Posts Tagged ‘Market Crashes


Housing Bubble

A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by a reduction in price levels.

Typically, prices go high on speculations and rumors, and the bubble just builds on. And when it builds on, sales are high, mortgages are easy, credit availability is easy and this goes on till there is a crack (an incident) causing panic and the bubble burst.

It is argued that the financial crisis of 2007-2010 (not really sure if I can mention 2010 as the last year of the crisis), was due to the real estate bubble.

Within mainstream economics, some argue that real estate bubbles cannot be identified as they occur and cannot or should not be prevented, with government and central bank policy rather cleaning up after the bubble bursts.

Some of the recent popular bubble bursts are:


Dot Com

We’ve seen the Black Monday and the Japanese Asset Bubble in previous posts. When Black Monday happened, I was 2 years old and had no clue about prices, stocks et. al. When Japanese asset bubble burst… I didn’t have property in the Japanese markets. But I am surely aware of the Dot Com burst and I did see people around me get affected.

The IT Bubble was the period from 1995 – 2000 where IT stocks saw their valuations rocket through the sky.

Companies were seeing their stock prices shoot up if they simply added an “e-” prefix to their name and/or a “.com” to the end, which one author called “prefix investing.

A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics such as P/E ratio in favor of confidence in technological advancements.

And hence the bubble. There were several reasons for the bubble to burst

  • The Y2K bug got resolved. So most companies were equipped enough for sometime and hence, spends decreased
  • Massive million dollar sell orders got processed incidentally at the same time, triggering price collapses and panic
  • Adverse findings of US Vs Microsoft for monopoly

Good reads (this and this and this)


Japanese Asset Bubble

This one continues from the previous thread of biggest financial crashes (Black Monday).

The Japanese Asset Bubble was one of the biggest in the history because it took as many as 13 years for Japan to recover from the burst. The build up to the crash was as big. The bubble was between 1986 and 1991 in which the stock prices and real estate inflated and when it burst, the effects were seen till 2003 (when stock markets reached the lowest point).

The build-up to the bubble as I mentioned was big too.

In the decades following World War II, Japan implemented stringent tariffs and policies to encourage people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.

With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. Additionally, banks granted increasingly risky loans.

And when the bubble burst. In 2004, prime “A” property in Tokyo’s financial districts had slumped to less than 1 percent of its peak, and Tokyo’s residential homes were less than a tenth of their peak.

The impact was huge on the financial system too. The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low probability of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. They would sometimes resort to depositing their block of investment cash, as ordinary deposits, in a competing bank, which would bring howls of complaint from that bank’s Loan Officers and Investment staff. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called “zombie businesses” (which lived on constant cash bailouts).


Black Monday

Was looking at the historical stock market crashes and this one was particularly interesting.

Black monday refers to Oct 19th, 1987. The stock markets around the world crashed on this day, starting from Hong Kong. It was the largest percentage of one-day-decline in stock market history (declining over 22%).

The mysteriousness was as bad as the crash. For many years after the event, debates as to why the crash occurred reached no conclusion. One major reason quoted by many is the faulty program trading.

The programs performed rapid trades and engaged in arbitrage strategies. This resulted in a bubble where stock prices went up which made the crash imminent. The programs that engaged in portfolio insurance strategies took advantage of this and were forced to sell every time the stocks went down. This led to panic selling and a stock crash.

The concept of circuit-breakers was introduced post this to curb this proportion of panic selling. The idea is that the circiut breaker period will help cool off and dissipate the panic sentiments.
At the start of each quarter, the NYSE sets three circuit breaker levels at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval.

So what’s this blog about?

Another attempt? Well yes. Attempting to figure out another sustainable model (there are some other attempts going on parallel-ly). Well, we have a lot of questions in mind. we read up stuff, we do some research to find answers to these questions. This is an attempt to publish that little 15-20 minute research.
June 2018
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