Blue water rings

With bang or with a whimper?

Do bubbles end with a bang or with a whimper? What caused the end of the U.S. TMT bubble in the 1990s or the housing bubble in the 2000s? Stop for a second and think. What comes to mind?

Even years later, we don’t really know. We like clean narratives and simple X-caused-Y explanations so perhaps a few things came to mind (I won’t judge). But take your thinking two steps further: 1) how many of those explanations were developed before the burst; and 2) if there was a single catalyst, wouldn’t it have been easy to anticipate (or make a dash for the exits when the catalyst became clear)? If so, why didn’t investors figure this out beforehand? And make money when the bubble popped (or, at least, avoid losing money)? Extreme bubbles are easy to see but predicting when they’ll end is close to impossible (in advance, which is when it matters).

There is nothing reliable to be learned about making money. If there were, study would be intense and everyone with a positive IQ would be rich.
– John Kenneth Galbraith

For the U.S. TMT bubble, prices peaked in March 2000. And 20+ years later, we still don’t know why the peak happened then. Why not a year or two earlier? Alan Greenspan made his now infamous irrational exuberance remark more than three years earlier. Or why not a year or two later? Why did it peak at a cyclically adjusted price earnings ratio of 44 and not 33 (as in the U.S. Roaring 1920s) or 50 (it is 38 as of fall 2021)*?

In the U.S. housing bubble, activity peaked in 2005 and prices peaked in early 2006. And yet the S&P 500 kept climbing for two years, peaking in October 2007. And the bursting didn’t gather steam until 2008. Lehman Brothers and AIG, for example, were casualties of the bubble bursting (not the cause).

There are many astute people who recognize when we are in a bubble. But, if they lean against the wind too early, they’ll lose their jobs or their clients. Others believe they’ll be able to bail out before the inevitable end and don’t want to miss out on the ripping gains. If we don’t know – years later – what caused past bubbles to burst, how much harder is to identify the catalyst(s) in real time?

The great bull markets typically turn down when the market conditions are very favorable, just subtly less favorable than they were yesterday. And that is why they are always missed.
– Jeremy Grantham

So, do you think you’ll be able to see the end coming? Will it end with a bang or with a whimper?


*Source: Bob Shiller’s website, http://www.econ.yale.edu/~shiller/data.htm

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