In this era of global bubble-blowing we have seen speculative fever flourish in relation to many different asset classes. At the peak of a bubble the euphoria can be palpable, and the perception that ‘it’s different this time’ confers a sense of invulnerability that justifies throwing caution to the wind.
Speculators cease to worry about how much they pay for an asset, since they think someone else will always pay more later. Unfortunately for those caught up in powerful swings of herding behaviour, it’s never different this time. Boom inevitably turns into bust, because the supply of Greater Fools is not infinite after all.
Speculative financial flows seeking ‘alpha’ can overwhelm important sectors of the real economy. Price, driven by perception rather than by reality, significantly over-reaches the fundamentals. Demand is artificially brought forward. That apparent demand drives considerable mal-investment and a pathological level of risk-taking. When the bubble reaches its maximum extent and implodes, speculation moves into reverse and the sector is dumped.
The artificial demand stimulation disappears, leaving a demand vacuum. The scale of the mal-investment becomes obvious, and prices head for a significant undershoot of the fundamentals. A bubble that created virtual wealth temporarily, leaves very real economic wreckage in its wake. When a critical economic sector is affected, the fallout can be very painful. Continue reading “Get Ready for the North American Gas Shock”








