1. All growth is exponential, not linear. Exponential growth always leads to a bubble at some point.
2. All growth is cyclical, not incremental. Over the long term, growth is exponential, but even exponential growth comes in surges and busts. Whenever you have an extreme bubble, you’re going to have an extreme crash.
3. Bubbles always burst. When a bubble is at its top, everybody thinks that we’re in a permanent period of prosperity and that this time it won’t burst, but it always does. There are no exceptions.
4. The greater the bubble, the greater the burst.
5. This is very important, because it allows me to make projections most people wouldn’t be able to make: bubbles tend to go back to where they started or a bit lower.
6. Financial bubbles tend to become more extreme over time, because as income and wealth expand, more credit is available to fuel them.
7. Bubbles become so attractive that they eventually suck in even the skeptics.
8. No one wants the high of easy gains to end. You’re getting something for nothing, so you go into denial as the bubble develops, especially in its later stages.
9. Major bubbles occur only once in a human lifetime. The last one was the Roaring Twenties and the Great Depression. So it’s very hard for the present generation to understand bubbles, how they burst, and why you get deflation and a depression. They’ve never seen one—baby boomers especially.