Why Wall Street Is Hardwired to Produce Bubbles

Because bubbles are just buying low and selling high at scale. JL

Tracy Alloway comments in Bloomberg :

A weary client once defined a bubble to us: “something I get fired for not owning”.

Citigroup's magnum opus on market bubbles is a fine read, replete with asset price heat maps and many tulip references.
But it also highlights a truism of markets - that the financial industry, by its very nature, is doomed to forever be blowing bubbles.
The difficulty is that investment managers have to (ahem) invest in stuff. Not only that but their performance is almost inevitably judged against a benchmark which doesn't necessarily conform to their investment ideology. You think long-dated bonds are over-valued? Too bad! Your benchmark is full of 'em and they've been doing amazingly well so you better buy them or your clients (and boss) will be questioning your underperformance against the broader market this year.
Here's what the Citi analysts, led by Robert Buckland, had to say.

A weary client once defined a bubble to us: “something I get fired for not owning”. It is career-threatening for an asset manager to fight a big bubble. For example, the late 1990s [technology, media and communications] bubble almost destroyed the value-based fund management community. Any bond manager hoping that valuations were mean-reverting would have been fired many years ago.
Big bubbles are especially dangerous. TMT stocks already represented a large part of equity market benchmarks when they re-rated aggressively in the late 1990s. By contrast, Biotech stocks might currently be expensive but their small market cap means they are still not a big benchmark risk. You don’t get fired for not owning Biotech stocks now, but you did get fired for not owning TMT stocks in the late 1990s.
Bubbles are obvious in hindsight, but they are very hard to fight in real time. Indeed, proper bubbles are so overwhelming that they force sceptical fund managers to buy into them in order to reduce benchmark risk and avoid significant asset outflows. As these sceptics capitulate, of course they contribute to the bubble and so force other sceptics to capitulate and so on and on until there are no sceptics left to capitulate. It makes sense for an asset management company to manage its business risk but this can end up contributing to the madness. Through this, the modern fund management is almost hard-wired to produce bubbles.

If you can't beat 'em, join 'em. But you can bet that everyone will be trying to get out before that bubble bursts.