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Is The Next Bubble About To Burst?

IS THE NEXT BUBBLE ABOUT TO BURST? Economics is all about learning from previous market movements, and trying to predict the next big move. Let's look at historic bubbles to see what's next. WHAT ARE BUBBLES AND CRASHES? BUBBLE: - over-demand on a stock drive prices beyond actual worth based on performance of the underlying company. price CRASH: Significant drop in the value of a market where a majority of investors are trying to flee the market. value LEADING TO: Panic selling, stocks lose value and investors lose money to invest in the future. Often leads to a depression. PHASES OF BUBBLES THE DOW JONES 1996-2014 O STEALTH: "Smart Money" enters. HOUSING BUBBLE TECH AWARENESS: Institutions begin ??? BUBBLE BUBBLE to invest. ) MANIA: Media broadcasts to general public who invest. Špeculation rises, prices soar. '10 '14 96, 90, 00, A HISTORY OF BOOMS AND BUSTS Netherlands 1634-1637: THE DUTCH TULIP MANIA ELEMENTS In 1593 rare tulips were brought from Turkey to the Netherlands. A non-fatal virus known as mosaic created "flames" of color on tulips, and scarcity and demand increased. PEAK Tulip worth Bulb buyers filled up inventories for the growing season, and scarcity and demand increase again. People traded homes, livestock, and life savings for tulips flipped for profit, and tulip price increased x20 in one month. an estate Some crystallized profits by selling, leading to fewer buyers Others waited Ilonger, trying to continue flipping tulips until there was no demand. BOTTOM Tulip worth an onion TULIP CRASH: To halt panic government offered 10% on contracts. EVERYONE LOST: !.1hose who profited couldn't use profits in massive depression 2. Those who didn't lost houses, life savings. LESSON: Don't heavily speculate on objects without intrinsic value. Britain 1716-1720: THE SOUTH SEA BUBBLE ELEMENTS 18th century saw a large section of Britain with money to invest and nowhere to put it. Britain controlled the world's seas, and mistakenly believed Mexicans and PEAK South Americans were waiting for someone to introduce European fineries. Shares worth $1000 (unadjusted) SO THE BRITISH THOUGHT: MEXICO AND SOUTH AMERICA: - jewels - gold SOUTH SEA COMPANY BOTTOM - wool Shares - fleece WORTHLESS TIMELINE: 4200 STOCK. * Day of lov "1y39 South Sea Co. uses 10 million pound IOU to the British South Sea Company issues and repeatedly reissues stocks. Fueled by nationalist pride, Lulon, tlhe in the Capital and Principal Soock es erica, ant for British continued of ibe Grerar aul Company of Merchar of Great-Britain, Transfered is 3ecetibed of South Sea Company was mismanaged. Entire shipments were routed to the wrong ports and left to decay. to invest to Encuraging the Firy, ke, this Day 1 Company's Booka, unito the faid erote Witner, government for rights to all trade in the South Seas Trading te the Sorth Seas, enf aber Partf Am Y compete with French Mississippi LESSON: Don't let government favoritism and nationallism obscure faulty ventures. France 1716-1720 TX* THE MISSISSIPPI BUBBLE OX ELEMENT France, insolvent after a war, issues paper money. Company of the West obtains rights to Mississippi Valley in North America. Using paper money, Company of the PEAK West monopolizes French tobacco and African slave trades. Stock worth 80x Issues a total of 625,000 shares, which increase with the glut of paper money the value of all and causes a speculation frenzy. John Law, founder of Company of the Indies (as it was renamed), begins to control France's foreign trade and finances. gold and silver in France. PUBLIC RISK, PRIVATE REWARD: BOTTOM State issued public securities backed by Company of the Indies stock: The entirety of France thrown Public securities > public investors Public debt < investors' money into a depression. Then stock plummets, and Law flees France. Frànce assumes debts of the company and raises taxes to cover it. Large nationwide depression begins. LESSON: Beware of too big to fail. Britain 184o's "RAILWAY MANIA" BUBBLE ELEMENTS • Railways = disruptive technology. • Low interest rates pushed investment. PEAK • Small number of early railroads were very effective. • South Sea Bubble Act, limiting investment to 5 people, removed. 272 Acts of Parliament passed and 9,500 miles of new railway approved in one year. At peak, 1/3 of railroads collapsed due to financial planning, or because they were shell corporations used to commit fraud. BOTTOM Massive number of middle income LESSON: Disruptive technology drives growth, within bounds. families bankrupted. Florida, 192o's REAL ESTATE BUBBLE ELEMENTS Increasing population and "leisure class." » Scarcity of properties increases demand. Prices double and friple. Investors begin flipping properties. » In order to claim a profit, prices had to continue to rise. » Panic when buying stopped leads to mass panic. PEAK 1926 luxury condos going for $4.5 million, unadjusted for inflation. %24 BOTTOM Real estate prices ended up lower than before. Products with inherent value (houses) LESSON: don't crash as hard an products without inherent value (tulips). America, 1929 STOCK MARKET CRASH ELEMENTS Booming markets through the 20's were at massive highs. Margin buying allowed investors to pay just 10% of total value of stocks then pay installments. There PEAK was a huge influx of startup banks with few regulations. Brokers were regularly Massive new lending investors just 2/3 the price of stocks. Banks used customer deposits for leisure class risky speculations. from the inven- TIMELINE: tion of the radio, automo- bile, and BLACK TUESDAY Market loses Market stops sliding By July, the market 11% of value at opening bell. but scares investors. lowest of the 20th commercial century, losing 85% of value. Next day the Dow drops 12%, with the largest volume of stocks traded as any airplanes. THE STOCK KiKET CRASH Leading bankers meet to stop slide, buying large blocks or shares Runs on banks, and The Milwaukee Leader BILLIONS LOST IN NEW STOCK CRASH shattered fortunes day in 40 years. BOTTOM pushed the US into the Great Depression. above current Adi Tan w market. Thousands of banks fail and unemployment skyrockets. LESSON: Investment and commercial banking should be separated. America, 1987 BLACK MONDAY ELEMENTS - Uncertainty from the Cold War, a new Federal Reserve chairman, and a falling dollar. - After a massive slide, the economy continued to grow, and the market rebounded. PEAK CONSIDER: Dow stock index nearly doubled from If you invested $10,000 the day after the crash, it would be worth $133,000 today. 1986-1987. If you invested the Friday before the crash, it would still be worth $98,000. BOTTOM BUT: Dow lost 22.6% of it's value and had the largest one day market crash in history. LESSON: Investment should proceed based on principles, not predictions. Even when we learn from booms and busts, we tend to forget our lessons over time. Is this the next big bubble? Brought to you by BIZBRAIN.ORG. CITATIONS


  • Is The Next Bubble About To Burst?

    shared by merrillcook1 on Mar 16
    From the dutch tulip mania to the great recession--humans love speculation. Even if it nearly always ends in a bust!



    Mandy Haskins


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