A Brief History Of Major Financial Bubbles, Crises, And Flash-Crashes

WHAT YOU NEED TO KNOW ABOUT FINANCIAL BUBBLES AND MANIAS

Throughout history, there have been numerous speculative economic bubbles and manias. Some were relatively isolated events which held limited or no broad economic ramifications, while others resulted in a full-blown financial crisis or marked the end of important eras.

In more recent times, flash-crashes have become another unusual but very different type of short-term threat to the marketplace as an unintended consequence of rapidly growing dependence on technology and algorithmic trading. Keep reading a brief history of bubbles and manias and how they impacted the trading landscape.

A Brief History of Major Financial Bubbles, Crises, and Flash-crashes

 

WHAT ARE FINANCIAL MARKET BUBBLES AND MANIAS?

Bubbles and manias have been around as long as financial markets have, and for as long as human nature remains the same these episodes of severe market dislocations will continue to develop and unravel as they have in the past. Over and over.

The history of bubbles begins in the 17th century. The first recorded market bubble – the Tulip mania – dates all the way back to 1636-1637, and yet after nearly 400 years, we find ourselves today amidst the deflating of the Bitcoin bubble that reached its crest in December 2017. Of all the historical bubbles, only Bitcoin’s final blow-off stage rivaled that of the one seen during the Tulip craze, and in total, from the beginning to the end only the Bitcoin bubble has exceeded it.

Indeed, a perfect example of how human nature in the marketplace remains unchanged despite all the advances in technology and the availability of education and information to market participants. The asset type and reason behind the spectacular rise and fall are different, but the irrational behavior of market participants is nearly identical.

The Tulip and Bitcoin bubbles are two of the more unusual occurrences given the type of ‘asset’ they are (were) and sheer magnitude of price appreciation. But along the way between the days of Tulips and Bitcoin, there have been many instances of speculative bubbles and manias, of which some ended very badly for the broader financial markets and economy.

In this article, the history of bubbles and manias has been segmented into two types, with the importance of the asset class to broader financial markets as the dividing factor. ‘Normal’ market bubbles if you can call them that, are those which involved major markets (i.e. stock markets, commodities) and ‘abnormal’ market bubbles are those involving ‘niche’ markets with limited to no macro-impact.

MAJOR MARKET BUBBLES (10 YEARS TO THE PEAK, 2 AFTER)

Major market bubbles (10 years to the peak, 2 years after)

 

2 YEARS AFTER THE TOP

2 years after the top

 

Dow 1929 (led to the 1930s depression)

The first major developed-world bull market that led to excessive speculation and extreme valuations took place during the ‘roaring ‘20s’ and culminated in the 1929 top. While the gains during the decade leading up to the top were relatively tame by comparison to other major speculative bubbles, the fall-out was tremendous with the Dow Jones losing 89% from the top on September 3, 1929, to the trough on July 7, 1932. Along with the collapse of stock prices came the ‘Great Depression’, a recession which lasted over three and a half years and saw unemployment spike to nearly 25%.

A Brief History of Major Financial Bubbles, Crises, and Flash-crashes

 

Precious metals 1980 (Marked the top of the ‘70s inflation cycle)

In what was one of the largest manipulations in market history, the Hunt brothers, sons of oil tycoon H.L. Hunt, attempted to corner the silver market. This helped drive the price of silver to a peak of $49.45 on January 18, 1980, from approximately $6 just a year earlier.

In less dramatic fashion, during the same time-frame gold rose from about $225 per ounce to a high of $843 on January 21, 1980. It’s worth noting, though, that gold rose a staggering 2300% over the 10 years leading up to the top.

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