Asset Bubbles Explained | eBook | AudioBook

The Following is an Excerpt from this Book

An asset bubble is a business cycle marked by high asset price escalation accompanied by a compression. It is triggered by a rise in asset prices that are underserved by the asset principles and influenced by exciting market behavior. If not enough investors are keen to purchase at a high price, there is a huge sell-off which causes the bubble to evaporate. Due to a shift in investor behavior, bubbles emerge in currencies, stocks, capital markets, and business sectors. It can be a radical change – as observed in Japan’s bubble economy in the 1980s when financial institutions were partly liberalized, or inclined towards a paradigm shift. It occurred amidst the dot-com boom seen at the end of the 1990s and the beginning of the early 2000s. Amid the boom, investors purchased high-priced tech stocks, hoping to sell them at a lower price before the trust was lost, and there was a big market downturn or collapse. Asset  Bubbles in the economies and stock markets enable capital transfer to fast-growing locations. Resources are relocated once again at the later part of a bubble, leading prices to dampen.
Hyman Philip Minsky, a renowned American economist, was one of the initial pioneers to elucidate the progress of relationship and the financial instability it had with the then economy. He picked out five stages in a typical credit cycle. An asset bubble’s pattern is fairly constant, considering variations in how it interprets the loop.
Boom: Initially, prices begin to rise and then gain momentum as additional investors join the market. That will set the tone for the boom to roll on. There is a general sense of not jumping in, which creates far more opportunities for people to begin buying assets.
Displacement: This stage happens when investors begin to consider a new trend, such as a new brand or technology, or precedently low-interest rates: essentially something that catches their focal point.
Panic: Prices of assets change course and go down as fast as they grow. Investors are always desirous of having them liquidated at any price range. Asset prices tend to fall as demand outwits supply.
Profit-making: It’s not easy to figure out when the asset bubble will burst; once a bubble bursts, it won’t regain the original shape.  Yet someone who shifts focus at the alert signal has the surety to make money by disposing of positions.
Euphoria: Caution is nowhere to be seen when euphoria strikes in tandem with escalating asset prices.
Modern history has witnessed two of the most prolific bubbles: the 1990s dot-com bubble and the 2007–2008 housing bubble. However, the first major documented speculative bubble took place in the Netherlands from 1634 to 1637, which provides a descriptive education that relates to this very day.
Dot-com bubble
The dot-com bubble occurred in the late 1990s and was represented by an increase in equity markets fuelled by investments in technology-based and internet firms. It developed out of a confluence of venture capital surplus and speculative investment flowing into start-ups. In the 1990s, investors began pouring money into internet start-ups, specifically hoping they would be successful. As technology began to progress and the internet continued to be bought in the commercial spectrum, new dot-com businesses helped drive the stock market boom that consolidated in the year 1995. The following bubble was built out of easy money and fast capital. A majority of these business entities produced hardly any income and perhaps a meaningful product but offered IPOs (initial public offerings). Their stock prices have seen amazingly high, generating a flurry among the concerned investors. Panic amongst investors developed as the market soared, culminating in the stock market loss of around 10%. The once incredibly simple capital started drying up, and in a short notice, businesses with millions in market capitalization became irrelevant. A large segment of the public dot-com companies wound up by the end of 2001.
The U.S. Housing Bubble
It was termed as a real estate bubble that, in the mid-2000s, impacted over half of the United States, which was the part outcome of the dot-com bubble. As the markets began to collapse, real estate values started to shoot, and ownership demand began to grow at a nearly alarming rate. Interest rates continued to fall, and whatsoever stringent lending standards banks and lenders had established had been thrown into the spillage bins, which indicated that almost anyone might become a house owner. In essence, under normal conditions, nearly 56% of the U.S. populace who bought real estate properties during that period would never have imagined doing so.
Tulipomania
Absurdity seems to penetrate the rational minds even to consider that a flower could topple an entire economy, but that is precisely what transpired in the Netherlands in the early 1600s. Trading in tulip bulbs began unexpectedly when a botanist decided to bring tulip bulbs from Constantinople to be cultivated for his scientific study. After this, the residents in the vicinity stole the bulbs and started selling them. The wealthy segment began buying some of the scarce species as luxury products. Consequently, the demand went up, and the tulip bulb prices shot up, enjoying high rates. Bulbs, including homes and acreage, were exchanged for anything with a measure of wealth. Tulipomania had stirred up so much of an outburst at its highs that wealth was produced overnight. The development of an exchange of futures, wherein tulips were transacted through contracts with no immediate delivery, fuelled the possibility of speculative price. The bubble indeed burst when a seller negotiated with a buyer for a major deal, but the former did not appear. The expectation that was set in the hike at prices was untenable. Subsequently, that generated a panic that spread across the whole of Europe, pushing down the value of any tulip bulb to a minuscule proportion of its latest price. Dutch authorities had also intervened to curb the panic by letting 10% of the value of the contract to be discharged from their contracts. In the end, both rich and poor lost fortunes alike.