How can we know when a boom becomes a bubble, and, if so, how can we guess when it might pop?
It has been one of those extraordinary weeks, with the world’s financial markets mesmerised by the mixture of menace and bombast from Donald Trump.
They are not used to this, and are struggling to set this wall of new information into what they thought was happening to the world economy.
As far as the menace is concerned, we’ve the threat of tariffs on imports, particularly from the European Union and China. Of the EU, he said: ‘They treat us very, very badly, so they’re going to be in for tariffs. You can’t get fairness unless you do that.’
Note there was no reference to the UK, so while we should expect no special favours, we would be wise to differentiate ourselves from the EU as far as we can. Let us hope we’ll be smart enough, as he would put it, to do so.
But the most immediate impact of the new President has not been from his threats but from his boosterism. Shares here, in the US, and even in Germany were all at record highs last week.
Heading for trouble?: Donald Trump’s re-election gave a second wind to the Bitcoin boom
The most extreme example? It must surely be crypto. Trump’s push to establish the US as the leader in the crypto world has helped catapult bitcoin and other digital assets to new heights.
By Friday, bitcoin was a bit off its peak on Monday of just under $110,000. But it was below $70,000 in early November, so anyone using it to back a Trump victory will have made a huge profit.
You can’t argue with profits. But there is the huge, enduring cloud looming over all crypto-currencies. There’s nothing there – just a line of code on a computer.
Anyone can launch one, including as it happens, the new president and his wife Melania.
There is no income. There is no investment in, for example, a building or a factory, or even a team of talented people who create a blockbuster movie. The value lies only in what people will pay on the secondary market.
None of this means it won’t climb higher, maybe far higher.
As you can imagine, there have been a string of predictions on this. The highest one I have spotted is that a single bitcoin will be worth $1 billion by 2038-40. But of course it may be worth nothing.
Indeed it may not even exist.
So perhaps the most helpful way of thinking about the crypto boom is in a historical context.
Crypto is new, or relatively new. Booms and crashes are not. The best study of the gyrations of markets is probably Charles Kindleberger’s Manias, Panics, and Crashes, published back in 1978.
He points out a common pattern to the boom-and-bust cycles. To start, there is usually some real innovation that catches the mood of investors: the canals, railways, or much more recently, the 1990s dotcom boom. But what starts as something with substance turns into a mania, as the profits of early investors mount and less-experienced ones pile in.
But while there is a pattern, the timing, nature and scale of bubbles is impossible to predict. There are too many moving parts. So we have to fall back on intuition: what does this feel like?
My view is that Trump’s re-election gives a second wind to a boom that was starting to feel tired. Ahead of the election, bitcoin had recovered to its previous peak in November 2021, after a big plunge in 2022.
It could carry on for a while yet, with the trigger for the next downturn being a wider retreat on the markets. If values of more conventional assets fall significantly, those of the most speculative would fall more.
A crash does not feel imminent. But something will go wrong in the coming months that will trigger a rethink of asset values.
It could be a renewed surge in inflation, or a jump in bond yields. It could be a serious recession in the developed world.
Or it could be mis-handling of trade talks. We are in a boom, but it is an unloved one, and the longer it runs, the more the dangers will mount.
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