If we’re in a bubble, it’s not very shiny

June 9, 2021 // ISSUE #97

Hi y’all —

Allow me to share some of my favorite bubbles:

Dubble Bubble, which I used to chew by the handful during my brothers’ Little League games
the bubble baths in the Jonas Brothers music video for “Sucker”
the scene in SpongeBob SquarePants where Bubble Buddy pays with bubble money at the Krusty Krab
Redbubble, where I have bought many a dumb sticker
Michael Bublé, whose last name is not as soapy as it sounds
“Bubbly,” that Colbie Caillat song that was everywhere in 2007 (“it starts in my toooes, and I crinkle my nooose...”)
Band in a Bubble, the absolutely wild-in-retrospect reality show MTV produced where it trapped several musicians in a huge fiberglass bubble in New York City and made them record an album
these GIFs of Harry Styles getting distracted by a random bubble at a concert

Notice the absence of the dot-com bubble on this list. That’s not so much because of its grave financial ramifications — it’s mostly because I don’t really know what it is. I’m seriously lacking historical context, and that’s proving increasingly difficult as people continue to debate whether the U.S. is currently in a crypto/NFT/housing bubble.

If you’re confused, too — or just still thinking about Harry Styles — Dollar Scholar is here to help.

What do I need to know about bubbles? What are some major ones from throughout history?

I called Phillip Braun, a clinical professor of finance at Northwestern University, to get the basics of bubbles. Braun told me that a bubble is when the price of something goes too high relative to its true value. It occurs when people get irrationally overexcited, and as a result the price “keeps going up and up and up until suddenly everyone goes, ‘Oh my God,’ and then it comes crashing down,” he adds.

Perhaps the most infamous bubble occurred in the 1920s, when overenthusiastic Americans bought stocks on margin and assets like cars on credit, meaning they used a lot of borrowed money without giving much thought to the consequences. (Experts like to debate the semantics, but long story short the stock market crashed in 1929, and then the Great Depression started.)

William Quinn, co-author of the book Boom and Bust: A Global History of Financial Bubbles, told me over Zoom from Ireland that there are three necessary conditions for a bubble. It’s similar to how a fire needs oxygen, fuel and heat to ignite. A bubble needs marketability, money and credit, and speculation to start.

I predict that within a few years we're going to have the Dot Com bubble burst but for podcasts. I just know it sir. I have the statistics right here

Marketability refers to how simple it is for an asset to be bought and sold. Quinn says bubbles are often preceded by increase in marketability. Robinhood is a modern example of this. The fact that people can trade on their phones, commission-free, has seriously lowered the barrier to investing.

Money and credit is self-explanatory — when interest rates are low and it’s easy to borrow, people are more likely to put that cash to use by investing in riskier assets.

Finally, speculation is the strategy of buying something without “looking at the company involved, or the nature of the asset, or how much money you think it's going to generate … just thinking the price is going up,” explains Quinn, also a lecturer at Queen’s University Belfast.

Because these conditions usually have to combine — along with a spark, like politics or technological innovation — there weren’t many major bubbles between the ‘20s and the Japanese asset price bubble of the 1980s.

The Japanese bubble can be traced back to the Plaza Accord, which was an international agreement to strengthen the yen. The financial deregulation, fiscal stimulus and low interest rates essentially made “a cookbook for a bubble,” Quinn says. Banks were making money on their stock market investments, which meant they could lend out more funds, which meant people could buy housing and more stocks, which drove the prices higher, and so on. (Also, gangsters got involved.)

From there, we’ve got the dot-com bubble, which occurred in the late ‘90s in connection with heavy speculation about internet companies.

So where do we stand now? The answer is nobody knows. Part of the trouble with bubbles is that it’s “impossible to know that you’re in a bubble,” Braun says. And all it takes for the bubble to burst is an epiphany that the asset is overpriced.

From his perspective, Quinn says there’s likely a bubble in crypto as well as in electric vehicle companies (aka Tesla). But again, he can’t pinpoint which stage we’re in. That would require predicting the future.

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

Bubbles happen when people get too excited about the price of something without a real reason. Marketability, money and credit, and speculation all contribute to bubbles, which are difficult to pin down until after they’ve popped.

Generally, though, Quinn urged me to be cautious.

“If anyone tells you that they know what the price of an asset is going to do next week, or next month, or in a year's time, I wouldn't trust them,” he says. “Just ask yourself, is this company really going to make enough money to justify the share price? What kind of returns can you realistically expect? Where are these returns coming from?”

via GIPHY

RECEIPT OF THE WEEK

check out this crazy celebrity purchase

via Instagram

Rapper Lil Uzi Vert, who in February implanted a gigantic pink diamond into his forehead, has apparently removed said gem. The $24 million stone is conspicuously absent in recent Instagram photos of him, but don’t you worry — he has insurance.

INTERNET GOLD

five things I'm loving online right now

1	Kellogg’s just debuted its Bowl Bot, which is basically a vending machine with a touchscreen that you can use to customize your ultimate bowl of cereal. It offers people over 20 ingredient options, including Frosted Flakes, banana chips, espresso syrup, Froot Loops, cocoa nibs, pineapple and Frosted Mini-Wheats.
2	In London, people can now swim in a transparent infinity pool located 115 feet above the ground — that’s on the 10th floor, for all you acrophobics. Oh, and did I mention the pool is suspended between two buildings? The floating apparatus allegedly has “special technology that allows it to move in high winds,” but still… it’s a no from me.
3	Moose in baseball game.
4	I really love this project that collected anecdotes, photos and audio recordings of people talking about bugs in the southern U.S. There are so many good quotes, like the person who described the cicadas’ buzz as “sonic care packages when I was feeling homesick, transporting me from my couch across the country to the barefoot North Carolina summer” and the one who said “it felt like they were serenading us, the mountains and hollers.” Poetic!
5	Look how cute Judy Blume is on the set of the Are You There, God? It’s Me, Margaret movie!

401(K)9 CONTRIBUTION

send me cute pictures of your pets, please

via Gary Price

Meet Roca, who is hanging in the backyard looking at Mount Rainier and largely unconcerned about barket conditions.

See you next week.

Julia

P.S. I confess I haven’t been good at replying to emails lately, but I intend to catch up this week! So please tell me: Do you think we’re in a bubble? Would you swim in a pool suspended 115 feet in the air? What’s your favorite kind of cereal? Reach me at julia.glum@money.com or @SuperJulia on Twitter.

This newsletter is free because Money earns a commission when you click or make purchases from the links in this email and on our site. We also receive compensation for some of the products and services featured in this message. Offers may be subject to change without notice. Learn more about how we make money.

Privacy Policy • Advertise With Us • We're Hiring!

To stop receiving these emails, unsubscribe or manage your email preferences.

Copyright ©2021 Ad Practitioners, LLC. All rights reserved.

Metro Office Park Calle 1, Building 7 Suite 204, Guaynabo, 00968 Puerto Rico, USA

If we’re in a bubble, it’s not very shiny

Older messages

5 Affordable Ways to Boost Your Home’s Curb Appeal Before You Sell

The Six-Figure Side Gig

3 Moves Every New Investor Needs to Get Right

How to Find the Next Meme Stock

Battle of the ‘Bots: Which Robo-Advisor Is Best?

You Might Also Like

👀 Meta spilled the beans

Lots of things emerge as spring begins — and we’re not talking about flowers

Issue #235: Is chasing high APYs worth it?

Harry's Take 4-24-24 Have You Saved Enough?

Adapt or Atrophy? - Issue #465

The 10-Minute Trader [One Easy Option Trade]

Quantifying the macroeconomic impact of geopolitical risk

Banning the non-compete

📉 Tesla's revenue couldn't steer itself

Can you pass this basic retirement knowledge quiz?