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Greatest Bubbles of All Time - By GrowtoRetire

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.

There were some aspects that made this company attractive: Monopoly on business activity, a guaranteed interest of 5 or 6 percent.

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 )
It was perceived by some that it was easy and safe to invest in stocks. Soon people started investing using borrowed money or selling stuff such as properties.

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.

5. Dot-com

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 a burst 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.

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Conclusions

Financial Bubbles have some things in common. Let’s sum up what we’ve learned.

  1. The prices associated with assets, in a bubble environment, can reach really high values. Therefore measurable against things such as the annual income of a worker, the price of another asset (ex. house, a car).
  2. Often these events are associated with assets that don’t have any real (nor potential) value. Or with assets that in the present time have a real/intrinsic value far less than the one which it’s trading for.
  3. Generally, the bubble will deflate in a short period of time (a few months), when there are no more buyers left to continue the madness. On the other hand, there are examples of more recent bubbles that “deflated” through more than 1 year.
  4. Assets can collapse (in price) yet survive (operational speaking) and continue for more than a century. Thus affecting the investors. Especially those that bought during or at the peak of the bubble.
  5. Governments and regulators are not very effective in avoiding/dealing with bubbles. Also, there is a debate ongoing if they are effective (or not) dealing with the consequences after the events.
  6. Central banks can provoke an asset bubble (or even more than one at the same time).
  7. Stock/Bond/Other markets that have asymmetries in accessing information are prone to have bubbles. Investments or markets that are opaque too.

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About GTRetire

GTRetire is the founder of GrowtoRetire, a blog about financial independence and early retirement. Click here to learn more about starting a blog! Also, this post may contain affiliate links, please read the disclaimer for more info.

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