Bubbles, Booms, Busts, and Bummers

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by Gary Christianson, Miles Franklin:

For the week ending September 11, 2020:

  • Gold rose $13 to $1939.
  • Silver rose $0.14 to $26.86.
  • Tesla stock fell $45 to $372, down 26% since early last week.

Bubbles are a fact of life. They occur, like hurricanes, when conditions are right. Like hurricanes, they can be deadly. In the financial world, for a bubble to expand, we need a great story, an excess of credit, mass appeal, and suspension of critical thinking while individuals embrace greed and fear.

EXAMPLES:

  • The South Sea Bubble in England in the 1700s.
  • The stock market bubble in the late 1920s.
  • The silver bubble in 1978 – 1980.
  • Japanese real estate bubble during the late 1980s.
  • The NASDAQ 100 tech bubble in 1998 – 2000.
  • The housing bubble in 2004 – 2007.
  • Bitcoin in 2017.
  • Tesla stock prices in 2018 – 2020.

GREAT STORIES:

  • Everyone is getting rich in the stock market in 1928 – 1929. Don’t miss out…
  • Silver is going to the moon. Inflation is out of control. Buy hard assets.
  • Tech stocks and the internet will change everything. Get into those stocks now.
  • House prices always rise. They aren’t making any more land. Mortgage money is available and easy to get. No assets, no job, no income, no problem. Buy the biggest house you can finance.
  • Bitcoin will rise to $100,000. The quantity is limited, while dollars are created with no limit. Buy, buy, buy.
  • Tesla is a great company and … whatever.

Each bubble is different, but they depend upon easy credit, inexpensive debt, and a “perfect storm” of conditions that boost prices beyond any reasonable level. What goes up must come down, and after the bubbles implode, prices often crash to pre-bubble levels. Suicides, foreclosures, bankruptcies, and lost savings result. The post-crash “hangover” is hard on individuals, businesses, and economies.

Consider the charts of several bubbles.

Silver sold for $5 in 1978. But in January 1980 it rose to $50 for a few minutes. People stood in long lines to exchange their fiat dollars to buy ounces of silver because consumer price inflation raged out of control and silver looked safe. The Hunt brothers wanted silver to hedge other investments, and people blamed them for the bubble. However, gold prices rose almost as much, and the Hunts were not buying gold. COMEX changed the rules, forced sales, and crashed the silver market. Protect the insiders…

Silver sold for $5 in 1978, over $50 in 1980, and for $4.78 in June 1982. Silver prices rose too far, too fast, crashed, and returned to pre-bubble levels. After the 1980 metals mania, investment dollars flowed into the stock market, real estate, Japanese stocks, and Japanese real estate.

Silver prices fell to $3.51 in early 1991 and $4.01 in November 2001. It took two decades to correct the silver bubble.

The tech heavy NASDAQ 100 index sold for under 1,000 in early 1998. It peaked at 4,800 in March 2000 and fell to 795 in October 2002. The NASDAQ rose to unsustainable levels, based on a good story and credit, and crashed back to pre-bubble levels in two years.

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