Greatest Bubbles of All Time
Economic bubbles are one of the most difficult events to spot of all. Thus very difficult to avoid, let alone do something about it. So why study them at all? History rarely repeats itself (at least not in the exact same way, with the exact same financial assets).
On the other hand, we can extract some lessons from every bubble. Thus constructing some protocol for future guidance. Here I’ll write about 7 of the Greatest Bubbles of all time, and then highlight common aspects between them.
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1. The Dutch Tulip
Tulipmania is the story of the earliest recorded event of an irrational asset bubble. These flowers were brought to the Netherlands from Turkey and grew in popularity over the years.
As people start to trading tulip bulbs, the average price of a single flower exceeded the annual income of a skilled worker and cost more than some houses at the time. Therefore a clear sign that something was wrong, won’t you say?
This bubble reached its peak around February of 1637. From that moment one, the price crashed and by May of 1637 it lost almost 99%. 4 months. Game over.
2. The South Sea
The South Sea Company was formed in 1711 and was supposed to manage all trades with Spanish colonies of South America. The idea of the British government was to repeat the success of the East India Company.
From January to August of 1720, the stock price climbed from £128 to £1000. By September the market had collapsed, and by December South Sea shares were down to £124, dragging other, including government, stock with them.
The government ordered an investigation, which showed that at least three ministers had accepted bribes and speculated. South Sea Company itself survived until 1853.
3. US Stock Market Crash of 1929
After the World War I, the US experienced an economic boom, fueled by the industrialization of the country and the use of new technologies in different sectors.
From 1921 to 1929, the Dow Jones climbed from 60 to almost 400, creating many millionaires. ( On September 3, 1929, the Dow Jones Industrial Average reached a record high of 381.2 )
In 1929 after the FED raised the interest rates several times, one of the worst bear markets in US history begun. The bubble popped.
On October 24 (“Black Thursday”), the market lost 11 percent of its value at the opening bell on very heavy trading. During November of 1929, the Dow lost about half of its value.
The stock market lost 90 percent of its value from 1929 to 1932.
4. Japanese Asset Price Bubble
The Japanese asset price bubble started when the yen’s 50% surge in the early 1980s triggered a Japanese recession in 1986. After that, the government began a program of monetary and fiscal stimulus.
The Nikkei (stock index) had a huge increase until the end of 1989. From that moment on, the index started to plummet until it lost more than 50% in less than 1 year. Until this day it never recovered from its peak.
Also known as the tech bubble, or Internet bubble, was a period where there was a rapid rise in U.S. equity valuations fueled by investments in Internet-based companies.
The technology index NASDAQ increased from under 1000 to over 5000 between 1995 and 2000. Companies such as Amazon or eBay experienced a huge increase in its stock price.
And then came more than 2 long years of horror: The burst of the bubble, lasted from March 11, 2000, to October 9, 2002. Companies such as Pets.com, Webvan, Boo.com, Worldcom, NorthPoint Communications were terminated. Even big internet companies like eBay, Amazon, Cisco or Qualcomm, experienced declines in their stock price.
Contrary to other bubbles, this one tech us a painful lesson: there is a possibility that aburst of a bubble could extend through years (not a few months). And we’re talking about the stock market (not the bond market for example).
6. Financial Crisis of 2007-2008
There are multiple reasons that may have contribute to the bubble that ended in 2007. One often discussed is the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act, that repealed the Glass-Steagall Act of 1933. The repeal allowed banks to use deposits to invest in derivatives.
The following year, the Commodity Futures Modernization Act exempted credit default swaps and other derivatives from regulations.
The financial deregulation made some risky products such as derivatives very profitable. Banks created conditions to have more mortgages that would consequently support the sell of more derivatives.
And then the music stopped. The FED increased the interest rates, and demand of new houses suddenly decreased. Supply outpaced demand. No more buyers. And pop! Another one (bubble) bite the dust.
US REIT index fell of the cliff. Early 2007 it hit a peak of over 1200 points. From that moment on, it went all the way down until around 200 points in early 2009. 2 years always falling.
Almost every stock index in the world suffered from this crisis. The whole financial system was near total collapse.
7. Bitcoin Mania
One thing that usually comes with low interest from central banks, is that there is more money that can be applied to good investments, but also to bad ones. After years of low-interest environment produced by the majority of central banks, bitcoin showed us that there maybe some bubbles showing up in unexpected places.
Who would say that in one year (2017), a “virtual coin” such as bitcoin, went from around $1,000 to near $20,000? Why? This hasn’t real intrinsic/potential value. Thus not a commodity. It isn’t a stock or a bond. Hence not a coupon or dividend to be collected. As it varies in US dollars so much, it can’t be used as real coin. No one knows what value it will have in the near future.
The only thing that it can do is to transfer money without leaving trace. Probably (some disagree). And even this has an upside but also a downside.
As expected the bubble soon ended. Violently. Today, 1 Bitcoin equals 3,569.72 United States Dollars (14-02-2019). It’s losing over 80% of its peak value.
A bubble by all measures.
Financial Bubbles have some things in common. Let’s sum up what we’ve learned.
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