Sunday, July 6, 2014
Financial Bubbles, Popular Manias and Panics: Gaining New Perspective Using Powerful Online Resources
Financial Bubbles, Popular Manias and Panics: Gaining New Perspective Using Powerful Online Resources Most Financial Traders and Investors Are Aware of the Opportunities and Dangers of Financial Bubbles but Few Have Taken the Time to Get More Perspective on the Issue originally from Lex Loeb, Yahoo Contributor Network . Recently I decided I wanted to know what George Soros was talking about when he said we might be in a "super bubble" and suggested that it may be one that is 30 years old. I started to do some comparative bubble research to find out what he might be talking about. I also have the engaging problem of deciding if the present commodities boom is in the early stage of a bubble or the late stage. It is very hard to tell with any certainty. What I discovered is that there is a way to quickly and easily compare market price chart spikes on line, at least the ones in more recent history. I quickly learned that although the magnitude of the proportional size of the charted spike varies to a very large degree the dynamics are almost always the same for every financial mania and the ensuing panics that follow them. Most financial panics , save more ancient versions of the same thing, like the South Sea Bubble, tend to launch into their hyperbolic creshendo from a more regular trend line in about 4-6 years from start to zenith. When I saw this regularity in comparing the charts I was surprised. The 1929 US Market chart spike is exactly similar or even proportional but not necessarily of the same percentage growth magnitude to a lot of financial spikes in more recent times. Here is a partial list of parabolic market episodes to compare: The 1929 market crash spike, The Japanese market crash spike, The recent Chinese market crash spike(so far) , the 1970s oil spike, 1970s gold spike, the US housing bubble spike of 2007 (so far), The NASDAQ and Internet bubble. You may be surprised how amazingly similar the dynamics of each of these is. Comparison is now fairly easy for more recent market events by going to Google finance or Yahoo Finance and typing in the name of an index that is representative of the bubble event. Once you get to that page on either Google Finance or Yahoo finance you click the "max" button on the chart to expand the chart the maximum number of years to see the progress of the bubble in long term perspective. You then can click other index boxes or add your own to make instant charted comparisons. The fascinating thing is that as you play around with the interactive charts you gain perspective not just on how similar the bubbles are but how some totally dwarf others in magnitude. The more recent bubbles are a vast exaggeration of older ones. I believe the south seas bubble lasted less than 2 years from start to collapse. Most of the newer ones last between 4 and 6 years on the upside alone and go into their worst hyperbolic mode just before collapsing even faster than they rose. Most bubbles are taken down by a panic that cause them to hit bottom with in just 1-2 years! The pattern is almost always the same. Then comes the real surprise. You thought that the recent housing bubble was a big deal? Well when you compare it to single stock bubbles or the grand Internet bubble it is almost flat on the chart! Then comparing the Internet tech bubble to an individual stock spike like the one you see Cisco experienced where it appreciated 100,000 percent in about as many years it goes to the ground in the chart as hardly as a nearly horizontal line with a little pimple of a bump to compare it with Cisco's mountain of a spike. The thing to do next is to compare other market spikes in individual stocks and index's. I recommend looking at Time Warner, Amazon, Intel , Amgen, Microsoft , Berkshire Hathaway , and others just to get more perspective of what really goes on in the financial markets. You only think you are aware until you play with these appliances on Google and Yahoo! Seeing is believing. I wanted to know if steel stocks are in a hyperbolic market mania state now or not. They do seem to be until you compare them to the really big spikes like Cisco. Oil may be up 400 percent in a few years but that is nothing compared to what happened to Intel or NASDAQ . Comparing 400% to 4000% to 400,000 % possible future price spikes does give me more perspective as to when to think about unloading steel stocks and oil stocks. There is no absolute indicator on when to sell but one can see how the final stages of a real bubble can only end badly regardless of the magnitude of percentage gain. Better safe than sorry is easier said than done. My conclusion is that having the perspective of being able to actively compare the charts and see which bubbles are less aggressive in magnitude does not mean they cannot also end in financial ruin. Another conclusion is that bubbles will probably only get more hyperbolic as the markets are computerized and have more widespread global participation. The steep fast declines that in the wake of financial manias is a warning that selling too soon can very well be the best way to prevent having the wave crash on top of you. The statistical probability of being able to know the absolute top or be within 5 % of it has to be relatively low or we would have a lot more bubble billionaires roaming the planet. Some say that when it looks like a bubble it probably is a bubble. The trick to riding the wave is to get off when they reach the final most vertical hyperbolic state or a little bit too soon. .