Nicolas

Chief Client Relationships Officer
Responsible for the relationship with all our organization’s customers. I oversee the Customer Support and Customer Relationship Departments.

You’ve probably noticed that financial advisers and analysts spend considerable time thinking about asset valuation. They know all too well what happens when an asset (or assets) become overvalued. An asset bubble occurs when the price of a market rises to levels that exceed its intrinsic value or well above historic norms, or both.

 

The financial market has experienced several asset bubbles throughout the ages. Below are five historic cases of financial bubbles that led to catastrophic crashes.

 

The First Gold Bubble

Back in the early 1980s, gold prices spiked seemingly out of nowhere, eventually reaching a high of around $1,000 per troy ounce. Prices would fall almost as quickly as they rose, and by 1982, bullion was priced between $300-$350. To this day, nobody knows for sure what happened. However, the Soviet invasion of Afghanistan in 1979 may have caused gold to spike initially.

 

Japan’s Debt Bubble

The Japanese economy has been mired in stagflation for decades. The economic rut followed a massive debt bubble that peaked in 1989. At the time, Tokyo real estate sold for $1 million per square meter – an insane level that hasn’t been topped anywhere else since. Japanese stocks and urban land values basically tripled from 1985 to 1989. The market burst in the early 1990s, resulting in Japan’s “lost decades” of the 1990s and 2000s.

 

Dot-Com Bubble

The Dot-Com bubble of the 1990s and early 2000s was one of the largest the world has ever seen. Of course, the Internet was all the rave back then. Any stock with a “.com” in its title was being valued through the roof, leading to multiple record highs for the tech-heavy Nasdaq Composite Index. When the bubble popped in 2000, the Nasdaq plunged nearly 80%, triggering a massive economic recession. It would take the Nasdaq 15 years to reach a new record high.

 

U.S. Housing Bubble

Nine years ago, the U.S. sub-prime mortgage industry went belly-up, triggering the biggest global recession since the 1930s. The U.S. housing boom was truly mesmerizing; between 1996 and 2006, the Shiller house price index nearly doubled, with the majority of the growth occurring between 2002 and 2006. In many ways, we are still dealing with the after-effect of the U.S. housing bubble, with central banks around the world pumping their economies with stimulus.

 

Dutch Tulip Bubble

For this one, we need to go all the way back to the 1630s when Holland was enamored by Tulipmania. By at least one account, tulip prices surged 20-fold between November 1636 and February 1637 before collapsing 99% by May 1637. At the peak of the euphoria, some tulip bubbles fetched prices greater than luxury homes.

 

[1] Elvis Picardo (23 June 2015). “Five Of The Largest Asset Bubbles In History.” Investopedia.

[2] Kathryn J. Byun. “The U.S. housing bubble and bust: impacts on employment.” Bureau of Labor Statistics.

[3] Elvis Picardo (23 June 2015). “Five Of The Largest Asset Bubbles In History.” Investopedia.

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