Market Pulse: Tiny bubbles … and some not so tiny
In the Netherlands in 1636 there was a bubble. Was there ever! Investors piled into soaring tulip bulb futures, which provided a cheap way for people to speculate. But when the futures expired the price of tulips had fallen and a large number of defaults rippled through the economy. There were more bubbles. In 1822 investors flocked to bonds from the government of Poyais. The problem? Poyais wasn’t a real country. More recently real estate prices rose sharply in the 2000s until that bubble burst in 2008. There are many more examples of asset bubbles.
A bubble forms when investors buy an asset well above its intrinsic value with the hope of selling it later at a higher price. That’s also known as the greater fool theory: I may be a fool to buy something but I’m hoping to sell it to someone who is even more foolish.
In the early phase of a bubble investors don’t see it forming. Greed takes over as investors see rising prices and they feel left out. A common ingredient prior to most bubbles is excess liquidity (i.e., lots of money in the system). An environment in which interest rates remain near zero counts as excess liquidity. Sound familiar?
Pets.com and their Super Bowl ad became the poster child for the dot.com bubble. Now crypto currency exchange FTX along with its Larry David Super Bowl ad is the poster child of the “everything bubble” that took place during the 2020-21 coronavirus pandemic. Spacs, NFTs, crypto currencies, not profitable technology companies, etc. were bid up to ridiculous prices.
I have had no interest in crypto currencies (Bitcoin is down 67 percent this year) or crypto exchanges since they came on the scene several years ago. I see no real value in them (at the end of 2021 1000 new currencies were created each month!). Many people disagree.
Billions of dollars have pursued the cryptos, but at a risk few people understood. They understand now with FTX filing for bankruptcy. Its former leader is being investigated for fraud amid losses of 10 to 20 billion dollars involving more than 100,000 or reportedly even 1,000,000 people. By the way, fraud is another common element after a period of too much easy money.
As losses soar people must be wondering how otherwise intelligent investors were caught up in the mania and perceived value where there was really none at all. Some of the most prominent hedge funds were suckered in to what all, with a little probing, would have seen as a scam. We will hear more.
— David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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