Market Manias

Sir John Templeton founded Templeton Growth Fund in 1954. His fund averaged 15% annual growth for 38 years. “This time it’s different” is John’s most expensive phrase.

In financial history, investors were excited and greedy, much like with bitcoin. History is full of frantic investment markets with endless opportunities.

Burton Malkiel mentions bubbles in A Random Walk Down Wall Street.
Internet stocks surge, causing a bubble. The upswing encourages more people to acquire the stocks, which boosts TV and newspaper coverage and benefits early Internet stockholders. Successful investors think cocktail parties are effortless ways to get money, which boosts stocks and attracts additional investors. The whole operation is a Ponzi scheme in which new investors acquire stock from earlier ones.
Charles P. Kindleberger’s 1978 book Manias, Panics, and Crashes presents the Minsky-Kindleberger model of speculative bubbles (Stages include Expansion, Euphoria, Distress, Revulsion, Crisis and Contagion)
In many manias, buyers take out loans to buy assets, thinking they can pay them off if the asset grows.
These investors are vulnerable to price volatility. Short-term drops in asset prices may force them to sell since they can’t pay interest.

Minsky’s study shows that debt financing predicts asset bubble stability. History reminds us that each new generation must learn that markets can only withstand gravity for so long until reality sets in.
Bubbles and fraud are old. Opportunists and operators join mass delusions to preserve the flow of foolish money used to inflate them.

Charles Mackay’s work explores 1700s manias and delusions. Mackay’s moralizing crowd crazy represents an outdated concept that manias are “done by others.” Ken Galbraith said manias come from a lack of public sense-making and institutions willing to confront popular incoherence.
Those involved maintain their euphoria to justify their wealth. It’s maintained by ignoring, banishing, or vilifying doubters.

Populist upheavals, anti-democratic sentiment, distrust of public sense-making institutions, low-interest rates, and growing economic disparities offer a perfect field for manias to proliferate.
In Lombard Street: A Description of the Money Market, 18th-century British economist Walter Bagehot described manias. He characterized bubbles’ reality-distortion field for quick money. After contradictions are uncovered, the public will laugh at economic follies.

Affluence breeds deception. When enormous money has recently been generated, when some people are truly making it and when most people think they’re making it, there’s a happy opportunity for brilliant mendacity. Nearly everything is believed, and the worst and most astute deceivers are beyond punishment. But credit damage is worse.

Speculative assets are often built around a charismatic CEO or banker who investors believe embodies the new economy. George Hudson in the Railway Mania, Kenenth Lay in the Enron scandal, Adam Neumann in the Venture Bubble, and Elon Musk in the cryptocurrency bubble all speak to some underlying circumstance and opportunity that resonates with the zeitgeist and allows them to channel enormous amounts of capital into investments that in otherwise-rational eras would be seen as patently insane. In a market frenzy, these men act irrationally and deify themselves, thinking their business is above the law and their acts have cosmic significance. Their worst flaws show in their weird behavior. Their character is ruined.

We have six hundred years of recorded history to study the initial conditions, internal structure, and aftermath of speculation and bubbles. Previous manias had fruitful and catastrophic bubbles. Rapid technology advances or new commodities produce bubbles. Financial engineering advancements or viral mass delusions cause unproductive bubbles.