Harry Dent's 10 rules of bubbles...

I just signed up for Harry Dent's free news (sales) letter.  I did not find a link to this info on his site (economyandmarkets.com) so I just cut and pasted it below verbatim:




Here’s the thing, from decades of studying all the bubbles in modern history, I’ve identified 10 rules that such phenomena follow.
Knowing them helps you to identify bubbles when no one else can, and it helps you know what the aftermath will most likely look like when the manure hits the fan.
The 10 rules that bubbles follow are:
Rule #1: All growth, progress and evolution is exponential, not linear.
Rule #2: All growth is cyclical, not incremental.
Rule #3: Bubbles always burst; there are no exceptions.
Rule #4: The greater the bubble, the greater the burst.
Rule #5: Bubbles tend to go back to where they started or a bit lower.
Rule #6: Financial bubbles tend to get more extreme over time as credit availability expands along with our incomes and wealth.
Rule #7: Bubbles become so attractive that they eventually suck in even the skeptics, like a succubus ensnaring unwary men.
Rule #8: No one wants the “high” and easy gains of the bubble to end, so everyone goes into denial, especially in the latter stages.
Rule #9: Major bubbles occur only about once in a human lifetime, so it is easy to forget the lessons from the last one. The last bubble of this magnitude that burst was from 1922 to 1929: the Great Depression.
Rule #10: Bubbles may seem fruitless and destructive when they burst, but they actually serve a very essential function in the process of innovation and human progress (more on that another day.)
So next time someone tells you we’re not in a bubble right now, slap them and then show them this article. 

Rule #1 is something I have pointed out countless times on my blog: exponential growth is not normal and when you see it you have to immediately think "debt fueled bubble".

Rule #3 has also been a common theme on my blog.  There is no soft landing for a pyramid/Ponzi scheme.  There is no plateauing.  It goes up, runs out of gas and then often crashes below where it started (debt/credit mania).

Rule #4 is obvious, there will be reversion to the mean and then an undershoot that is associated with how much the upside over shoot was.

Rule #5 is part of Prechter's long standing definition of a mania.

Rule #6 is a bit misleading even if correct.  It seems to attempt to separate "financial bubbles" from any other kind when in fact, there is only one kind of bubble - a confidence bubble (which is required for any con game to work) - and 99% of the time it is driven by debt or other forms of unkeepable Wimpy promises.

Rule #7 is correct but not completely for the reason stated.  Yes, Mark and Patsy are drawn in by their greed and the human desire to attain more than we actually worked to earn.  But bubbles are also driven by herding behavior whose main rule is "I don't want to fall behind".  Herd members don't necessarily care about winning but they don't want to lose.  Throwing logic out the window in order to keep up with the Jones is how most people get screwed by bubbles and manias.

Rule #8 is so true.  And anyone who suggests that the party must end is labeled a heretic and made an outcast.

Rule #9 is the fundamental behind the Kondratiev cycle.  Basically, once a generation gets conned it loses all trust in the con men.  Because so much trust is lost, the sheeple then lose sight of the fact that these things are cyclical and so they cannot bring themselves to buy the bottom.   An entire generation will swear off the stock market even though the remaining stocks will be the survivors, will have cash, will produce needed goods and services and will spin off free cash flow in the form of sustainable payout ratio divvys.

Rule #10 is basically saying that deflation is the mother of new invention.  When big corporations own everything the best you get from year to year is a new face on the operating system, a new color of paint on the car and 2 more MPG.  In other words, safe, incremental changes that guarantee their profits over time.  When the bust happens, intelligent risk taking and innovation begin to be valued again because commodity goods and services are massively devalued by deflation.