the greatest market crashes and bubbles

8/8/2019 The Greatest Market Crashes and Bubbles

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THE GREATEST MARKET

CRASHES AND BUBBLES1. A crash is a significant drop in the total value of

a market

2. It is a situation wherein the majority of investors

are trying to flee the market at the same timeand consequently incurring massive losses.

3. Attempting to avoid more losses, investorsduring a crash are panic selling, hoping to

unload their declining stocks onto otherinvestors.

4. This panic selling contributes to the decliningmarket, which eventually crashes and affectseveryone.


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HISTORIC MARKET

CRASHES

1.1. TULIPMANIATULIPMANIA

2.2. SOUTH SEA BUBBLESOUTH SEA BUBBLE

3.3. FLORIDA REAL ESTATEFLORIDA REAL ESTATECRAZECRAZE

4.4. GREAT DEPRESSION INGREAT DEPRESSION IN

USAUSA

5.5. CRASH OF1987CRASH OF19876.6. ASIAN CRISISASIAN CRISIS

7.7. THE DOTTHE DOT--COM CRASHCOM CRASH


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TULIPMANIA

(HOLLAND 1634-1637)Tulip mania was a

period in the Dutch

Golden Age during

which contract pricesfor bulbs of the recently

introduced tulip flower

reached extraordinarily

high levels and thensuddenly collapsed.


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1. In 1593 tulips were broughtfrom Turkey and introduced tothe Dutch.

2. The novelty of the new flowermade it widely sought after and

therefore fairly pricey.3. After a time, the tulips

contracted a non-fatal virusknown as mosaic, which didn'tkill the tulip population butaltered them causing "flames" of

color to appear upon the petals4. After a time, the tulipscontracted a non-fatal virusknown as mosaic, which didn'tkill the tulip population butaltered them causing "flames" ofcolor to appear upon the petals

Anonymous 17th-century

watercolorof the Semper Augustus,

famous for being the most

expensive tulip sold during tulipmania.


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Tulips bloom in April and May for only about a week, and thesecondary buds appear shortly thereafter.

Bulbs can be uprooted and moved about from June to September,and thus actual purchases (in the spot market) occurred duringthese months.

During the rest of the year, traders signed contracts before a notaryto purchase tulips at the end of the season

In 1636, the Dutch created a type of formal futures markets wherecontracts to buy bulbs at the end of the season were bought andsold.

Soon, prices were rising so fast and high that people were trading

their land, life savings, and anything else they could liquidate to getmore tulip bulbs

Many Dutch persisted in believing they would sell their hoard tohapless and unenlightened foreigners, thereby reaping enormousprofits.

During this time, the bubonic plague was killing off 1 out of every 7people per year, so the common man saw little reason not to invest

foolishly with a chance of making a substantial profit.


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Many Dutch persisted in believing they would sell theirhoard to hapless and unenlightened foreigners, therebyreaping enormous profits

As it happens in many speculative bubbles, someprudent people decided to sell and crystallize theirprofits.

A domino effect of progressively lower and lower pricestook place as everyone tried to sell while not many werebuying.

The price began to dive, causing people to panic and sellregardless of losses.

Dealers refused to honor contracts and the governmentsattempts were futile.


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THESOUTHSEA BUBBLETHESOUTHSEA BUBBLETHESOUTHSEA BUBBLE

The South Sea Companywas a British joint stockcompany that traded inSouth America during the18th century.

Founded in 1711, thecompany was granted amonopoly to trade in Spain'sSouth American colonies aspart of a treaty during theWar of Spanish Succession.

The primary element of trade

was slaves. In return, the company

assumed the national debtEngland had incurred duringthe war.

HOGARTHS SOUTH SEA BUBBLEHOGARTHS SOUTH SEA BUBBLEHOGARTHS SOUTH SEA BUBBLE


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The few companies offering stockat that time were all solid butdifficult investments to buy.

The South Sea Company wasperched on top of what wasperceived to be the most lucrativemonopoly on earth.

The first issue of stock didn't evensatiate the voracious appetite of the

hardcore speculators. So nobody questioned the repeated

re-issues of stocks by the South SeaCompany--people just bought theexpensive stocks as fast as theywere offered.


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They were blind to many indications that theSSC was run too poorly to break even

Eventually the management team of SSC tooka step back and realized that the value of theirpersonal shares in no way reflected the actualvalue of the company or its dismal earnings.

So they sold their stocks in the summer of1720 and hoped no one would leak the failureof the company to the other shareholders

Like all bad news, however, the knowledge ofthe actions of SSC management spread, andthe panic selling of worthless certificates

ensued. The huge hole in the south sea bubble also

punctured the unrealistic values of othercompanies like the Mississippi and both camecrashing down.


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FLORIDA REAL

ESTATE CRAZE

The Florida land boom of the 1920s was

Florida's first real estate bubble, which burst

in 1926, leaving behind entire new cities and

the remains of failed development projectssuch as Isola di Lolando in north Biscayne

Bay.

The preceding land boom shaped Florida's

future for decades and created entire new

cities out of the Everglades land that remain

today.


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THE RISE In 1920, Florida became the popular U.S.

destination/ residence. Due to its economic prosperity, property prices

rose rapidly on speculation and a land and

development boom ensued.

So, once people began pumping huge amountsof money into the real estate market, it took off.

Soon everyone in Florida was either a real

estate investor or a real estate agent.


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THE FALL The rules are the same whether you pay too

much for a stock or for a piece of land: youhave to make that much more to claim a

profit.

This did happen for awhile, and land pricesquadrupled in less than a year.

Eventually, With thousands of sellers andvery few buyers, prices came down with asickening thud, twitched a bit, and then

crawled down even lower.


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THE GREAT DEPRESSION IN

USA

The Great Depression began withthe Wall Street Crash of October,1929 and rapidly spreadworldwide.

The market crash marked thebeginning of a decade of highunemployment, poverty, lowprofits, deflation, plunging farmincomes, and lost opportunitiesfor economic growth andpersonal advancement.

The depression caused majorpolitical changes in America.

High Tariffs and war debtsoccurred.


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Since the stock market was believedto be a no-risk, no-brain world whereeverything went up, many peoplepoured all their savings into itwithout learning about the system orthe underlying companies.

With the flood of uneducatedinvestors, the market was ripe forsome manipulation and swindling.

When the public noticed theprogression of price on the tickertape, everyone would buy the stock.

So, the market manipulators wouldthen sell off their overpriced sharesfor a healthy profit.

On and on the cycle went asuneducated investors turned a profitby selling the manipulated, over-priced shares to someone whowanted to have a rising stock.


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THE CAUSES AND EFFECTS

CAUSES

Unequal distribution

of wealth.

High Tariffs and war

debts.

Over production inindustry and

agriculture.

Stock market crash

and financial panic.

EFFECTS

Widespread hunger,

poverty, and

unemployment.

Worldwide

economic crisis. Democratic victory

in 1232 election.


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THE CRASH OF 1987 (USA)

In finance, Black Monday refers to Monday,19October,1987, when stock markets around the worldcrashed, shedding a huge value in a very short time.

The crash began in Hong Kong, spread west through

international time zones to Europe, hitting the UnitedStates after other markets had already declined by asignificant margin.

In the wake of the crash, markets around the worldwere put on restricted trading primarily becausesorting out the orders that had come in was beyond

the computer technology of the time. This also gave the Federal Reserve and other central

banks time to pump liquidity into the system toprevent a further downdraft.


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CAUSES Potential causes for the decline include program

trading, overvaluation, illiquidity, and marketpsychology.

The most popular explanation for the 1987 crash wasselling by program traders. In program trading,computers perform rapid stock executions based onexternal inputs, such as the price of relatedsecurities.

U.S. pressure on Germany to change its monetarypolicy was one of the factors that unnervedinvestors in the run-up to the crash. The crash, inthis view, was caused when the dollar-backed HongKong stock exchange collapsed, and this caused a

crisis in confidence.


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