August 3rd, 2009
11:21 AM GMT
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HONG KONG, China - On our recent trip to Shanghai, my crew and I visited People's Square, a park in the heart of the Chinese city where children play in a fountain, fly kites, and blow soap bubbles.

These may not be the only bubbles forming in China.

According to many investment analysts, the nation's stock markets and real estate sector are headed into bubble territory. And investment bubbles, they say, can lead to significant losses if those bubbles burst. Just look at the U.S. housing collapse and the current financial crisis. Read more on growing anxiety in China

So how do you avoid an asset bubble? First, you need to learn how to spot one.

1) All bubbles start with a good story: Manias over dot.com companies, U.S. homes, even tulip bulbs all began the same way. People get overly excited about the prospects of an investment and bid up its value – even if the fundamentals lag.

2) Money, money: Money is available. Borrowing is made easy.

3) Herd mentality: Everyone and his third cousin are talking up that particular investment. Independent economist Andy Xie suggested taking a survey of the people around you. "When you hear that 90-percent of those people are in, you want to get out."

4) Denial: Jerry Lou of Morgan Stanley says if "you keep telling yourself that the story is so good, the growth is so robust, it's rock solid," it is time for a reality check.

Lou says hedge funds might want to keep playing the bubble before the crash, but warns average investors to be disciplined. Xie believes if you are in a bubble, it's best to get out, preferably early. "Don't try to make the last dollar," he cautions, "it's really dangerous." Watch how IPOs in China are making a comeback

It’s much safer to blow bubbles in the park.



soundoff (9 Responses)
  1. Global thinker

    As I understand it, bubbles appear to be formed around businesses, which are created more just because people need money, rather than on intelligent business plans. Naturally, when things go wrong, bubbles often seek government help. What do those of us do, who actually want to focus on more stable and intelligent lifestyles? How do we get help from the government? As humans we develop intelligence and knowledge in order to make better lifestyle choices. How are those people rewarded?

    August 3, 2009 at 2:02 pm |
  2. Reality Check

    Bubbles are a part of capitalism. What we call a "bubble" in hindsight, is a boom in the meantime. And who would be fool enough not to find a way to ride the boom, if they can? Until people really come to terms with the precarious history of capitalism to people and the planet all we have is "private" concerns– to each his own, fundamentally. You can get all John Wayne fantastical about it if you like, but its still a history and a structure we can understand and learn from like anything else. And that starts with getting past the mystifications. Like that "bubbles" are some mysterious thing out of nowhere, rather then part and parcel of the course of things.

    August 3, 2009 at 4:25 pm |
  3. justa

    If all these experts ( so called self-proclaimed ) can predict the outcome 3 to 4 years down the line ,why could'nt the pundits( Vikram)
    not forsee the sub-prime fiasco in the USA.

    Their predictions are just that : PRE – DICK – SHUN .
    they should be shunned!!!!

    August 3, 2009 at 5:35 pm |
  4. Muthyavan.

    Bubbles in life is certain to cross in every bodies life, when it burst it is natural, depends mostly on pressure and temperature variations around it. How ever you are careful these things will always happen,every time it burst, it is an additional experience in leaning the existing conditions for bursting. World economy is not the same always, specially when every nation is embarked on a race to beat the other. World itself is a fast competitive bubble where bursting and creations take place simultaneously. Balance of nature continues with bursting and creations of new bubbles at different places of the world at different times.

    August 3, 2009 at 8:41 pm |
  5. SK

    "Bubbles" as described are simply hyper-extended versions of the normal and healthy business cycle of expansion and retraction. They are "hyper-" because the government manipulates the currency (through arbitrary interest rate policies, printing money, debt, etc.), and often creates too much money. Governments are inherently politically motivated (no matter the party), and therefore trusting the government to not over-inflate the money supply is a tall order.

    There are bubbles because way too many people have way too much EASY money. Easy money chases bad and risky investments a lot easier than hard-earned money.

    Stop printing-up and giving away money (whether to clunker car owners or Wall Street executives), and "bubbles" go away.

    Check out http://www.mises.org for more on this fairly straightforward concept at the heart of free-market capitalism 101.

    August 4, 2009 at 5:57 pm |
  6. Manuel Aguilar

    Bubbles are in my humble opinion the inability of some groups to make a development sustainable and include most of the people involved in the process of creation, in the benefits that result from making business out of it.

    August 6, 2009 at 2:20 pm |
  7. Brencis

    The worst part of bubbles
    - when they are artificially created by government law (like the housing bubble)
    - when we use public money to protect those who involved themselves in the bubble. You can't have the boom if you are not prepared to live with the bust – these days we want it all. And it's my frugal lifestyle that you big spender use to prop yourselves up.

    August 7, 2009 at 7:06 pm |
  8. Per Holmlund

    Bubbles about a bubble

    People talking about a bubble without:
    Mega highs
    An over shooting
    An accelerator

    And the Chinese market has not reached mega highs, and no overshooting with 5 percent growth annually since 2001 and has not developed a accelerator (when the indices growth faster and faster).

    But it doesn’t mean that the market can have a normal setback. Just now the market shows technical weakness with a possible double top under development. Something that could give the market a healthy set back and preventing a bubble to develop.

    August 11, 2009 at 10:36 am |
  9. Mohan

    A new bubble has already set in – you can call it a liquidity bubble or an emerging market bubble. When things are so fragile in a economy where people a losing jobs, where most of the buisness are performing very well below there peak – stock prices are skyrocketing and Pundits and cheer leaders are coming on to the TV screaming the worst is over and beating and cheering the bull to go higher and higher...US govt is contemplating to devalue the Dollar to reduce and avoid the import of goods from China. This is good for the US in the long run, but will cause pain in the short term to all the economies in the world. China will be the worst affected and they might trigger a trade war..

    September 17, 2009 at 7:23 am |

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