OGIG - An Unsustainable Equilibrium

2025-10-28 06:02:00 ET

Bubbles are generated when investors drive valuations higher without simultaneously adjusting expectations for future returns lower. In other words, the defining feature of a bubble is inconsistency between expected returns based on price behavior and expected returns based on valuations. The ‘Bubble Term’ measures the gap between the two.

Unless the Bubble Term is able to become exponentially larger forever – it shows up as a growing gap between the long-term return that investors expect in their heads , and the long-term return that investors can actually expect based on the future cash flows that will ultimately be delivered into their hands. That means that prices have to continually grow faster than fundamentals, in order to juice total returns by the ‘extra’ amount that isn’t delivered by future cash flows.

In order to generate the return in investors' heads , the bubble has to supplement deliverable cash flows with ever-larger speculative gains. As a result, sustaining the bubble requires valuation multiples to increase forever, without any upper bound. The reason the current bubble feels so good to investors is that, up until the present moment, valuation multiples have done exactly that.

– John P. Hussman, Ph.D., The Bubble Term , August 14, 2025

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