Kampas Research: Market Bubbles


	The Anatomy of Market Bubbles: Market bubbles are happening more frequently than ever. The collapsed Dot.com bubble transitioned almost seamlessly into the collapsing housing bubble. One reason is the Feds lowering of interest rates to stem the post-Dot.com financial bloodbath enabled lower mortgage rates (especially Adjustable Rate Mortgages - ARMs) that fueled, along with other factors, the real estate boom. To help visualize, understand, and anticipate the rise and fall of market bubbles, Visual Integrative Thinking is a potent tool. Market bubbles are an extreme form of the business S-curve and have a predictable developmental process by which one can make sense of them and help predict their behavior. In the following two "visual case studies," the anatomies of both the Dot.com and current housing bubbles are revealed. The source for this material is an excellent article by Eric Janszen in the February 2008 issue of Harper's Magazine (click here for the complete article where the author predicts we will create another bubble to get ourselves out of the current one!). Here's a quick snapshot of what the four steps of VIT applied to market bubbles would look like: 1. Think Big - Visually! Market bubbles are unsustainable bursts of speculation where prices rise from, and fall back to an historical trend. 2. Gain Perspective! Market bubbles have a predictable inner structure (stages of development), but burst unpredictably and fall rapidly, making timing of market investments/divestments very difficult and risky. 3. See the Way Forward! House prices have yet to return to their historical trend (see bottom graph below), meaning prices will continue to fall (somewhat location dependent). 4. Act with Many Others! Widespread bankruptcies and foreclosures occur on the downside of bubbles, requiring financial intervention to keep the larger economy from stalling (the bigger the bubble, the more intervention required).
	Visual Case Study A -- The 1994-2002 Dot.com Bubble: This bubble was triggered by emergence of the World Wide Web and its potent yet easy-to-use web browser Mosaic. Vendors and pundits alike rhapsodized how the Web would transform business overnight, creating the "New Economy" where everything happened in "real-time," and commerce moved at the speed of electrons. Amazon.com sprung up and grew quickly selling books online, and every other industry became afraid of being "Amazoned" by a start up. The rush was on to build network capacity and huge server farms, and lots of money was invested. In the end, the Web has become a successful business model, but it has happened more at the rate of the historical technology trend (11% growth per year), not at the rate of the bubble trend. As you can see from the Dot.com bubble diagram below, bubbles are S-curves that collapse very quickly because of the realization/panic that the value being created is "fictitious," often falling in about a third of the time they took to rise.
	Visual Case Study B -- The 1996-2011 Housing Bubble: Today (early 2009) we are about 2 years into the collapse of the US housing bubble. This bubble is of enormous proportion, having created about $12 Trillion of fictitious value at its peak in 2007 (about 5 times the fictitious value created by Dot.com bubble, and more than the entire current US national Debt -- $10.7 Trillion). The big question on everyone's mind is how long before house prices bottom out and the real estate market (and stock market) return to normal? According the diagram below, we are only about half way there, with another 1-2 years of expected price declines. (Note: This curve is not the same for every locale; local real estate markets differ widely in the amount of speculative overbuilding they experienced).