a sense of it. Low number of shares available in IPOs may be a conscious choice for listed companies. Two- or three-digit percentage increases in listed products on first trading days indicate scarcity. In the crash the supply of stocks is plentiful. This is reflected in the rapid decline. For example, a broad front before popular stocks lowers its prices in double digits on several days.

The majority of people follow a few authorities that seem credible. The latter may have been in other businesses before the bubble or boom. The general public gets promises from them where prices multiply fast. As the boom progresses, the promises increase. They sound nonsensical to those familiar with things. As the bubbles and booms progress, the warnings of the former follow, the anti-authorities of the booms, increase. At the same time, more people believe they are incomprehensible. In crashes, authorities and their promises are revealed to be either scams or their views wrong. During that time, the “Warren Buffets” will also start to get rich with their foreclosed assets. Their returns exceed averages by significant margins as the collapse progresses.

Excessive regard in one’s own abilities, possessions, and chances of success is reflected in excessive trust in both communities and individuals. The euphoria created by booms and bubbles increases confidence in significant and rapid economic growth. It can be seen e.g. as large-scale, absurd consumption patterns. Record prices are paid at auctions. You can see signs like the construction of the world’s tallest building or record-breaking massive construction projects that exceed their budgets. A sign of bust may be the interruptions in them.

It is particularly evident in individuals who, during the new economy, have earned significant returns, at least on paper, through either their investments or their business. They buy expensive cars and waste their money on status symbols. The phenomenon does not only affect individuals. One sign of the new economy is found in individuals who leave their jobs because they believe they can be investment professionals. They recommend the same to others. This “This time it is different” delusion is big.

The above factors reinforce the illusion of excess availability, but they are not all the causes for its existence. The media is a significant part of the strengthening. They give their followers what they want to hear during a boom. They want to hear that ”now is a good chance to get rich immediately,” etc. They dig up people who suddenly became rich and let them present their advice. It is common that the majority of journalists don’t understand enough to be able to question bad advice. They lift the wrong authorities on pedestals and write negative stories about how those who have invested for decades have lost their grip. They talk about how their investments don’t match short-term successes. The number of things moving from media placement is at its peak at the end of the boom or the start of the collapse. At the same time, their availability and popularity are at their highest.

There are many signs of political factors reinforcing bubbles and booms. One is tax cuts on certain investment products or real estate. Bubbles and booms may gain significant start-up momentum or accelerate as wealth is diverted to tax-advantageous destinations. Speeches by politicians and central bankers about the merits of a booming economy run rampant. Some of them may warn the public. Unfortunately, they do not lead to actions when they are important.

Promises to save investors are a sign of the moral hazard that has occurred in all booms. Promises ultimately lead to actions. Unfortunately, they are too late. The first capital injections for those who mismanaged their business are a sign of moral hazard and anticipate a boom in artificial respiration for too long. At the same time, the probability of a larger collapse increases.

The increase in the use of “alphabet soup” or other new investment products in language is a sign of a boom. Increasing supply to retail investors also speaks for itself. Their complexity can also tell about it. The more investment products you don’t understand, the more surely the bubble is growing. The deregulation is also a sign of a boom. Increasing them probably indicates the risks that have already materialized. Regulators are often late.

The interference of central bankers or politicians in market price formation are signs of bubbles, booms, and crashes. Purchases or price cuts by central bankers of investment products will increase bubbles and booms. Unexpected sales or price increases can signal or cause a risk of collapse. The boom can also be seen in the lack of supply regulated by politicians. For example, land use restrictions can tell about a real estate bubble. The rapid increase in supply indicates that the crash is approaching.

There are enough signals about the existence of bubbles, booms and crashes. Alone, they don’t tell much. Certain signals have been present in all the booms and collapses of recent decades: the shift from income-based to collateral-based lending, cheap money and the money supply it increases. Other signals are less relevant, but the more of them are found the more likely booms and collapses are present.

Crash signals are less important because they occur afterwards. They don’t help with timing of sales, but they tell about the likelihood of new investments making sense. The most important of these is the extensive and rapid price cuts of tens of percent. After that, you can start to invest carefully. In addition, “just crazy to invest now” and all the other post-panic messages on the psychological profile after the aforementioned collapses are signals of better investment moments.