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 Articles
  1. Industries That Thrive On Recession
    Economics

    Industries That Thrive On Recession

  2. A Review Of Past Recessions
    Insurance

    A Review Of Past Recessions

  3. The Baltic Dry Index: Evaluating An ...
    Economics

    The Baltic Dry Index: Evaluating An ...

  4. Industries Prone To Bubbles And Why
    Economics

    Industries Prone To Bubbles And Why

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center