4-World of Manias

A bubble is characterized by rapid rise in asset prices, divorced from its fundamentals or intrinsic value. Many economists believe first recorded bubble happened in the year of 1636-37 in Netherlands. What could be the asset under speculation ? Was it Real estate/Gold/Diamond  at that point of time? No. 

 Craze for Tulip flowers engulfed the Netherlands starting from Nov 1636. In 3 months, prices sky-rocketed many folds before finally crashing down. It is said that at the peak of the bubble, some Tulips were traded at price that was greater average house price in Amsterdam at that time.

Sir Isaac Newton , the famous scientist , invested in a British company called South sea, which held exclusive rights to trade in South America in 18th Century. Initially he made some gains and exited the stock. But it flared up further and his friends were making a lot of money. It should be a humbling moment for him. So he purchased the stock again at a higher price. After some time the stock price crashed. The graph looks like below.
After the loss, Newton reportedly said, ‘I could measure the position of distant stars, but could not measure the madness of men’.

Irving Fisher , was one of the greatest economists in 20th Century and Yale University professor. After World War I, what is known as Roaring 20s, US stock market had a bull run. In 1929 , Fisher said ,’ Stock prices have reached what looks like a permanently high plateau’. After 3 days of the statement the stock market started crashing, from 381 level in 1929 to , 41.22 in Mid of 1932 .It triggered a depression in US. After 26 years, in 1955 Dow regained its old peak level of 380+.

It was 1986, Japan already had a high GDP growth for nearly 30 years, It was the world’s second largest economy. Everyone started citing Japan as example for hard work and success and economists were predicting the year when it would overtake US in terms of GDP. The real estate prices were already high due to high population density. Starting 1986,Real estate started flaring up with the stock market . At the peak, the land underneath the Tokyo Imperial Palace was rumoured to be worth as much as the entire real estate of California.



In 1989 Japan decided to prick the bubble using monetary tightening . As interest rate went up, asset prices cooled down. They thought they were successful initially. But after few years, they realized that asset prices were on a deflationary path, going down year after year and started hurting the real economy. Despite many measures, including near zero interest rates, they could not stabilize the asset prices. Japan had a meagre growth starting from 90. Even after 26 years, Nikkei is still more than 40% down from 89 peak. Now some aggressive monetary and fiscal policies are carried out to come out of deflationary pressures . These were the few bubbles before the well-known dot com, US housing bubble took place.
Even great people could not figure out the bubbles till they crashed. It’s quiet easy to bet on stock market and make gains in short term. But it would be quite difficult to sustain in the long run.

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