by Roger Bourke White Jr., copyright October 2015
This section is about a common pattern that shows itself in financial markets. It about how End of World instinctive thinking influences financial marketplaces. The effect is distinctive and it can become quite dramatic.
Mania and markets: Here are some examples to be thinking about.
o In 1997 the city of Hong Kong transferred from British control to Chinese control. This was an End of World moment for Hong Kong and the East Asian region.
In 1998 we had the financial crisis now called the “Asian Flu” in America and the IMF crisis in Korea.
o In 2000 we had the end of the 20th Century in America, and that was accompanied with the widely popular Y2K End of the World pronouncement.
In 2001 we had the Dot-Com and the Telecom busts, which later sucked in Enron, Arthur Anderson, and Worldcom.
These are examples of markets succumbing to End of World mania, which first booms the marketplace, and then busts it when the morning-after reality sinks in. These are big examples of a mania first producing a boom, then transforming the boom into a bust.
A mania is when a person or people get excited -- so excited that they start doing things impulsively. Another way of saying impulsively is to say they are doing things rationally, but with a rationality based on a different set of premises than those that are used in non-mania times. An example of this changing of premises that got expressed in writing was the "New Economy" concept that surfaced in 1998 and 99 to explain the stratospheric "Dot-Com" stock valuations. If you believed in the New Economy concept during those two years, the stratospheric P/E ratios (price-to-earnings ratios) of that era were rational.
Manias take time to develop. So they become most pronounced and easily identified when the mania is linked to an "end" or a "beginning" that is clearly seen a long distance in the future. In the case of the Hong Kong turnover and the end of the century, the ending date was well known at least a decade before the event occurred. (In the case of Hong Kong, the negotiations for its fate took place in the 70's and were resolved fairly quickly. The resolution took place so early because real estate developers needed some certainty in their calculations for buildings and mortgages, and the British government obliged them by opening the subject with China.)
Another series of events that routinely produce small manias are when prestigeous sporting events are held in cities. The Olympics and World Cup events bring locally-oriented manias to the cities that are selected.
Not all manias are tightly linked to a beginning or ending event. The 1929 stock bubble, as best I can determine, was the tail-end of a combination of post-WWI euphoria and habit of cooperating mixed in with the euphoria of a domestic lifestyle revolution caused by the mass acceptance of autos and electrically-driven consumer appliances such as refrigerators and washing machines. The timing of the peak of such a "non-event driven" mania is hard to predict. "Event driven" mania, on the other hand, has an easily foreseeable pattern.
In the case of End of the World event-linked mania, as the community approaches the "exciting event", there will be a lot of high profile "doom and gloom" sentiments expressed by the community. In modern times, this will show up as the worst-case scenarios being constantly talked about by the media. They will pony up pundits who describe these worst-case scenarios in lurid detail. But quietly, underneath the flashy doom and gloom of the media pundits, there will be many people who see investing opportunities, and rather than being scared, they become more willing to invest in them.
In the case of the Hong Kong turnover of 1997, the lurid doom and gloom concerned how people and businesses would be treated under Beijing's Communist regime. The classic specter of the pre-turnover era was that the Red Army would come marching in, with Little Red Books in hand, nationalize everything, and "reeducate" the entrepreneurs who had built up Hong Kong. Meanwhile, the quiet investors were investing in buildings located everywhere around the Pacific Rim except in Hong Kong. The logic was, "When Hong Kong is turned over to China, there will be an exodus from Hong Kong of the brightest and best people. These people will leave and want to set up shop somewhere else on the Pacific Rim. If I have a modern building available, they will set up here."
In the five years leading up to the Hong Kong turnover, there was a building boom taking place from Calcutta to Vancouver in anticipation of this Hong Kong diaspora, and this boom drove up property values, which increased the loan money available from banks. When the Hong Kong turnover happened quietly and with no mass exodus, the rest of South and East Asia found itself overbuilt with offices, and the construction companies and banks who had bet on those offices being filled by Hong Kong exiles suffered first and worst. That was the start of the "Asian Flu" of 1998.
The mania brought on by the end of the millennium in America was known as the Y2K Crisis. Here, the high profile worry was about computers failing as internal clocks wrapped from 99 to 00. The doom and gloom pundits made predictions that airplanes would fall from the skies, ships would crash into docks, and there would be massive infrastructure stoppages of all sorts.
While the doom and gloomers were getting all the talk show attention, the quiet investment was going into Internet and telecommunications startups. During 1999, there was talk of "two economies", an Old Economy tied to the traditional business rules and the New Economy that was going to be playing out with different business rules. When the millennia passed without terrifying incident, it took a few months for investors to snap out of it and realize that the old rules really did apply to the New Economy companies, too. As that realization hit, the stock market and the economy tanked -- the DotCom Bust.
The third thing to note about mania-generated bubbles -- beyond noisy naysayers and quiet investors -- is that the post-bubble environment is always different from the pre-bubble environment. In other words, the good old days and ways of the boom aren't coming back in any reasonable investing time frame. Examples of this not-coming-back are numerous: A recent example is the 1989 Japan stock bubble that popped to become Japan's Lost Decade. Japan after recovery from that bubble-pop was quite different in thinking and lifestyle.
Whatever was swept up and up by the old bubble will stay crashed for at least a decade. The next mania will prey on a different concern, and the next bubble will form in some other sector of the economy.
Lesson One: Watch for a mania. An event-linked mania will be brought about by an exciting event coming in the future. The intensity of the mania will be proportional to the significance of the event and the time that the mania has to grow, up to about thirty years. Actions based on the mania can show up from a few months to about five years before the event, but these mania actions are based on mania thinking that has been maturing for a longer time. Hong Kong and Y2K both allowed plenty of time for mania thinking and actions to establish, whereas Pearl Harbor and 9/11 are examples of equally exciting events that allowed no time for mania to develop ahead of them. (although there was plenty of mania thinking going on at the time of both of these events that was related to other events, and a whole lot more followed them)
Lesson Two: The mania will latch on to an incipient bubble of some nature and inflame it into a real bubble. The mania-related actions will be to invest in a project category that, at the beginning of the mania action period, looks like a good investment. As the mania progresses, the investment in this category will become riskier, but the rising values caused by the quiet mania investment actions cover up that added risk. These investments don't have to be closely related to the root cause of the mania, and real estate of some sort is a perennial favorite for mania investing.
Lesson Three: Whatever was swept up by the old bubble will stay crashed for at least a decade. As I said earlier, the next mania will prey on a different concern, and the next bubble will form in some other sector of the economy.
And that is the Mania and Markets Model.
Manias and Markets can explain many bank panics and bubbles -- these are the tail end of manias. If a community is experiencing End of World excitement of some nature, part of that excitement will channel into risky investing.
When the End of the World comes and goes with little fanfare, it becomes hang-over time, and the riskiness of the investments becomes obvious, and the community suffers a financial hang-over -- a bust. How big the bust will be depends on how big the mania was preceding it.
This, by the way, is the difference between a Blunder and a Bubble. A Blunder may not get acknowledged for generations. But bad investments are routinely recognized very quickly.
-- The End --