The Tulip Bubble
Some of the most memorable bubbles that we have all learned about in college like the very first one in the Netherlands was the Dutch Tulip bulb craze. Tulipmania occurred shortly after the tulip plant was introduced to Europe from Turkey. The tulip plant’s rarity and exotic beauty helped it to find immediate favor within Dutch high society, actually showing off tulips as a status symbol.
As tulip prices rose to new heights, speculators began to buy tulip bulbs to “flip” later on for higher prices. Very soon, almost all classes of Dutch society were involved in tulip bulb speculation, with many trading all of their entire worth for a single tulip bulb.
When tulip bulb prices became worth the equivalent of tens of thousands of dollars (in current values), many Dutch tulip speculators became fantastically wealthy. Well, tulip bulb prices eventually peaked and soon imploded, bankrupting scores of speculators and throwing the Netherlands into an economic depression.
Then, we have America’s stock market crash in 1929. We all know that story perhaps by our Great Grandparents whose lives were greatly affected.
The roaring twenties was a time of great prosperity and peace. Many of the technologies at the time like radio, airplanes, and automobiles became public companies. Many investors speculated with BORROWED money and some became fantastically wealthy.
When the peak happened and the bubble burst, many Americans were wiped out and even jumped out of buildings to their death. Many banks went bankrupt and thousands of people lost their jobs.
The Junk Bond King
Black Monday 1987 when the stock index nearly doubled in a year and the market was being fuel by LBO’s (Leveraged Buy Outs), you may remember Michael Milken the Junk Bond King who fueled the merger mania and hostile take overs. He eventually went to prison along with Ivan Boesky.
I personally remember that time as I very young – just out college running the Swiss Franc Desk at a very well-known trading house and was long “Swissies” and couldn’t believe my luck! Needless to say it was a very profitable day for me and I was stunned that one person could make so much money while other investors were going bankrupt and committing suicide.
The Tech Bust
We all remember the tech bust in the late 1990’s where technology companies with no assets or even sales were giving out insane valuations of $100 million to $200 million just simply on a business plan.
I can remember when Warren Buffet was asked why he was not investing and he said I can’t make any valuations that make sense and just simply don’t understand it.
The Housing Crisis
Most recently and still fresh in our collective minds is the Financial crisis of 2008. Those nasty CDS (credit default swaps) where the cost of protecting its debt, through an instrument called a credit default swap, which began to rise rapidly as investors feared that Bear Sterns would not be good for the money it promised on its bonds.
Not familiar with credit default swaps? Well, we didn’t know much about collateralize debt obligations (CDOs) either — until they began to undermine the economy.
There were $45 trillion dollars of the nasty buggers which was nearly twice the value of the entire US stock market.
Guess what? Currently as of the New Year 2017, there are even more of these CDS’s and CDO’s which caused massive deleveraging and financial bailouts from the American taxpayer. No one has gone to jail as far as I know.
So in the end what lessons can we learn from history? Well, worry about a bubble matter less than how the investing public reacts to those worries. Using this standard it could be that we are in over-hyped and hyper-active markets, especially when I read about all sorts of rationalizations as to why it’s not a “bubble”. We may be there again, and I am excited.
I am continuously writing about additional crises (Black Monday 1987, Enron, the mid-2000s housing bubble & the Stock Market Crash of 2008), so please keep checking back to the future.