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A History of Market Bubbles.  Is the Next Bubble Already Upon Us?  Thumbnail

A History of Market Bubbles. Is the Next Bubble Already Upon Us?

“Tiny bubbles … in the wine … make me happy … make me feel fine.”

-Don Ho

 

Like the bubbles in a glass of champagne, bubbles in markets seem to form out of nothing and just as quickly burst and disappear.  Possibly the second hardest decision in the markets is to recognize a bubble; the hardest is to know when it will burst.  Bubbles are a part of market folklore.  The tulip bulb bubble, or “mania”, in the Netherlands in 1637 occurred during the Dutch Golden Age when their economy was considered the most advanced and sophisticated in Europe.  At the peak of the bubble, a single tulip bulb sold for 10x the annual income of a skilled artisan!  The South Sea Company bubble in the UK in the early 18th century ruined thousands of high-profile British investors, including Isaac Newton, when it popped in 1720.  Much more recently the “dot.com” bubble of the late 1990s led to a severe bear market (the S&P 500 was down more than 50%) when it burst in March 2000. Pets.com is a paradigmatic example of this mania, becoming a national sensation after its high-profile IPO despite having meager revenues and huge losses before going out of business just 9 months after its public launch.  JDS Uniphase soared from around $10 per share to over a $1100 in just months before making the trip in the opposite direction just months later when the bubble burst.

Bubbles usually occur in times when the economy is strong and all asset prices are high, sending investors in search of “the next big thing”.  Many ascribe market bubbles to greed and ignorance, or “irrational exuberance”, all of which may play a role, but bubbles need more than that to form.  They usually reflect significant government-generated liquidity that soaks the markets and pushes capital into market niches.  Also, they often occur in products that are hard to short sell, thus short-circuiting a mechanism that can keep asset prices more in line with value.  

This brings us to 2021.  Bitcoin?  Do we even really know what it is?  Up 1200% in 3 years.  Tesla?    Up 700% in a year and trading at an astronomic 1200x earnings!  These are not “reasonable” numbers and there is no economic justification for them – though they could go higher, much higher. Are they bubbles?  As we said, that’s the second most difficult question in the markets.   If it was just a few assets one could adopt a “who cares” attitude and just avoid them, but as the dot.com mania so clearly showed, a bursting bubble often takes a lot of innocent casualties down with it.  As you ponder the most difficult question, enjoy your champagne while the bubbles last!

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