Bubbles Create
The Best Opportunities
First and foremost, remember to think about and give “thanks” to all who have served this fine nation preserving our rights and liberties on the field of battle. In case you’re wondering, here’s an approximate number of Americans who were killed or injured in major wars involving the United States:
American Revolutionary War (1775-1783):
Estimated American military deaths: Around 4,435
Estimated American military wounded: Around 6,188
War of 1812 (1812-1815):
Estimated American military deaths: Approximately 2,260
Estimated American military wounded: Approximately 4,505
Mexican-American War (1846-1848):
American military deaths: Approximately 13,283
American military wounded: Approximately 4,152
American Civil War (1861-1865):
Union military deaths: Approximately 364,511
Union military wounded: Approximately 281,881
Confederate military deaths (estimated): Approximately 258,000
Confederate military wounded (estimated): Approximately 194,026
Spanish-American War (1898):
American military deaths: Approximately 2,446
American military wounded: Approximately 1,662
World War I (1917-1918):
American military deaths: Approximately 116,516
American military wounded: Approximately 204,002
World War II (1941-1945):
American military deaths: Approximately 405,399
American military wounded: Approximately 670,846
Korean War (1950-1953):
American military deaths: Approximately 36,574
American military wounded: Approximately 103,284
Vietnam War (1964-1975):
American military deaths: Approximately 58,220
American military wounded: Approximately 153,303
Persian Gulf War (1990-1991):
American military deaths: Approximately 382
American military wounded: Approximately 467
War in Afghanistan (2001-present):
American military deaths (as of September 2021): Approximately 2,461
American military wounded (as of September 2021): Approximately 20,721
Iraq War (2003-2011):
American military deaths: Approximately 4,491
American military wounded: Approximately 32,222
These numbers do not account for civilian casualties or the long-term physical and psychological impacts on veterans and their families. When you have a chance to look a veteran in the eye remember to say “thank you”; they’re why you’re living in the best damn country in the world.
Now back to “Bubbles”. I’ve lived long enough to realize that events of this nature lead to tremendous trading followed by long-term investment opportunities. Ironically, no one summed it up better than perhaps one of the worst Federal Reserve Chairmans we ever had, Alan Greenspan. He coined the term “irrational exuberance” in 1996 then he went on to facilitate it twice in his less than illustrious history between August 1987 through January 2006. It’s defined as a state of excessive and unwarranted optimism or enthusiasm in financial markets, often leading to inflated asset prices and speculative behavior.
When exhibited irrational exuberance causes investors to become overly optimistic about the future prospects of an asset, market, or sector. They disregard fundamental analysis and risk assessment creating a complete disconnect between asset prices and their underlying intrinsic value.
Market participants chase trends, take excessive risk while ignoring potential warning signs or negative factors. The optimism is often fueled by several factors like positive economic news, strong market performance, real or fake media hype, or a sense of fear of missing out (FOMO). I’ve spoken of the evils of piling into positions because of the “fear of missing out”, exemplified most recently by the “meme” stock craze. That did not end well, did it?
Most often irrational exuberance is unsustainable leading to market bubbles. When the bubble eventually bursts, asset prices experience sharp declines, causing financial losses for those who had bought into the hype. This is when and where “the street” is its most savvy. They take advantage of the real “fear”; others losing money and step up the plate and buy the dips.
Bubbles
One of the worst economic bubbles in U.S. history was the "Dot-com Bubble" or the "Tech Bubble" of the late 1990s and early 2000s. The Dot-com Bubble, a “speculative” frenzy in the technology sector, primarily focused on internet-based companies. Some of the details about this historic bubble follow:
Background: The internet was rapidly expanding during the 1990s. Investors became highly enthusiastic about the potential of internet-based businesses. Many companies showing little or no profits or revenues, received substantial investments resulting in parabolic surge in valuations based solely on promising technological ideas that failed to materialize.
Characteristics:
1. Excessive Speculation: Investors poured large amounts of money into technology stocks, disregarding traditional valuation metrics like earnings or revenue. They were “investing” in a potential of future growth not their current profitability.
2. Skyrocketing Stock Prices: Technology stocks experienced extraordinary price increases resulting in valuations reaching excessive levels. Investors believed that tech companies were immune from the “normal market rules” and growth was a given.
3. Bursting Bubble: In March 2000, the bubble peaked, stock prices soon began to decline. Financial difficulties led to bankruptcies followed by catastrophic, substantial losses for investors.
Consequences:
1. Market Decline: When the Dot-com Bubble finally burst the markets declined precipitously. Major stock indices, especially the NASDAQ Composite, experienced extremely sharp drops wiping out trillions of dollars in market value.
2. Job Losses and Economic Impact: The collapse of most technology companies led to substantial job losses and economic disruption. Investments and related activity in the tech sector declined causing a ripple effect throughout the entire economy.
3. Investor Confidence Shaken: The Bubble destroyed investor confidence, leading to increased skepticism and extreme caution in the market. Investor trust took several years to fully recover.
Lessons Learned: This Bubble should remind everyone of the significant dangers that are associated with speculative excesses. It also, for a period of time, brought to light the importance of sound investment principles. It highlighted the basic requirement that investors should evaluate companies based on fundamental metrics, profitability, and sustainable business models versus just buying the latest “name on the block”.
While it's important to note that the Dot-com Bubble was significant, other economic bubbles throughout history, like the Dutch Tulip Mania in the 17th century, the U.S. Housing Bubble in the mid-2000s, the recent “meme” stock craze and perhaps even an upcoming lesson in “AI” stocks, have profound impacts on the economy and financial markets. Will we ever learn?
Prior Bubbles in the United States
The United States has experienced several notable economic bubbles throughout its history. Some of the worst economic bubbles in U.S. history are:
1. The Mississippi Bubble (1719-1720): The Mississippi Bubble was a speculative financial scheme orchestrated by John Law, a Scottish economist, in Louisiana. Law created a monopoly on trade with French colonies through the Mississippi Company. The scheme generated excessive speculation. The company's stock price skyrocketed until it burst in 1720. This led to severe economic conditions, a catastrophic financial crisis in France that impacted the broader European economy as well.
2. The Florida Land Boom (1920s): In the 1920s, Florida experienced a speculative frenzy in real estate known as the Florida Land Boom. Investors all flocked to Florida, driven by the prospect of quick profits in land speculation. Prices soared, large-scale developments emerged until the bubble burst in 1925-1926. The ensuing collapse in land prices and subsequent economic downturn was an early signal of the impending Great Depression.
3. The Stock Market Crash of 1929: The Stock Market Crash of 1929 marked the beginning of the Great Depression and remains one of the most significant financial crises in U.S. history. Speculation coupled with excessive buying on margin inflated stock prices, creating an unsustainable bubble in the stock market. On October 29, 1929, known as "Black Tuesday," the stock market experienced a sudden and severe crash, leading to a prolonged economic recession.
These are just a few examples of the worst economic bubbles in U.S. history. Each of these episodes had significant economic and social consequences, underscoring the risks associated with speculative excesses, unsustainable growth, and unsupported asset price inflation.
Click here for an exhaustive list of other US “Bubbles” over the last 100 years.
Prior Worldwide Bubbles
Throughout world history, there have been several notable economic bubbles that have had significant impacts on economies and societies. Here are some of the worst economic bubbles in world history:
1. Tulip Mania (1636-1637, the Netherlands): Tulip Mania is often cited as one of the most famous and earliest speculative bubbles in recorded history. During what is known as the Dutch Golden Age, the price of tulip bulbs skyrocketed to extraordinary levels, driven by speculative trading until it burst in 1637, leading to a sharp collapse in tulip bulb prices and causing substantial financial losses for far too many investors.
2. South Sea Bubble (1719-1720, United Kingdom): The South Sea Bubble was a speculative frenzy that occurred in England during the early 18th century. The South Sea Company, established to trade with Spanish colonies in South America, saw its stock prices soar due to rampant speculation until it burst in 1720. This led to severe economic consequences for investors and the broader British economy.
3. Japan's Asset Price Bubble (late 1980s): Japan's Asset Price Bubble of the late 1980s is considered one of the largest and most prolonged bubbles in modern history. Fueled by speculative real estate and stock market investments, asset prices in Japan soared to unprecedented levels until it totally collapsed in the early 1990s. This led to a protracted period of economic stagnation, known as the "Lost Decade," the effects of which are still felt to this day.
4. Chinese Stock Market Bubble (2015): In 2015, the Chinese stock market surged driven by retail investors looking for quick profits. Stock prices skyrocketed, but the bubble quickly and abruptly burst, resulting in a sharp and steep market decline. The Chinese government intervened to stabilize the market and mitigate its impact, but the bubble's collapse had significant economic implications for China and the world.
These are just a few examples of some of the worst economic events in world history. Each exhibited similar characteristics and consequences which highlighted associated risks of speculative excesses, market psychology, and unsustainable valuations.
Click here for an even more exhaustive list of other US and worldwide “Bubbles”, bear markets and crashes. History unfortunately repeats itself; damn human nature.
Are we are entering an AI bubble at the current time?
It is worth noting that there has been a significant increase in interest, investment, and development in the field of artificial intelligence in recent years. AI technologies and applications have shown promising advancements in sectors such as healthcare, finance, transportation, and more. It has led to substantial investments in AI-related startups, research initiatives, and AI-driven projects. Starting to sound familiar?
While the growth of AI has been remarkable, it is essential to approach the field with a level of caution and critical thinking. Bubbles can occur when there is an irrational exuberance or speculative hype surrounding a particular technology or sector, leading to inflated expectations and valuations that seldom align with underlying realities and economic fundamentals.
To determine if there is an AI bubble forming or if the current growth is sustainable, it is crucial to assess factors such as the quality and maturity of AI technologies, the level of market adoption, the viability of AI-based business models, and the long-term value created by AI applications. It's also essential to consider regulatory and ethical considerations. They can impact the development and deployment of AI technologies.
I like Nvidia (“NVDA”). Over the past few months I’ve spent a great deal of my time on their site listening to webinars related to their advancements in AI and associated technologies they’re bringing to the technological marketplace. Unfortunately most are cost prohibitive from my standpoint but sense that over time, like most everything will become more affordable. Nonetheless, with a P/E ratio exceeding 200 it’s not on my list of “buy” recommendations, Qualcomm (“QCOM”) is and I’ll spend some time on that during this holiday weekend’s “The Week That Was & What’s Next”.
Because of you, our early adopters, Substack has taken notice. Our thanks go out to Barchart as well as they’ve adopted us. They’re going to form the foundation of how we teach “what we use & how we use it” but like anything else, it’s all on a learning curve. Back to the “curve”, it’s a long one, longer than anticipated so I’ll just keep to the content.
Hope you enjoyed this post. I’m just a young 68 years old; my Dad became a broker when I was 13. It’s time for me to ‘give back’ to all of you what’s in my head. It’s not always pretty but it’s based on history . . . and history, unchecked, repeats itself as you are witnessing..
Everyone learns at their own pace. If you pick everything up the first time through, great but if not email me at david@thetickeredu.com so we can further help. Again, let me know what you want to learn, I’m all ears.
Other than Don Ho’s “Tiny Bubbles” and kid’s songs about bubbles there’s not much to associate with today’s post. With that in mind let’s stick to the Memorial Day theme for today’s selection. Best to all and remember to remember.