Bubblecovery

AAA

DEFINITION of 'Bubblecovery'

When the economy appears to be coming back from a recession, but may actually be entering an asset bubble masquerading as a recovery, caused by the ease of obtaining inexpensive loans to finance asset purchases. The problem with a bubblecovery is that unlike a real economic recovery, which is based on sound fundamentals, a bubblecovery is based on speculative investments with short-term growth potential but long-term uncertainty. The term “bubblecovery” was coined by financial blogger and economic analyst Jesse Colombo.

INVESTOPEDIA EXPLAINS 'Bubblecovery'

Colombo considers the 2007 housing bubble to have been a bubblecovery because rather than experiencing a sustainable economic recovery from the dot-com bust in 2000, the United States simply formed another asset bubble. He says the Federal Reserve’s low interest rate policy caused this bubble, then terminated it by increasing interest rates to reduce inflation. Colombo looks at factors such as stocks' price to earnings ratios, the U.S. stock market capitalization to GDP ratio, New York Stock Exchange margin debt and the Dow Jones Industrial Average Volatility Index to support his bubblecovery hypotheses.

Similarly, Colombo considers the recovery from the Great Recession to be another bubblecovery. The Federal Reserve again lowered interest rates, but this time the bubblecovery was based on economic activity in China, Australia, Canada, Nordic countries and emerging markets; commodities; overvaluations of social media companies such as Facebook, LinkedIn and Twitter; overvalued U.S. housing market assets; an overvalued U.S. stock market; and skyrocketing U.S. college and healthcare costs. 

Investors who agree with Colombo’s theory about bubblecoveries might cautiously invest during apparent economic recoveries because they know the "recovery" might be based on temporary increases in jobs, economic growth and asset prices that will decline as soon as the new bubble bursts. These investors can see that when interest rates are extremely low, investors will flock to riskier investments instead of more conservative ones, even if the riskier assets’ high values aren’t grounded in fundamentals. 

RELATED TERMS
  1. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  2. Economic Recovery

    A period of increasing business activity signaling the end of ...
  3. Dotcom Bubble

    An rapid rise in equity markets fueled by investments in internet-based ...
  4. Bubble Theory

    A school of thought that believes that the prices of assets can ...
  5. Jobless Recovery

    An economic recovery, following a recession, where the economy ...
  6. Recession

    A significant decline in activity across the economy, lasting ...
RELATED FAQS
  1. In what manner will a recession likely affect the marginal-propensity-to-save rate ...

    The marginal propensity to save, or MPS, rises in most, though not all, recessions. This makes perfect sense on an individual ... Read Full Answer >>
  2. Why would a country's gross domestic product (GDP) and gross national income (GNI) ...

    A country’s gross domestic product, or GDP, and gross national income, or GNI, are likely to differ considerably because ... Read Full Answer >>
  3. While closely related, how do gross domestic product (GDP) and gross national income ...

    Gross domestic product, or GDP, and gross national income, or GNI, are the two most important economic indicators that measure ... Read Full Answer >>
  4. What are the major laws (acts) regulating financial institutions that were created ...

    Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>
  5. How does the neoclassical growth theory predict real GDP?

    Neoclassical growth theory predicts real gross domestic product (GDP) through measures of total factor productivity, capital, ... Read Full Answer >>
  6. What do banks do to control the bank reserve?

    While all banks are required to maintain a specific amount of bank reserves, the banks themselves do not control the minimum ... Read Full Answer >>
Related Articles
  1. Economics

    Industries That Thrive On Recession

    Find out where to turn when looking to invest in a tumultuous market.
  2. Insurance

    A Review Of Past Recessions

    Here we look at the biggest economic declines in the U.S. since the Great Depression.
  3. Economics

    The Baltic Dry Index: Evaluating An Economic Recovery

    This index can provide insight into economic growth and production, but it has its critics.
  4. Economics

    Industries Prone To Bubbles And Why

    Investors who want to avoid future bubbles should learn from the past in order to protect their investments.
  5. Bonds & Fixed Income

    Tips For Recession-Proofing Your Portfolio

    Find out what to do when the sun sets on a burgeoning market.
  6. Economics

    The Myth About Market Bubbles

    Bubbles have made and ruined fortunes. Though they can be difficult to predict, understanding how they work gives you a visible advantage.
  7. Active Trading Fundamentals

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  8. Options & Futures

    Profiting In A Post-Recession Economy

    When the dust from a recession settles, there are often many opportunities for portfolio growth - both locally and internationally.
  9. Options & Futures

    Rules For Post-Recession Investing

    Market volatility causes investors to lose confidence, yet history shows that market exposure is the path to returns.
  10. Personal Finance

    Recession And Depression: They Aren't So Bad

    Financial downturns are part of the economic cycle and may have important long-term benefits.

You May Also Like

Hot Definitions
  1. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  3. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  4. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!