"All happy bubbles are alike, all unhappy crashes are different."
Anna karenina
Bubblers hate the word crash. They always tell you that a correction in markets is due. Corrections of 100% sometimes.
When asked about the dot com bubble,Brokers answered: "God , please! let me live through another bubble".
Documentary post-crash
Documentary during the bubble.
Even some German people that lived during the Nazi regime describe it as heaven on earth, because of the shared sense of purpose and the feeling of an ever promising future. Which is very telling of the way exuberance affects us.
There are many examples in information technobubbles:
The telegraphmania (1840); Radio (RCA $3 "1923" to $114 "1929", then crashing only going back to $114 by 1964; Internet (Dot com 2000)
There are some common denominators: High Speed and liquidity traps.
These are some of the books that are a must read.
- "The great crash of 1929" by JK Galbraith
- "Mania, Panics, and Crashes" by Charles Kindleberger
- "A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation" by Scott Nations
- "The slumps that shaped modern finance" The Economist Newspaper 2017
"Is pure hubris, we think this time we know better: it's been too long since the last crash, don't worry - -The last crash was just too recent, don't worry-" Scott Nations.
First some common signs:
- You are punished for not owning the asset because of increasing valuation (even if the P/E ratio is high, like a peer pressure FOMO).
- There's some financial contraption that gets out of control (We think it solves an old problem but there's always a financial contraption)
- There's an external catalyst. Something that requires external liquidity quickly.
I've been watching a lot of documentaries about the Dot com bubble and reading some books about it, as well as other market crashes.
1929 's bubble. The catalyst was a friendship, Benjamin Strong, and Montague Norman. Head of the federal reserve bank of New York and the governor of the Bank of England, respectively. Article about this
Benjamin kept the interest rates ridiculously low, even more than the WW I levels. The treasury had made a country of investors by giving them war bonds.
It was in September of 1929, that people started talking. When a fraudster in London started counterfeiting stock certificates.
A utility wanted to split its stock, then a Massachusetts regulator said no. This freaked out the market. There were two drops after labor day. The 28 and 29 of October. That's when things really got bad. Most of the people thought it was gonna be like 1907, with JPMorgan as a hero. So financiers tried to do the same and put brakes on the market. Getting grind in the process.
1987 , A contraption "Portfolio insurance" was an invention in Berkley as a way for investors' positions to never fall below a certain value. In the worst of the crash, Leland, O'Brien, and Rubinstein were selling futures to affect this insurance. Until their trader refused to keep selling more futures because of fear that he would drive the market to zero. Allan Greenspan probably saved the day by saying the federal reserve would give everyone everything they want.
The first 13 days in 1987, the DOW hit 13 straight win days in a row. Every normal person thought they could buy and sell for higher.
1999 , It's quite interesting to see how it all began and the stages of it all. Probably with the Apple commercial during the super bowl in 1984
Most people pay close attention to the top of the bubble but in the early days, there were many crazy things. Even by the now surviving thriving companies.
For instance, cryptocurrencies are growing at 6 times the rate of growth companies during the Dot com bubble had.(Yeah, this time is different. Although people used to say this time is different about the mentioned bubbles)
At the time thanks to Amazon's Jeff Bezos motto "Get Big Fast" many companies started functioning at a loss with a huge emphasis on PR, and valuation competitions. Winner takes all and user experience was everything in those days.
One of the first things that happened was the apparition of day traders. Ordinary people doing the same that professionals did.
What first allowed transactions was a relatively new development system of public cryptography. The simple explanation of how it worked was that to avoid middlemen from taking the transaction away, Amazon did send only an open lock, people took the information and did lock it using that lock so only Amazon had the key to open it.
Is common to the pattern, the appearance of a new "contraption" on how to improve existing technologies of the financial market than an unrelated event asks for liquidity from it at the same time. People can't get out orderly. So the system crashes.
According to Lee Walczak from BusinessWeek and Scot Nations (A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation), VC's were booming with money after the tail end of a ten years market all time high.
As well as capital gain taxes getting cut in 1978 and 1981 and deregulation.
After the first successful transmission of information what came later were conferences. Initially by experts then regular people attending those conferences. Always a new conference by tech leaders on how things were improving.
Later everyone was an expert at something valuable.
Is not irrationality, or not only irrationality as Allan Greenspan called it, is most likely due to Baumol's cost disease
What drives prices are humans. They become a luxury and so everything is pegged to them. People asking 10x - 100x times what they used to. Teams of developers suddenly become the only ones that can carry a particularly big project (even if it can be copied)
Then the barrier of entry to new projects becomes extremely low.
When there's a crash (even a fake one) experts just know. That's the reason they are paid so much.
Like Mark Cuban describes it: "The whole Markets are a casino. If there's a greater fool you can get out. The greater's fool theory"
A big pump and dump. Illustrated in a small example you can see the stages.
- Smart money buys slowly an asset while is undervalued.
- There's a small but sudden jump in volume but not much in price.
- Once they have bought, they tell the fools to start buying and publicly start buying and pumping a small portion
- While on the way up they start selling slowly.
Genius is a rising stock market.
– John Kenneth Galbraith
Any plan conceived in moderation must fail when circumstances are set in extremes.
– Prince Metternich
I'm forever blowing bubbles, Pretty bubbles in the air, They fly so high, nearly reach the sky, Then like my dreams they fade and die,
Fortune's always hiding, I've looked everywhere, I'm forever blowing bubbles, Pretty bubbles in the air
– Burr and Campbell