Bubbles: Pop goes the market

When finance blows up Every once in a while, a swath of the population goes mad for something—tech stocks, bitcoin, bicycles, a [videogame seller]( in Grapevine, Texas—propelling prices up and to the right until they can’t climb any higher. Sometimes these financial hurricanes pop relatively harmlessly, but other times they cause a deep economic crunch that rattles the economy. Economists disagree on what exactly constitutes a bubble, but here’s a [rough-and-ready]( definition from bubble scholar and MIT economic historian Charles Kindleberger: an “upward price movement over an extended range that then implodes.” This definition [comes with a catch]( by this reckoning, you only know for sure that something is a bubble when it’s over. This makes life difficult for regulators and investors, as well as everyday people who sometimes get stuck in the fallout. You might be asking—are we in one now? If we look at tech stocks, or bitcoin, we certainly have an “upward price movement over an extended range.” The question is whether we get the implosion on the other side. Let’s see what bubbles up. 🐦 [Tweet this!]( 🌐 [View this email on the web]( [Quartz Weekly Obsession] Bubbles February 03, 2021 When finance blows up --------------------------------------------------------------- Every once in a while, a swath of the population goes mad for something—tech stocks, bitcoin, bicycles, a [videogame seller]( in Grapevine, Texas—propelling prices up and to the right until they can’t climb any higher. Sometimes these financial hurricanes pop relatively harmlessly, but other times they cause a deep economic crunch that rattles the economy. Economists disagree on what exactly constitutes a bubble, but here’s a [rough-and-ready]( definition from bubble scholar and MIT economic historian Charles Kindleberger: an “upward price movement over an extended range that then implodes.” This definition [comes with a catch]( by this reckoning, you only know for sure that something is a bubble when it’s over. This makes life difficult for regulators and investors, as well as everyday people who sometimes get stuck in the fallout. You might be asking—are we in one now? If we look at tech stocks, or bitcoin, we certainly have an “upward price movement over an extended range.” The question is whether we get the implosion on the other side. Let’s see what bubbles up. 🐦 [Tweet this!]( 🌐 [View this email on the web]( By the digits 2,957%: Rally in GameStop shares from Dec. 1, 2020 to a high on Jan. 29, 2021 [$19,650:]( Bitcoin price on Dec. 17, 2017 at the peak of the last boom [$40,666:]( Bitcoin price on Jan. 8, 2021 during the latest crypto boom [20 in (50.8 cm):]( Guinness World Record for the largest bubblegum bubble ever inflated [22%:]( How much the Dow Jones Industrial Average fell on Black Monday, Oct. 19, 1987 [168:]( Decibels produced by the sound of a balloon popping [$1.7 trillion:]( Market value that evaporated when the dot-com bubble popped 71%: How much the Nasdaq Composite Index fell in the dot-com crash [$5 million:]( Gross box office sales for the movie Bubble Boy Explain it like I’m 5! Why do bubbles happen? --------------------------------------------------------------- Yale economics professor Robert Shiller, who [won the Nobel prize]( for his work on the topic, says there has to be a viral story for a bubble to form, and there has to be a way to spread that story. He notes that [there were no bubbles]( before Gutenberg’s printing press got going in the 1600s. And then there’s technology: Few things capture investors’ attention more than the promise of a new gizmo. In the past, it’s been everything from railways and bicycles to automobiles and the internet. Companies capturing the public zeitgeist right now are all about tech, like electric cars and video calls, as well as smartphones and e-commerce. William Quinn and John Turner, authors of [Boom and Bust: A Global History of Financial Bubbles]( say most bubbles are far from accidental and are often [engineered by governments](. France, for example, tried to get out of its debts from the War of Spanish Succession in the 18th century by allowing investors to swap government debt with shares in the Mississippi Company, which the government ensured would increase in price. They did so by ramping up the money supply, making the shares easy to trade, and supplying lots of credit to buy the stock. It worked for a while, turning Paris into a haven for stock brokers, until inflation went haywire and brought the mania crashing down. Quotable “People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t.” —[Warren Buffett]( investor and CEO of Berkshire Hathaway Bob's Burgers Fun fact! The 17th century Dutch “[tulip mania]( is among the most famous bubbles. [According to the legend]( everyone in Holland was in on the action, with tulip bulb derivatives trading for the price of houses. The country’s economy was supposedly destroyed when the bubble burst as bankrupt investors threw themselves into the canal. But research by Anne Goldgar, early modern history professor at King’s College London, turned up [little evidence of a speculative frenzy](. Tulip bulbs were popular and prices increased, but few were exchanged at astronomical prices. When the crash came, it was acute and landed on people who had the money to afford it. She suggests the episode became famous after it was misconstrued in 1841 by Charles Mackay, whose book [Extraordinary Popular Delusions and the Madness of Crowds]( was a runaway success. Giphy Pop quiz Which of these is not a failed dot-com company? FastlyeToysFlooz.comWebvan.com Correct. Fastly is a cloud computing company that is doing just fine. Incorrect. RIP. If your inbox doesn’t support this quiz, find the solution at bottom of email. Million-dollar question Are bubbles bad? --------------------------------------------------------------- Runaway booms have a [deservedly bad reputation](. The worst of them cause deep recessions that can drag down the banking system, creating a crisis that takes years to dig out of. “If the results harmed only shareholders, one could argue that they should be free to take that risk,” Eric Rosengren, president of the Boston Federal Reserve, said during a virtual conference in November. “The fact is that customers, suppliers, and employees are also hurt by risk-taking behavior.” But bubbles aren’t necessarily always bad—particularly when they leave the banking system unscathed. Bill Janeway, a long time venture capitalist, has observed that [some bubbles are “productive.”]( That is, they drive money into new industries, from railroads to the internet, that create a new economy. Brief history [1719-1720:]( France’s bubble in shares of the Mississippi Company, a monopoly of the French colonial trade, plays a role in the widening use of paper money and central banking. [1844-1846:]( Shares in British railway stocks crash, devastating shareholders like the Brontë sisters and Charles Darwin. [1886-1893:]( Australia’s land boom leads to the widespread collapse of banks and building societies and results in a depression. [1895-1898:]( Nearly 700 bicycle companies go public during Britain’s bicycle stock bubble. [1920-1931:]( The epic technology boom of the 1920s begins unravelling on Oct. 28, 1929, Black Monday, when the Dow Jones Industrial Average falls nearly 13%. [1985-1992:]( During Japan’s real estate bubble, Tokyo property sells for as much as $139,000 per square foot, roughly 350 times the cost in Manhattan. [1995-2001:]( As much as $6 trillion of wealth blows up when the US dot-com stock bubble pops. [2003-2010:]( The housing bubble results in a decade-long foreclosure crisis in which some 10 million borrowers lose their homes. The way we 📈 now The GameStop saga has at least one of the hallmarks of a financial mania—nobody thought the struggling brick-and-mortar video game seller was genuinely worth nearly $25 billion (its market capitalization at the height of last week’s trading frenzy). The company’s shares soared because retail traders appeared to be banding together to push the stock as high as possible. They did this, the story goes, because hedge funds were betting in the [other direction](. Traders on Reddit figured out that they could squeeze institutional investors with heavy short-selling bets. (Read more about what’s going on and [how it works]( It has the flavor of a bubble, but it also has a whiff of market manipulation. Whatever you want to call it, the great GameStop short squeeze will go down in the history books as a seminal moment in the retail trading boom of 2020-21. Charted The next bubbles? --------------------------------------------------------------- [A line charting showing the price for Tesla stock and bitcoin from March 2020 to February 2021. Tesla stock price increased over 500% and bitcoin increased over 300%.] Two other assets that have come to represent the great pandemic bull run of 2020-21 are Tesla and bitcoin. Even Tesla founder Elon Musk [has said]( the car maker’s shares are overvalued (shares have soared about 500% since then 🙄). Bitcoin can’t be valued and was recently labeled by JPMorgan analysts as one of the most bubblicious assets out there. Listed Were you hoping this email was going to be about a different kind of bubble? Try one of these other Quartz Weekly Obsessions: 📦 [Bubble wrap]( 🛀 [Bubble baths]( 🥤 [Bubble tea]( 🎈 [Bubble gum]( Rodrigo Fortes for Quartz Membership This is your brain on Robinhood --------------------------------------------------------------- John Coates is a former derivatives trader and the author of [The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust](. Before he trained in neuroscience and endocrinology at the University of Cambridge, Coates got a PhD in economics there and then worked on trading desks at Goldman Sachs and Deutsche Bank. He says he switched from [Wall Street to science]( because the biology of financial risk-taking was fundamentally misunderstood. As part of our field guide on [the next bubble]( Quartz spoke to Coates about how retail trading apps like Robinhood affect your brain. [Read the QZ&A]( Johannes Eisele/AFP via Getty Images Poll Is the US stock market in a bubble? [Click here to vote]( ObviouslyUhhh, no, meme stocks will take me to the moonRelax, it will be fine when the pandemic subsides 💬 let’s talk! In last week’s email about [preprints]( an impressive 69% knew what “peer reviewed” meant before the pandemic. ✉️ Greg wrote, “I think the inside joke [about the letter ‘X’ in ‘arXiv’] is it represents the Greek letter ‘chi,’ pronounced as the ‘k’ sound. Hence phonetically with that substitution, it still sounds like ‘archive.’” 🤔 [What did you think of today’s email?]( 💡 [What should we obsess over next?](mailto:obsession%2Bideas@qz.com?cc=&subject=Obsess%20over%20this%20next.&body=) 🎲 [Show me a random Obsession]( Today’s email was written by [John Detrixhe]( edited by [Liz Webber]( and produced by [Jordan Weinstock](. [facebook]( The correct answer to the quiz is Fastly. Enjoying the Quartz Weekly Obsession? [Send this link]( to a friend! Want to advertise in the Quartz Weekly Obsession? Send us an email at ads@qz.com. Not enjoying it? No worries. [Click here]( to unsubscribe. Quartz | 675 Avenue of the Americas, 4th Fl | New York, NY 10011 | United States