The term “bubble,” in the financial context, refers to a situation where the price for an asset exceeds its fundamental value by a large margin. During a bubble, prices for a financial asset or asset class are highly inflated, bearing little relation to the intrinsic value of the asset.
Bubbles isn’t a new phenomenon. It has been around from Dutch tulip mania -1637—but in recently time they have started coming in to average investor’s dictionary. What’s different is that bubbles happen much frequently in recent times. Let’s see the last ten bubbles.
Last ten bubbles
Poseidon bubble (Australia)(1969-1970)
A company called Poseidon NL discovered a promising site to mine nickel. Because of this news, the stock prices of Australian Mining Companies rose high in late 1969.
But after some time, though there were no official news on the nickel mining, prices of the company’s shares were speculated upto $382 a share from it’s earlier price of $0.80. In January 1970, Poseidon’s share rose to the record peak level at $270. Soon after the prices were crashed in 1970. Soon after the prices were crashed in 1970.
Gold and Silver bubble (1976-1980)
As they say, the value of anything lies on the eyes of the beholder. Gold definitely falls into the category. It is just the intrinsic value of this glittering metal. The price of Gold Metal rose to a historical height of $850 per ounce in January 1980. It shot up from a humble beginning of just $35 in 1971. From 1979, the price of Gold just rose to 280% within a year. The strong inflation due to war, oil prices and uncertain economic conditions led people and governments to invest on Gold led to the bubble. Today (January 2018) Gold Spot Price per Ounce stands at $1,327.90
Silver Thursday 1980
The Hunt Brothers tried to corner the entire silver market by buying Silver and Future Contracts using their cash pile of Billions of dollars. This triggered the price of silver to $50 per ounce. Their investment of $1 Billion in Silver had become $4.5 Billion when The US Government stepped in and made rapid measures to stop this intentionally manoeuvred trading practice. The price of the silver fell down to $11. This made the brothers to eventually declared bankruptcy. Still they were as rich as good.
Japan real estate and stock market boom (1986-1991)
The Japanese asset price bubble was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. The bubble was characterised by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. By late 1991, asset prices began to fall. Even though asset prices had visibly collapsed by early 1992, the economy’s decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade.
The dot-com bubble (US)(1995–2000)
The dotcom bubble occurred in the late 1990s and was characterized by a rapid rise in equity markets fueled by investments in Internet-based companies. During the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated NASDAQ index rising from under 1,000 to more than 5,000 between 1995 and 2000.
The NASDAQ index peaked on March 10, 2000, at 5048, nearly double over the prior year. Right at the market’s peak, several of the leading high-tech companies, such as Dell and Cisco placed huge sell orders on their stocks, sparking panic selling among investors. Within a few weeks, the stock market lost 10% of its value. As investment capital began to dry up, so did the life blood of cash-strapped dotcom companies. Dotcom companies that had reached market capitalization in the hundreds of millions of dollars became worthless within a matter of months. By the end of 2001, a majority of publicly traded dotcom companies folded, and trillions of dollars of investment capital evaporated.
1997 Asian financial crisis (1997)
The Asian financial crisis, also called the “Asian Contagion,” was a series of currency devaluations and other events that spread through many Asian markets beginning in the summer of 1997. The currency markets first failed in Thailand as the result of the government’s decision to no longer peg the local currency to the U.S. dollar (USD). Currency declines spread rapidly throughout South Asia, in turn causing stock market declines, reduced import revenues and government upheaval.
United States housing bubble (US) (2002-2006)
A housing bubble is a run-up in housing prices fueled by demand, speculation and exuberance. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively long period of time to replenish and increase. Speculators enter the market, further driving demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices — and the bubble bursts.
The 2000s commodity bubbles (2002-2008)
The 2000 Commodity bubble was the rise, and fall, of many physical commodity prices (such as those of food stuffs, oil, metals, chemicals, fuels Many firms, individuals, and hedge funds went bankrupt or suffered heavy losses due to purchasing commodities at high prices only to see their values decline sharply in mid to late 2008. Many manufacturing companies were also crippled by the rising cost of oil and other commodities such as transition metals.
China stock and property bubble (China) (2003-2007)
The 2005 Chinese property bubble was a real estate bubble in residential and commercial real estate in China. The New York Times reported that the bubble started to deflate in 2011 while observing increased complaints that members of the middle-class were unable to afford homes in large cities. The deflation of the property bubble is seen as one of the primary causes for China’s declining economic growth in 2013.
The phenomenon had seen average housing prices in the country triple from 2005 to 2009, possibly driven by both government policies and Chinese cultural attitudes. High price-to-income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been cited as evidence of a bubble. Later, average housing prices in the country increased between from 2010 to 2013.
Critics of the bubble theory point to China’s relatively conservative mortgage lending standards and trends of increasing urbanization and rising incomes as proof that property prices are justified.
Uranium bubble of 2007
Between 2004 and 2007, the spot price of uranium more than quadrupled, reaching more than $140 before falling off sharply in the past several months to less than $80. The reason is because there’s been an increased demand from nuclear power plants around the world, as nuclear energy becomes more palatable in the face of global warming.
Starting in 2005 and peaking at roughly $300/kg in mid-2007. This coincided with significant rises of stock price of uranium mining and exploration companies. After mid-2007, the price began to fall again and at the end of 2010, was relatively stable at around $100/kg.
Right now, in the investment world, people are so hype about Bitcoin. Could this be the next biggest bubble? May be or may not be. But let’s just understand the lessons from the past bubbles.
Lessons from the above bubbles to see before going to Bitcoin
- Frequency has increased from one in decade to multiple bubbles in a decade
- When people are making easy money, it’s close to the end. These Initial Coin Offerings (ICOs) of Cryptocurrencies like Bitcoins make us to remember the old IPO craze in 1999. Nobody says no to Easy and free money
- Bitcoin may be the biggest bubble because people are minting money all out of proportion to their work ethics and intelligence, which is one of the classic sign of a bubble
- Yes, you can buy bitcoins and fly with the bubble. But the suspicious of buying just computer code with cash flows or with tangible things.
- Ultimately the regulations from Government bodies regularize the clutter. Until then, people might just float their hard-earned money into speculative investments. Few may make money. But that is just exception. Many lose their investments. That’s the hard reality.
So, be wise to invest your hard-earned money and don’t get burst in economic bubbles without carefully vetting it.