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.
BREAKING DOWN '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.