Faber bullish on Indian realty sector

Investment guru Marc Faber expects money flow into India will continue. He added the appreciation of the rupee has helped foreign investors in India.

Faber would not focus on indices and would look at individual stocks.

According to Faber, real estate companies are on the high side. There is a beginning of major real estate development cycle and it could last 20-30 years. He added the Indian realty prices are still very reasonable in comparison to the rest of the world. He would rather invest in Indian real estate.

He added there has been strong bull market since 2003 in India. The indices are higher than it was during 2006 and majority stocks are down. Funds are no higher than May 2006, he added. Most funds put underweight on Asia.

The second half of 2007 is not likely to be favourable for equities. He expects that US Fed would likely to cut interest rates in H2CY07.

Global liquidity tightness is unlikely originate in the US. Interest rates in the US would climb higher than the market estimates, he added.

Excerpts from CNBC-TV18's exclusive interview with Marc Faber:

Q: How are you feeling about emerging markets now because most of the markets are at new highs? Has the sustainability or the sustained strength come as a bit of surprise?
A: We had a very strong bull market since 2002; here in India we had it since 2003. Then in some markets we made highs last May and had a serious correction here in India. After that we recovered again and had a high during last February; since March 13 we again moved into a correction. The markets have been relatively soft. But the key is to understand that the market consists of many different shares.
If you take as an example of the Indian markets, the indices are higher today than they were in May 2006. But the majority of stocks are actually down from May 2006. The performance for foreigners is of course helped by the appreciation of the Indian rupee versus the US dollar. By and large since I am the Chairman of a variety of funds here in India, most of the funds I look at are actually no higher than they were a year ago in 2006.
Q: What is your call then on the market from here because we have just made a new high a couple of days back? Do you see substantially higher levels in India from hereon?
A: Well anything can happen. In India, I would not focus too much on the indices but would actually focus on individual stocks. The indices have been driven by a few large cap stocks. It is the same in the US markets where some stocks are still moving up. But in case of the brokers and the banks, they are all lower than they were in February or a couple of months ago.
With the exception of Goldman Sachs, that made a new high just three weeks ago, all the other brokers did not exceed the February highs. So, I think we have to focus here very much on individual shares and global liquidity.
I think from the US, you do not get tight money from the Federal Reserve, as it is run by a very dovish person Bernanke. We have some illiquidity in the household sector and now some illiquidity is happening in the capital markets through the sub-prime lending mess; there are already 50 sub-prime lenders that have been forced to the wall. But I do not think that the second half of this year will be favourable for equities.
Q: What do you expect to see for money flows into India in specific because we have got quite a gush up until now both in the primary and secondary market?
A: Well, I still think that by and large the world is underweight on Asian stocks.
We have a lot of liquidities at the hands of the central banks and well-to-do individuals worldwide; their investments in India and other Asian countries are relatively small. So, I expect actually money will continue to flow into India. Of course the question is what the supply is going to be for securities and what is global liquidity going to be? Because, if you have an S&P that goes down in the US at some point or you have a dollar crisis or anything, then obviously these money flows can be interrupted at least temporarily.
Q: I believe you do like the real estate story in India though. What have you made, if you have had a look at today’s new listing - DLF? How do you find the listed real estate stocks at this point?
A: Well, I am not interested in real estate listed companies in India because I think they are on the high side. But I think for the individual investor, there is still plenty of opportunity in realty in India per se because we are at the beginning of a major realty development cycle that could last 20-30 years.
If you compare the realty prices, by and large the prices in India are reasonable compared to the prices in the Western world; I am not talking about Mumbai's prime location.
Q: The big concern for the emerging market investors came in a month back when the US bonds yield crossed 5% and went to 5.3%. Subsequently, it has cool down back to around 5%. Do you think it has topped out for the moment or this is just a pullback and bond yields will harden more out there?
A: We had bulls in the bond market in the US which began in September 1981 and worldwide it ended in June 2003 when the Japanese Government Bonds, or JGBs, were yielding less than half a percent and the 10 years in the US was yielding 3.3%.
I expect over the next 20 years interest rates in the US will go much higher than it is perceived by the market place as I think inflation in the US will accelerate on the upside partly because of the rise in the prices of commodity, energy and food. This is also partly because of the weakness in the dollar that will eventually lift import prices.
Therefore, I would be negative about bonds. But the bonds market will not collapse in one go simply because the economy in the US is in my opinion much weaker than what the statistics show. The statistics show during the first quarter the economy grew in real terms by something like 1%. I think we are already in stagflation because the government in the US probably does not measure inflation properly.
So, if you have to say a growth of 5% in the economy and instead of taking your consumer price increase at 3%, then you got 2% real growth. If you take inflation at 5% or 6% then you actually have nominal GDP growing up by 5%. Then the real GDP is contracting by 1%. I think this is happening in the US and during the second half of the year Bernanke will again cut interest rates.

Q: So far the global markets have been extremely resilient. What do you think could be the trigger for an eventual correction because we have not had any meaningful corrections over the last three-four months?
A: Yes that is correct. And, I would also like to make an additional comment about resilience. If you look at the US markets, say since 2000, first of all in euro terms we are way down over the 2,000 levels. So, we never recovered back to 2,000 high. If you look at the US markets since February, the indices have made a new high in dollar terms. But in euro terms, we are exactly at the same level in February. So, I am not so sure that the US market has been that strong.
If you talk about the stock markets of India, Brazil, Argentina or Russia since 2000, yes we have been very strong. We are up several fold and so forth. And, I think your point about the correction is absolutely correct. We have not had a 10% correction in the US since March 2003; one correction will come at some point and I think that will be more than 10%.
There are two points I would like to make about the Indian stock market. First of all, a couple of days ago the technical picture would have favoured a breakout of the market on the upside. But when you have a technical constellation, that would favour an upside breakout and does not materialise, then the downside could be quite sharp. So, we have to watch in the next few days.
Secondly, Samsel sold his real estate investment trust off in February this year. That was the peak of the REITs in the US and since then they have been going down. Blackstone just went public the other day and the stock on the first day jumped to a premium. But today it is lower than the issue price.
Now in India, you have DLF which is going public today. I think it will be a case where at the beginning the promoters have the vision and the investors have the money; later it would be public have the vision and the promoters have the money. And, usually these great issues are a negative side for the sector and the entire market.
Q: Are you saying that you are not very impressed with the kind of paper India has been churning out these past few weeks?
A: We have two counter-trends in the world. We have private equity and individual selling equities, which we have essentially in the US. The private equity now in other words are the LBOs, or Leveraged Buyouts, as we have had since the 1980s. They are running at the rate of over 5% of market capitalisation in the US.
Equity supply contracts are also the same where we have equity buybacks by corporations. But believe me every private equity firm buys equities and then they repackage and resell them into the market at some point.
I believe some tax changes in the US will make private equity far less attractive. If you want private equity, I would say you should look at some Asian countries. In fact, a large LBO funds should take over the whole island of Taiwan and sell it to the Chinese because the Taiwanese shares are selling at a very low PE and the Chinese shares are selling at something like 40 times of the earnings. So, you could make a great arbitrage.
Q: If you had money to invest in India and had to split it between realty, equity and art, how much would you give to each category?
A: Well, personally I would actually spend all my time on realty in India because I think that is a no-brainer in the long run. It is a problem for people who will have very high borrowings, against their realty because of interest rates. Realty has always been a cyclical industry, where prices move up or down. But by and large if I look at the world, the reason so many families are rich, that came out of realty, is that the money was tied up in realty. They did not do anything more stupid with their money like buying Internet stocks in 2000 and then losing 90% of their money as prices went down.
So, my advice essentially for people, if you are not an expert in financial matters, to own realty - a safer avenue to wealth.

Brazil, Russia, India and China to outdo Europe and the US

Brazil, Russia, India and China to outdo Europe and the US

The main economic analysts of today share their thoughts of tomorrow
What the year 2020 will be like? Although it seems not a long way away, still it is wrapped in mystery. Some 50 years ago sci-fi writers were foretelling the future without any doubts. Experts of today are more careful in their predictions. The world is changing so quickly that the human mind is unable to keep up. Experts from the research department of Deutsche Bank under famous analyst Dr. Norbert Walter decided to take a look at the future. Their research is based on analysis of economic situation in 34 countries.

It turned out that euro zone bankers could not imagine the world without the US dollar as the main currency and means of payment even in 2020. According to their forecasts, the world will stay unidirectional with only one superpower – the USA, GDP of which will reach $17-18 trillion by that time.
Experts from Deutsche Bank certainly expect competition of dollar and Chinese yuan in 2020. Analysts are sure that in 15 years china and India will be some of the leading nations of the world. China, for instance, will become the world assembly shop and the second superpower, followed by India. However, the latter will have to carry out reforms more aggressively, Deutsche Bank. “Further reforms will allow India to keep its growth high at six percent every of next ten to fifteen years. If the reforms are carried out aggressively the growth of GDP may reach seven or eight percent”, Norbert Walter said at the seminar of Indian-German Chamber of Commerce.
At the same time the role of the EU will become less and less important, according to the research. Besides, it is said that the economies of some EU members including France and Germany will lose their positions in the world.

The growth rate of Spain and Ireland will be higher than average European due to the openness of their markets. Another positive factor in their development will be dynamism of investors, favorable demographic perspectives and balanced immigration policy. Experts came to the conclusion that as far as politics is concerned European states have to develop structural political system that can guarantee their further integration. Great changes both in economic infrastructure and social system of European states are needed in order to overcome negative tendencies.
It is worth mentioning that Deutsche Bank research is contrary to that made by another European analytical centre. In March investment group Goldman Sachs published the work of its chief economist Jim O'Neill about the future of world economy. O'Neill is a legendary economist that became famous after his main forecast – dollar's landslide – became a reality.
O'Neill thinks that in terms of living standards Russia will be ahead of Italy and Germany by 2050. When it comes to GDP it will leave France and Great Britain behind.

According to O'Neill, four developing countries Brazil, Russia, India and China (so-called BRIC) will be ahead of six largest industrial countries of the world in terms of cumulative USD GDP. He says that China can leave the US behind as early as by 2040, whereas India will be ahead of Japan by 2035 and Russia can outrun any country in Western Europe by 2030.
The role of the BRIC economies will grow quicker in the sphere of energy: in the next 15 years they will consume more energy than the EU and the US. The growth will be slower in the world motorcar market: BRIC countries will become leaders only in 2025-2030. The share of the four countries in the world capital market will be probably not so big, although it depends on the policy of the countries. Jim O'Neill does not consider the USA motive power in the economic progress. He thinks that at the moment China and other BRIC countries are more important in the accelerating of world economy. They provided for 40-50 percent of the world economic growth. The CIA in its long-term strategic forecast views the fate of Russia differently. According to this prognosis Russia will be able to become a country with the headlong growing economy, but will not become the leading economic power. The report says that Russia together with Brazil, South Africa and Indonesia will belong to a group of countries where economy will grow faster but will leg behind the world leaders China and the US.
The authors of CIA Project 2020 say that Russia will not be able to become one of the economic superpowers because of its failure to solve social problems: unfavorable demographic situation, spreading AIDS as well as slowing down in democratic reforms. A serious threat will remain organized crime and Islamic terrorism.
Nevertheless, these problems will be partly graded by Russia's ability “to change the vector of economic power”. According to the report it will be the result of the Russia's position as the main supplier of energy carriers. Russia will be able to provide for the one third of energetic needs of Europe, with export of energy carriers as the main constituent of Russian foreign policy. The report also predicts large-scale but controllable migration from the Central Asia to Russia: up to a million people can move to Russia bringing down social tension in Asia and making up for lack of labor force

29.08.2005
Source:
URL: http://english.pravda.ru/world/europe/8832-forecasts-0

World Bank data(Latin America and the Caribbean)

REGIONAL FACT SHEET FROM THE WORLD DEVELOPMENT INDICATORS 2007
Latin America and the Caribbean


Many countries in the region have made impressive gains in
social indicators. With 98 percent of the children completing
primary school, the region has effectively reached the MDG
goal of providing universal primary education to its children.
The region has achieved a secondary school enrolment rate
of 86 percent in 2005, an increase of 35 percentage points
since 1991. Except in three countries, over 80 percent of the
population had access to an improved water source in 2004.
With over 90 percent of its children immunized against
measles and DPT, the region has also made impressive
gains in reducing child mortality. The child mortality rates
declined from 54 per 1,000 in 1990 to 31 in 2005, the lowest
child mortality rate among all regions।

Despite impressive achievements in health and education, poverty rates remain high. In 2004 8.6 percent of the people in Latin America and
the Caribbean were living on less than $ 1 day, and between 2002 and 2004, the number of people living on less than $1 a day fell by only
one million people, leaving approximately 47 million people in extreme poverty. Another 74 million were living on less than $2 a day.

Macro conditions improved
Macroeconomic indicators show positive signs. Inflation has been brought down
to single digit levels in most countries where double digit rates were common
in the 1990s. The region as a whole ran a trade surplus for the last three years,
reaching $45 billion in 2005. As a result, many countries were able to reduce their
external financing needs. The public debt profiles of many countries improved:
total debt service was 22.5 percent of exports in 2005, 9 percentage points lower
than 2003 and 16 percentage points lower than 2000. Similarly debt service ratio
to Gross national income has also fallen by 2.6 percent to 8.8 percent in 2005
compared to 2000.


Latin America and the Caribbean: the most urbanized developing Region

Today, half the world’s population lives in urban areas.
Urban populations are expected to grow by 1.8 percent
a year through 2030—almost twice as fast as the total
global population. Most of this increase will occur in
developing regions. No region is more urbanized than
Latin America and Caribbean. In 2005, 77 percent of the
region’s population lived in urban areas—almost as high
as high-income economies’—and the region has four of
the ten largest cities in the world in the region. However,
as cities grow the cost of meeting basic needs increases, as
do the demands on environmental and natural resources.


Between 1990-2005, Latin America had the highest investment in infrastructure projects with private participation
Private participation in infrastructure projects in developing countries plummeted after the 1997 Asian financial crisis and declined for
several years afterward. But in 2004 and 2005 infrastructure investment increased. During 1990-2005 Latin America and the Caribbean
accounted for more than 40 percent of total investment in infrastructure projects with private participation. By 2004-2005, as investment
in other regions increased, Latin America & the Caribbean’s share fell to about 23 percent of global investment in infrastructure projects
with private participation. Three Latin American and Caribbean countries—Argentina, Brazil, and Mexico, are among the top five
countries with total investment in infrastructure projects with private participation, 1990-2005.

World Bank Data ( East Asia and Pacific )

REGIONAL FACT SHEET FROM THE WORLD DEVELOPMENT INDICATORS 2007
East Asia and Pacific
East Asia and the Pacific well on the path to the Millennium Development Goals
East Asia and the Pacific, which comprises 30 percent of the world’s population, has recorded the largest reductions in poverty since
1981. It has exceeded the MDG target of cutting poverty in half by 2015. The region has, on average, also achieved the MDG targets
of universal primary education, with a completion rate of 98 percent, as well as gender equality in access to primary and secondary
education. In health, the fertility rate is at replacement level, almost 90 percent of pregnant women receive antenatal care, and 87 percent
of the births are attended to by skilled health staff. Infant and under-5 mortality are among the lowest of all developing regions.
But problems remain. Preliminary estimates suggest that almost 170 million people live on less than $1/day, over 75 percent of
them in China. For most countries, achieving a two-thirds reduction in child mortality will be difficult. And this is made more difficult
by pervasive inequalities in countries: survey data for seven countries show that, on average, under-5 mortality is 88 per 1,000 among the
poorest fifth of the population, compared with just 31 among the richest fifth. As of 2004, half the population lacked access to improved
sanitation facilities, and prevalence of HIV/AIDS among women increased from 24 percent in 2003 to 27 percent in 2005 .

Growth remained strong
East Asia and the Pacific, which has grown at an average
rate of about 8 percent a year for the past two decades, was once
again the top performer among developing regions in 2004.
China achieved a growth rate of 10.1 percent, while Malaysia,
Philippines, Thailand, Vietnam, and Cambodia exceeded 6
percent growth. Export growth in these countries was particularly
strong, ranging from 10 to 28 percent in 2004।

Cereal yield is approaching that of high income economies
Global demand for food is projected to double in the next 50 years,
as urbanization proceeds and income rises. However, arable land per
capita is shrinking. Growing demand for food has been met by agricultural
intensification. Cereal yields have increased in most developing regions,
with East Asia realizing the highest cereal yield in developing regions.
In the 2003-05 period the region produced 4460 kilograms per hectare,
higher than the average yield in high-income economies in 1990-92, and
more than 4 times that of Sub-Saharan Africa।


Business reform--big improvements in China, Indonesia, and India
The fewer obstacles there are to starting a business, the more businesses will
be created in the formal sector. Firms that go from the informal sector to the
formal sector pay taxes and grow faster. Between 2004 and 2006 both China
and India cut business start-up time to 35 days. And Indonesia shortened
the time to register a business from 151 days to 97 days. During the same
period, China also reduced the cost and minimum capital requirements for
starting a business।


Malaysia leads East Asia and the Pacific in mobile phone
subscribers per capita
The use of mobile phones has been growing rapidly in East Asia & Pacific
countries, and in most of these countries, more people have access to
mobile phones than fixed line phones. In Malaysia, there are almost 800
mobile phone subscribers out of every 1,000 people. Since 2000, access
to mobiles has increased by about 10 times in Thailand and by about 5
times in China and the Philippines।

East Asia and Pacific: led in growth of trade
The nominal value of world merchandise trade in 2005 rose by 13 per
cent to $21.1 trillion or 47 percent of global output. Merchandise trade
by developing countries – especially exports -- has grown significantly
faster than for high-income countries, continuing the trend since 1990.
As a result, developing economies have gained market share. The East
Asia and Pacific region has been the leader and has continued to benefit
from rapidly expanding trade. In 2005, the region’s merchandise trade
rose to 75 percent of GDP, up from 47 percent in 1990.

StockMarket Research

Stock Market Research.
Why is Stock Market Research Important?

Stock Research is important part of the Technical Analysis of the stock or Fundamental Analysis of the Stock depending on what type of market research you are involved in। The Stock Research has to be done to predict the future trends of the stock, to built market timing system or asses the real value condition of the company.

Market Stock Research General:
Before starting your market research company , determine whether the company is publicly held (traded on a stock exchange), privately owned, or a subsidiary of a publicly held organization. You will be much more successful in obtaining information on publicly held companies. Public companies must report certain financial information to the Securities and Exchange Commission (SEC) and their shareholders. Also, serious investors use the Internet to research potential stock purchases or monitor companies in their portfolios. As a result, the Internet provides much more information on public corporations than on private companies.
The first step in "research stock" is to identify the stock exchange ticker symbol for the company of interest. It can be found at
Yahoo Ticker Symbol Lookup
After finding a ticket symbol for the company you should know on what Exchange stock is trading, to what industrial group (ETF) it belongs is an important part of company research. The according Exchange Research and Index Research (ETF) have to be done as well.
When you are doing stock research (company research) you should consider what price and volume movement did your stock experience in the past two months, or three months, or six months, or YTD (year to date) and up to 10 years? Understanding price and volume movement is one of many concepts that will enable you to hold on to your equities (stocks or stock mutual funds), long term।

Some Tips of the Stock Research Company:
There are some some of the facts to look at to properly evaluate your stock to do your Stock Analysis?
Price to Earnings Ratio
Does the company have earnings?
Increasing revenues and profits yearly?
Stock split history?
Is the company paying dividends?
Future plans of the company
Past and Current news on the company?
Company graph of price and volume over time The company ranking in its industry
Five Steps of Market Research
Market Research can be divided in several separate steps.
First of all you have to get the basic knowledge about market, exchanges, stocks, indexes, ETF, shares, options, futures etc.
Second step of market research demands you to define a subject of research, your target. During this period you have to answer on the following questions: what type of trader you are and what you are trading.
On the third step of Market research you have to define relationships. If you are trading on the stock market, you should know to what industrial group ( ETF ) this stock belongs, on what exchange it is traded etc. Other words doing stock research you have to support it with according index and exchange researches too.
The forth step is one where you are collecting information such as historical price and volume, etc. Real time quotes of price and volume, real time charts are always the most important part of any type of market research ether it stock research, stock market option research, research index or trend research.
The last step demands you to analyze all data gathered during your market research and make conclusion either it prediction of trend movement or assessing real value of company ( stock ).

History of U.S Stock Market Crashes

History of U.S. Stock Market Crashes
The Crash of 2000
From 1992-2000, the markets and the economy experienced a period of record expansion. On September 1, 2000, the NASDAQ traded at 4234.33. From September 2000 to January 2, 2001, the NASDAQ dropped 45.9%. In October 2002, the NASDAQ dropped to as low as 1,108.49 - a 78.4% decline from its all-time high of 5,132.52, the level it had established in March 2000.
Causes of the Crash:
Corporate Corruption. Many companies fraudulently inflated their profits and used accounting loopholes to hide debt. Corporate officers enjoyed outrageous stock options that diluted company stock;
Overvalued Stocks. There were numerous examples of companies making significant operating losses with no hope of turning a profit for years to come, yet sporting a market capitalization of over a billion dollars;
Daytraders and Momentum Investors. The advent of the Internet enabled online trading –a new, quick, and inexpensive way to trade the markets. This revolution led to millions of new investors and traders entering the markets with little or no experience;
Conflict of Interest between Research Firm Analysts and Investment Bankers. It was common practice for the research arms of investment banks to issue favorable ratings on stocks for which their client companies sought to raise capital. In some cases, companies received highly favorable ratings, even though they were actually in serious financial trouble.
A total of 8 trillion dollars of wealth was lost in the crash of 2000.
Following the Crash:
New Rules for Daytraders. Under the new rules that were introduced, investors need at least $25,000 in their account to actively trade the markets. In addition, new restrictions were also placed on the marketing methods daytrading firms are allowed to use;
CEO and CFO Accountability. Under the new regulations, CEOs and CFOs are required to sign-off on their statements (balance sheets). In addition, fraud prosecution was stepped up, resulting in significantly higher penalties;
Accounting Reforms. Reforms include better disclosure of corporate balance sheet information. Items such as stock options and offshore investments are to be disclosed so that investors may better judge if a company is actually profitable;4. Separation between Investment Banking and Brokerage Research. A major reform was introduced to avoid conflicts of interest in the financial services industry. A clear split between the research and investment banking arms of brokerage houses was mandated.
The Crash of 1987
The markets hit a new high on August 25, 1987 when the Dow hit a record 2722.44 points. Then, the Dow started to head down. On October 19, 1987, the stock market crashed. The Dow dropped 508 points or 22.6% in a single trading day. This was a drop of 36.7% from its high on August 25, 1987.
Causes of the Crash:
No Liquidity. During the crash, the markets were not able to handle the imbalance of sell orders;
Overvalued Stocks;
Program Trading and the Use of Derivative Securities Software. Large institutional investment companies used computers to execute large stock trades automatically when certain market conditions prevailed. Some analysts claim that the program trading of index futures and derivatives securities was also to blame.
During this crash, 1/2 trillion dollars of wealth were erased.
Following the Crash:
Uniform Margin Requirements. New margin requirements were introduced to reduce the volatility for stocks, index futures, and stock options;
New Computer Systems. Stock exchanges changed to new computer systems that increase data management effectiveness, accuracy, efficiency, and productivity;
Circuit Breakers. The New York Stock Exchange and the Chicago Mercantile Exchange instituted a circuit breaker mechanism, which halts trading on both exchanges for one hour should the Dow fall more than 250 points in a day, and for two hours, should it fall more than 400 points.
The Crash of 1929
On September 4, 1929, the stock market hit an all-time high. Banks were heavily invested in stocks, and individual investors borrowed on margin to invest in stocks. On October 29, 1929, the stock market dropped 11.5%, bringing the Dow 39.6% off its high.
After the crash, the stock market mounted a slow comeback. By the summer of 1930, the market was up 30% from the crash low. But by July 1932, the stock market hit a low that made the 1929 crash. By the summer of 1932, the Dow had lost almost 89% of its value and traded more than 50% below the low it had reached on October 29, 1929.
Causes of the Crash:
Overvalued Stocks. Some analysts also maintain stocks were heavily overbought;
Low Margin Requirements. At the time of the crash, you needed to put down only 10% cash in order to buy stocks. If you wanted to invest $10,000 in stocks, only $1,000 in cash was required;
Interest Rate Hikes. The Fed aggressively raised interest rates on broker loans;
Poor Banking Structures. There were few federal restrictions on start-up capital requirements for new banks. As a result, many banks were highly insolvent. When these banks started to invest heavily in the stock market, the results proved to be devastating, once the market started to crash. By 1932, 40% of all banks in the U.S. had gone out of business.
In total, 14 billion dollars of wealth were lost during the market crash.
Following the Crash:
The Securities and Exchange Commission (SEC) was established;.
The Glass-Stegall Act was passed. It separated commercial and investment banking activities. Over the past decade though, the Fed and banking regulators have softened some of the provisions of the Glass-Stegall Act;
3. In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000.

The Nasdaq Bubble

The Nasdaq Bubble

After the 1987 stock market crash, the global markets resumed their previous bull market trend। This powerful trend was driven by computer technology. Many of the technology stocks were listed on the Nasdaq exchange, which is an electronic marketplace.

In the early 1990’s, the personal computer was rapidly gaining acceptance for business and personal use. The computer was at last becoming more reasonably priced and more user-friendly. Computers were no longer the fodder of geeky hobbyists. They were veritable business tools, which were vital in gaining a competitive edge. Business applications were invented to aid the user in accounting, calculating taxes and word processing. Computers also began to compete with televisions as a form of entertainment, as PC video games flooded the marketplace. Corporations such as Microsoft prospered enormously as almost every computer system contained their operating system software.
During this time, the US computer industry focused more upon computer software versus hardware. This is because software was an extremely high margin product, due to it not being a physical product, like chips. Software companies produced a markup from selling licensed information, which costs very little to reproduce. Computer hardware became a commodity product, i.e. virtually indistinguishable from the product of any other competitor. Commodity products produce very little profits as each competitor constantly undercuts each other’s prices. Asian companies, with small manufacturing costs, produced virtually all of the hardware components at this point. Software, however, was protected as intellectual property with patents. Therefore, a product such as Microsoft Windows is a one of a kind product. This creates a strong barrier to entry, a benefit which is highly sought after in business.
The stock prices of software companies were marching ahead rapidly. Many small software companies were started by college students in garages, paying their employees with as much pizza and soda they desired. Every startup wanted to become “the Next Microsoft”.
Eventually, several of these start-up companies took the notice of serious venture capitalists, who were looking to finance these operations, take them public and reap massive profits. Soon the fledgling startups began to pay their hopeful employees with company shares. The premise was that when the company went public, the early shareholders would become instantly wealthy. The majority of the software companies were started in Silicon Valley, near San Francisco, which was a technology Mecca. The Nasdaq index of technology stocks was rising extremely fast, creating many millionaires.
Computers became further popularized in the mid 1990’s, as blockbuster PC games were created, such as Sim City and Duke Nukem. This fueled an increase in tech savvy youth, as computers went from “geek to chic”.
The Internet Age
Around 1994, a new frontier called the internet, was first being made available to the general public. In actuality, a primitive form of the internet had been around since 1969. This early internet was called DARPANet and was created by government agencies as an efficient way to exchange scientific and military information to computers in different locations. By the 1990’s the internet had evolved as a way to communicate using email, use chat rooms and view informational websites.
Almost immediately, businesses saw the internet as a profit opportunity. America Online made the internet available for the masses. The Yahoo search engine was started in 1994 as a directory for the universe of websites. Amazon became the first online bookstore in 1994. EBay was started in 1995 as an online auction site. As the internet moved from the hobbyist domain to a commercialized marketplace, online business owners became fantastically wealthy. Many technology companies were now selling stock in IPO’s. Most initial shareholders, including employees, became millionaires overnight. Companies continued to pay their employees in stock options, which profited greatly if the stock went up even slightly. By the late 1990’s, even secretaries had option portfolios valued in the millions! Many companies had BMW sign on bonuses! This is surely an example of irrational exuberance.
Tech Stock Mania
Several economists even postulated that we were in a “New Economy”, where inflation was virtually nonexistent and the stock market crashes were obsolete! Even worse, it was said that earnings were not relevant in picking stocks either! The “Old Economy” referred to industrial stocks, such as those in the Dow Jones Average. Another buzzword was “Paradigm Shift”, which is a synonym of “New Economy”. Investors were enamored by these buzzwords, as they deceptively described something that was sleek, sexy, and exciting.
From 1996 to 2000, the Nasdaq went from 600 to 5,000! Dot-com companies run by people who were barely in their 30's, were going public and raising hundreds of millions of dollars of capital. These companies didn’t even have much of a business plan, and certainly didn’t have any earnings, either! For example, Pets.com had no earnings yet came public and raised billions of dollars. Dot-coms wasted millions of dollars per night on frivolous parties. Hard work was never part of the picture for dot-commers. There are many stories of dot-com employees walking around barefoot in the office and playing foosball all day. At one point, a new millionaire was created every 60 seconds! Many of these instant millionaires thought that they were so brilliant, that all they had to do was play to make money. Never mistake a bull market for brains.
The Bubble Pops
By early 2000, reality started to sink in. Investors soon realized that the dot-com dream was really a bubble. Within months, the Nasdaq crashed from 5,000 to 2,000. Hundreds of stocks such as Pet.com, which were each worth billions, were off the map as quickly as they appeared. Panic selling ensued as investors lost trillions of dollars. The stock market kept crashing down to 800 in 2002. One high flier, Microstrategy, slid from $3500 per share to $4! Numerous accounting scandals came to light, showing how many companies artificially inflated earnings. Shareholders were crippled. In 2001, the economy entered a recession as the Fed repeatedly cut rates, trying to stop the bleeding. Millions of workers were now jobless and had lost their life savings.
Needless to say, the New Economy was a farce, and traditional economic principles still hold. What is sadly interesting is how bubbles will continue to occur in the future. When they do occur, foolish investors will say, “This time is different!”

The Collapse of Barings Bank

The Collapse of Barings Bank
In February of 1995, one man single-handedly bankrupted the bank that financed the Napoleonic Wars, Louisiana Purchase and the Erie Canal. Founded in 1762, Barings Bank was Britain’s oldest merchant bank and Queen Elizabeth’s personal bank. Once a behemoth in the banking industry, Barings was brought to its knees by a rogue trader in a Singapore office. The trader, Nick Leeson, was employed by Barings to profit from low risk arbitrage opportunities between derivatives contracts on the Singapore Mercantile Exchange and Japan’s Osaka Exchange. A scandal ensued when Leeson left a $1.4 billion hole in Barings’ balance sheet due to his unauthorized derivatives speculation, causing the 233-year-old bank’s demise.
Nick Leeson grew up in London’s Watford suburb, and worked for Morgan Stanley after graduating university. Shortly after, Leeson joined Barings and was transferred to Jakarta, Indonesia to sort through back-office mess involving £100 million of share certificates. Nick Leeson enhanced his reputation within Barings when he successfully rectified the situation in 10 months (Risk Glossary).
In 1992, after his initial success, Nick Leeson was transferred to Barings Securities in Singapore and was promoted to general manager, with the authority to hire traders and back office staff. Leeson’s experience with trading was limited, but he took an exam that qualified him to trade on the Singapore Mercantile Exchange (SIMEX) alongside his traders. According to Risk Glossary:
"Leeson and his traders had authority to perform two types of trading:
1. Transacting futures and options orders for clients or for other firms within the Barings organization, and
2. Arbitraging price differences between Nikkei futures traded on the SIMEX and Japan's Osaka exchange.
Arbitrage is an inherently low risk strategy and was intended for Leeson and his team to garner a series of small profits, rather than spectacular gains।"
As a general manager, Nick Leeson oversaw both trading and back office functions, eliminating the necessary checks and balances usually found within trading organizations. In addition, Barings’ senior management came from a merchant banking background, causing them to underestimate the risks involved with trading, while not providing any individual who was directly responsible for monitoring Leeson’s trading activities (eRisk). Aided by his lack of supervision, the 28-year-old Nick Leeson promptly started unauthorized speculation in futures on Nikkei 225 stock index and Japanese government bonds (Risk Glossary). These trades were outright trades, or directional bets on a market. This highly leveraged strategy can provide fantastic gains or utterly devastating losses; a stark contrast to the relatively conservative arbitrage that Barings had intended for Leeson.
Nick Leeson opened a secret trading account numbered 88888 to facilitate his furtive trading. Risk Glossary says of Leeson:
He lost money from the beginning. Increasing his bets only made him lose more money. By the end of 1992, the 88888 account was under water by about GBP 2MM. A year later, this had mushroomed to GBP 23MM. By the end of 1994, Leeson's 88888 account had lost a total of GBP 208MM. Barings management remained blithely unaware.
As a trader, Leeson had extremely bad luck. By mid February 1995, he had accumulated an enormous position—half the open interest in the Nikkei future and 85% of the open interest in the JGB [Japanese Government Bond] future. The market was aware of this and probably traded against him. Prior to 1995, however, he just made consistently bad bets. The fact that he was so unlucky shouldn't be too much of a surprise. If he hadn't been so misfortunate, we probably wouldn't have ever heard of him.
Betting on the recovery of the Japanese stock market, Nick Leeson suffered monumental losses as the market continued its descent. In January 1995, a powerful earthquake shook Japan, dropping the Nikkei 1000 points while pulling Barings even further into the red. As an inexperienced trader, Leeson frantically purchased even more Nikkei futures contracts in hopes to gain back the money already lost. The most successful traders, however, are quick to admit their mistakes and cut losses.
Surprisingly, Nick Leeson effectively managed to avert suspicion from senior management through his sly use of account number 88888 for hiding losses, while he posted profits in other trading accounts. In 1994, Leeson fabricated £28.55 million in false profits, securing his reputation as a star trader and gaining bonuses for Barings’ employees (Risk Glossary). Despite the staggering secret losses, Leeson lived the life of a high roller, complete with his $9,000 per month apartment and earning a bonus of £130,000 on his salary of £50,000, according to “How Leeson Broke the Bank.”
The horrific losses accrued by Nick Leeson were due to his financial gambling, as he placed his trades based upon his emotions rather than by taking calculated risks. After the collapse of Barings, a worldwide outrage ensued, decrying the use of derivatives. The truth, however, is that derivatives are only as dangerous as the hands they are placed in. In this case, Nick Leeson was reckless and dishonest. Derivatives can be tremendously useful if used for hedging and controlling risk or even careful trading.
After a series of lies, cover ups and falsified documents, Leeson and his wife fled Singapore for Kuala Lumpur, Malaysia. By then, Barings’ senior management had discovered Nick Leeson’s elaborate scheme. The total damage suffered by Barings was £827 million, or $1.4 billion. In February 1995, England’s oldest, most established bank was unable to meet SIMEX’s margin call, and was declared bankrupt. Leeson and his wife were arrested in Frankfurt, Germany on March 3 rd , 1995. That same day, the Dutch bank, ING, purchased Barings for a mere £1 and assumed all of its liabilities (eRisk).
Nick Leeson was placed on trial in Singapore and was convicted of fraud. He was sentenced to six and a half years in a Singaporean prison, where he contracted cancer (Risk Glossary). He survived his cancer, and while imprisoned, wrote an autobiography called “Rogue Trader”, detailing his role in the Barings scandal. “Rogue Trader” was eventually made into a movie of the same name. Nick Leeson was released from prison in July 1999 for good behavior.

The Nikkei Bubble

The Nikkei Bubble

Can a bear market last for 14 straight years? Well, this is exactly what occurred in Japan, starting in 1991।

After World War II, Japan was devastated-several of its major cities were obliterated and its economy was virtually nonexistent. Due to much effort and hard work, the Japanese economy slowly began to stabilize and recover. Additionally, the United States helped Japan rebuild, and provided capital and military protection, as well. The value of military protection should not be overlooked, as this is usually the highest expense of any government. This benefit allowed the Japanese economy and government run more freely and efficiently.
Factories were quickly built and peasants became factory workers. Middle and upper class men became white collar workers, called salarymen. Salarymen and factory workers were offered lifetime employment. This caused salarymen to have fierce loyalty towards their employers. Most Japanese workers at the time were highly frugal, saving much of what they earned. Many companies merged together to become large industrial and banking conglomerates, called zaibatsu.
The zaibatsu gained their competitive edge by copying and improving Western products and selling them for much cheaper. The cheaper products won Western customers and started to hurt US companies. Tremendous economic growth occurred allowing the zaibatsu to evolve into even larger business alliances, called keiretsu। The keiretsu philosophy was one of cooperation, where all facets of business and government worked hand in hand. As the Japanese stock market soared, the keiretsu purchased each other’s shares.

In the 1970’s, the oil crisis and inflation crippled the global economy. Most American cars had large gas guzzling V8 engines, which cost a fortune to run. Japanese car makers, such as Honda, quickly mobilized to produce small fuel efficient cars. Additionally, these cars cost a fraction of the price of American cars. These cars were quickly increasing in quality, as well. Even as early as the 1960’s, Japanese cars were being assembled with robots, making human error almost nonexistent. This started the decline of the low tech American automobile industry. Throughout this entire boom, the Nikkei stock average was soaring to new heights.
By the 1980’s, Japan added electronics to its list of specialties. Japanese keiretsu corporations, such as Hitachi and Sony, copied and produced quality electronics hardware needed by the growing computer industry. Japan trounced American companies, due to its ability to compete on price, aided by robots and cheap labor. With the exception of microprocessors, Japan dominated the market for all chips, circuit boards and other components. It was widely believed that Sony and Hitachi, would eventually acquire Intel and IBM.
Throughout the 1980’s, Japan became viewed as a utopia, due to its people having the highest quality of life and longest life expectancy. In addition, Japan was the world’s largest creditor and had the highest GDP per capita. Many Americans feared that their workforce would become obsolete due to the use of robots in Japan. With the economy booming and the stock market climbing, Japanese corporations crammed many skyscrapers in Tokyo and Osaka. This caused real estate prices to skyrocket as well. Between 1986 and 1988, the price of commercial land in greater Tokyo doubled. Real estate prices soared so much that Tokyo alone was worth more than the United States! Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. An average home near Tokyo cost well over $2 million in 1989. Large scale stock speculation occurred causing a worldwide mania. Investors all over over the world were vying for Japanese shares. These euphoric investors believed in the fallacy of a perpetual bull market. Luxury goods were purchased in large numbers by the newly wealthy.
Unfortunately, all excessively good things must end. To cool the inflated economy, the Japanese government raised rates. Within months, the Nikkei stock index crashed by over 30,000 points. At its height, the Nikkei stood at 40,000. The Nikkei could crash this far because its value was inflated on false hopes and hype, not solid financials. Eventually, many scandals came to light showing the corruption that always occurs in a bubble’s heyday. Japanese housing prices plummeted for 14 straight years, and may continue in the future. The Nikkei sank until its low of 8,000 in 2003. The Japanese government and corporations are still suffering under unwieldy debt loads gained since the late 1980’s. This debt was used for stock speculation and buying overpriced land. Even today, in 2004, the Japanese economy is still in the doldrums.
Once again, we have seen the development of a bubble and the inevitable stock market crash that always follows it.

Worlds Financial Crisis(Stock Market Crash of 1929 )

Stock Market Crash of 1929
The 1920’s were a time of peace and great prosperity। After World War I, the “Roaring Twenties” was fueled by increased industrialization and new technologies, such as the radio and the automobile। Air flight was also becoming widespread, as well. The economy benefited greatly from the new life changing technologies.

As the Dow Jones Industrial Average soared, many investors quickly snapped up shares. Stocks were seen as extremely safe by most economists, due to the powerful economic boom. Investors soon purchased stock on margin. Margin is the borrowing of stock for the purpose of getting more leverage. For every dollar invested, a margin user would borrow 9 dollars worth of stock. Because of this leverage, if a stock went up 1%, the investor would make 10%! This also works the other way around, exaggerating even minor losses. If a stock drops too much, a margin holder could lose all of their money AND owe their broker money as well.
From 1921 to 1929, the Dow Jones rocketed from 60 to 400! Millionaires were created instantly। Soon stock market trading became America’s favorite pastime as investors jockeyed to make a quick killing. Investors mortgaged their homes, and foolishly invested their life savings in hot stocks, such as Ford and RCA. To the average investor, stocks were a sure thing. Few people actually studied the fundamentals of the companies they invested in. Thousands of fraudulent companies were formed to hoodwink unsavvy investors. Most investors never even thought a crash was possible. To them, the stock market “always went up”.

By 1929, the Fed raised interest rates several times to cool the overheated stock market. By October, the bear market had commenced. On Thursday, October 24 1929, panic selling occurred as investors realized the stock boom had been an over inflated bubble. Margin investors were being decimated as every stock holder tried to liquidate, to no avail. Millionaire margin investors became bankrupt instantly, as the stock market crashed on October 28 th and 29 th. By November of 1929, the Dow sank from 400 to 145. In three days, the New York Stock Exchange erased over 5 billion dollars worth of share values! By the end of the 1929 stock market crash, 16 billion dollars had been shaved off stock capitalization.
To make matters worse, banks had invested their deposits in the stock market. Now that stocks were obliterated, the banks had lost their depositors money! Bank runs started, where bank patrons tried to withdraw their savings all at once. Major banks and brokerage houses became insolvent, adding more fuel to the bear market. The financial system was in shambles. Many bankrupt speculators, who were once aristocracy, commit suicide by jumping out of buildings. Even bank patrons who had not invested in shares became broke as $140 billion of depositor money disappeared and 10,000 banks failed.
The 1929 stock market crash was beneficial for some, however. Jesse Livermore correctly forecasted the economic crisis and shorted. He made over 100 million dollars! Joseph Kennedy, John F. Kennedy’s father, sold before the 1929 stock market crash and kept millions in profit. Kennedy decided to sell because he overheard shoeshine boys and other novices speculating on stocks. Livermore and Kennedy were individuals are known as the “smart money”, who profit regardless if the market is skyrocketing or plummeting.
The stock market crash of 1929 launched the Great Depression. The Depression was the time from October 1929 to the mid 1930’s. Mass poverty occurred then, as many workers lost their jobs and were forced to live in shanty towns. Former millionaire businessmen were reduced to selling apples and pencils on street corners. One third of Americans were below the poverty line in the Great Depression. The Dow Jones finally surpassed its 1929 high, a full 26 years later in 1955.
The stock market crash of 1929 was identical to any other financial bubble. The classic pattern of extreme euphoria and irrational expectations will always lead to devastating financial crashes. Learning how to identify these timeless patterns will allow you to profit whether the market is rising or falling.

Florida Real Estate Bubble

Florida Real Estate Bubble
The 1920’s, in America, were a time of great prosperity. Skilled and educated working Americans had jobs providing numerous fringe benefits, paid vacations and pensions. In addition, automobiles were becoming commonplace for the wealthy and middle class allowing cross country travel. This good fortune set the stage for the Florida real estate bubble.
Starting in 1920, many Americans became enamored by the materialistic and prosperous lifestyle of the time. During this time, the stock market was moving forward at an extremely fast pace. Many investors were becoming quite wealthy. Florida became a hot spot for these newly rich people, who didn’t enjoy the cold. Many whole families took vacations to Florida. It was at this point that tourism started booming and land prices were skyrocketing. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn’t meet the demand. Florida became the “playground of the rich and famous”. Illegal casinos and drinking parlors became widespread in Miami.
At this point, almost anybody could invest in Florida, even without much money। Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent. In 1922, the Miami Herald became the heaviest newspaper in the world as a result of its humongous real estate advertisements. People in the North heard about the real estate prices “doubling and tripling”, causing a snowball effect. Capital was rapidly pumped into the real estate market. Whole golf communities were developed, such as Temple Terrace. Resorts and retirement communities were developed almost overnight. Mansions were sprawling in every area, as were swimming pools. As always, waterfront property was the most desirable. Florida was seen as a veritable
Real estate prices quadrupled in less than one year. An elderly man invested $1,700 in property and by 1925 the property was worth over $300,000! It seemed you could do no wrong by just buying any property in Florida and become a millionaire. By 1925, real estate prices had become so exorbitant that buying land wasn’t affordable any longer. New investors failed to arrive and old investors started to sell. Panic arrived, as it always does, and the real estate market crashed. Prices kept moving downwards as heavily indebted investors tried to sell to avoid bankruptcy. In most cases, no buyers arrived, and the investors were bankrupt from the enormous mortgages.
To make matters even worse, a highly destructive hurricane ravaged South Florida in September 1926. The 125 mile an hour winds eventually turned Palm Beach County into swamp lands. After the storm, a huge tidal wave crashed upon the towns of Belle Glade and Moore Haven. Due to these horrible turn of events, over 13,000 homes were destroyed and 415 people died. Additionally, the arrival of the Mediterranean fruit fly obliterated the large citrus industry. It took years for Florida to fully recover, even through the highly prosperous time from 1925 to 1929. Florida was barely affected in the stock market crash of 1929 and the Great Depression, because of its poor financial state from the start.
Market crashes always occur in the same manner. Regardless of the market, the same simple psychological underpinnings are always at work. People who are caught up in a bubble never look back for historical examples. For this folly, they become paupers.
“Those who cannot remember the past are condemned to repeat it.”

Worlds Financial Crisis (The Mississippi Bubble)

The Mississippi Bubble
In 1720, at the same time as England’s South Sea Bubble, France experienced its very own financial crisis. The Mississippi Bubble shares a striking similarity to the South Sea Bubble.
The crisis began in 1715, when France was bankrupt from war. It had defaulted on its debt as well as cut back on interest payments. High taxes quickly burdened the economy and the value of gold and silver currency fluctuated wildly. Eventually the youthful King Louis XV turned to his trusty advisor, the Duke of Orleans. In turn, the Duke of Orleans sought the help of his friend John Law, a Scottish financier.
John Law was born in Edinburgh, Scotland in 1671 to a goldsmith who lent money on the side. Law became his father’s apprentice and became well versed on the principles of banking. Tragically, Law became involved in a duel, killing his opponent and was convicted of murder. Law eventually managed to escape prison and quickly left England to travel Europe. Due to his keen mathematical abilities, Law earned much of his wages from gambling. John frequented destinations such as Amsterdam, Venice and Genoa. It was in these financial centers that John Law renewed his fascination for high finance. In 1705, Law published a monetary theory that argued against the use of metallic money and favored paper money, in true Keynesian style. Law favored paper money from his belief that its use would stimulate commerce (Smant).
With the desperate Duke of Orleans looking for John Law’s help, Law quickly devised a strategy to stabilize the French economy। In May 1716 Law established the Banque Generale, designed after the successful Wisselbank of Amsterdam (Smant). Banque General took deposits of gold and silver and issued paper money in return. These banknotes were payable in the value of the metallic currency at the time the banknotes were issued. Banque Generale gained equity through the conventional selling of shares as well as converting government debt. To John Law’s credit, the economy had begun to stabilize, helping to increase his rapport and influence within the French government.
Pursuing a new venture in August 1717, John Law acquired the ailing Mississippi Company and merged it with Banque Generale. France had granted the Mississippi Company a trading monopoly with the French colonies, commonly called “French Louisiana.” The trading monopoly carried a high-perceived value as speculation arose over the prospect of the beaver skin trade and of finding precious metals, with Indian slaves to mine them. France was looking to profit enormously, as Spain did with Mexico and Peru.
The Mississippi Company raised capital by selling shares to investors looking to take part in the “spoils of the Indies.” Shares were bought and paid for with bank notes or with government debt. The Mississippi Company increased its authority when it “Expanded to monopolize all French trade outside Europe. In July 1719 the Compagnie purchased the right to mint new coinage. In August 1719 the Compagnie bought the right to collect all French indirect taxes and in October 1719 the Compagnie took over the collection of direct taxes. Finally, a plan was launched to restructure most of the national debt, whereby the remainder of existing government debt would be exchanged for Compagnie shares.” (Smant)
Shares started trading at 500 livres (French currency of the time) in January 1719. The French public gained an insatiable desire for Mississippi Company shares and prices hit 10,000 livres by December 1719, a gain of 190 percent. People of all social classes became investors, and many became millionaires just from their holdings of Company shares. Interestingly, the French word millionaire originated as a result of the Mississippi Bubble speculation. (Moen)
The Mississippi Company gained 80,500,000 livres in revenue from interest paid by the King on loans and by profits from tobacco, the mint and trading (Smant), further bolstering investors’ confidence.
Profit taking started in January 1720, with investors receiving payment in the form of gold coins. John Law tried to curb the sell-off by limiting payments in gold of more than 100 livres (Moen).
The amount of bank notes in circulation had increased 186% in one year, due to the rampant issuance of notes to fund share purchases. As a result, hyperinflation ensued with the prices of goods doubling between July 1719 and December 1720. Much of Mississippi Company share price gains were due to inflation as well, rather than from sheer investor demand (Smant). The majority of Banque Generale notes were no longer backed by precious metals, essentially rendering them worthless.
A scandal struck in May 1720 when John Law decided that Company stock prices were exorbitantly high, causing him to start devaluing shares. Additionally, Banque Generale notes were devalued by 50%. Intense protest resulted in a compromise in which the bank notes’ value was restored but payment in precious metals was stopped. The public was outraged against the Company and the near worthless paper money.
Under intense selling pressure and Law’s devaluation, shares had collapsed from 10,000 livres to 1,000 by December 1720. At the end of 1720, John Law’s enemies confiscated two-thirds of shares, giving them control of the company. Share prices further deflated to 500 livres in 1721 (Moen). Investors were financially devastated and many former millionaires lost their entire fortunes.
The collapse of the Mississippi Company plunged France and Europe into a severe economic depression, laying the groundwork for the upcoming French Revolution. John Law was viewed as a scam-artist and was exiled from France. Law returned to his gambling roots and died in poverty.
Although traditionally called a bubble, the Mississippi Bubble wasn’t actually a bubble, in technical terms. A bubble is caused by widespread mania and speculation, followed by a brutal collapse in asset values. In contrast, the Mississippi Bubble was a failure in monetary policy, which caused excessive growth in money supply and inflation

World financial crisis(South Sea Bubble)

South Sea Bubble
Dubbed the “Enron of England”, the South Sea Bubble was one of history’s worst financial bubbles
The mania started in 1711, after a war which left Britain in debt by 10 million pounds. Britain proposed a deal to a financial institution, the South Sea Company, where Britain’s debt would be financed in return for 6% interest. Britain added another benefit to sweeten the deal: exclusive trading rights in the South Seas. The South Sea Company quickly agreed, because of the proximity to wealthy South American colonies. The company planned on developing a monopoly in the slave trade. Additionally it was thought that the Mexicans and South Americans would eagerly trade their gold and jewels for the wool and fleece clothing of the British.
The South Sea Company issued stock to finance operations and gain investors. Investors quickly saw what they perceived as value in the monopoly of the South Seas. Shares were quickly snatched up from the start. The South Sea Company, seeing the success of the first issue of shares, quickly issued even more. This stock was rapidly consumed by the voracious appetite of the investors. Investors had no quibble, despite having a highly inexperienced management team. All they saw was that the stock was going to the stratosphere. Many investors were enamored by the lavish corporate offices that had been set up. This painted an image of success and wealth in the eyes of shareholders. At this point in England’s inudstrial revolution, investment capital was plentiful. It became extremely fashionable to own South Sea Company shares.
The management team of this company started hyping the stock, spouting illusions of grandeur to the investors. Speculation became rampant as the share price kept skyrocketing. It was thought that this company “could never fail”. The management developed rumors that the South Sea Company had been granted full use of Latin American ports, by Spain. The truth was, however, that Spain only allowed 3 ships per year. Unrealistic expectations were the norm among South Sea’s investors and speculators.
Much like Enron, widespread corruption occurred among directors, company officials and their political friends. Ipo’s started everywhere as other companies tried to profit from the stock boom, as well. These companies proclaimed everything from building floating mansions to distilling sunshine from vegetables. These shares were snatched up by speculators as well. Many people became aristocracy almost overnight. Sir Isaac Newton, the scientist, had foreseen a coming stock market crash and sold his shares early with a profit of 7,000 pounds. Aftwerwards, however, Newton saw the bubble keep inflating and bought more shares.
In 1718, Britain and Spain went to war again, stopping all chances for trade. Investors were not daunted, as they kept buying. Investors from other European countries started frantically scrambling for South Sea’s shares, as well.At this point the company leaders realized that the South Sea Company wasn’t generating any profit from its operations. More emphasis was placed on making money from issuing stock than from actual commerce. For example, large shipments of wool were left to decay as a result of careless shipping mistakes. It was at this point that management realized that the shares were incredibly overvalued relative to the profits. They decided to sell while other investors were still unaware that the company was profitless.
Eventually word broke out that the management team had sold out completely. Investors were left holding the bag. Panic selling of the worthless shares immediately ensued. Fortunes were lost in a heartbeat. The stock market crash had started and all other stocks prices were obliterated, as well. Isaac Newton lost over 20,000 pounds of his fortune. As a result of this crisis, he stated “I can calculate the motions of heavenly bodies, but not the madness of people”. Jonathan Swift, who also lost a fortune, was inspired to write Gulliver’s Travels, which is a satire about British society. The British government avoided a banking crisis due to its standing as the financial powerhouse of the world. The government worked to stabilize the banking industry. The issuing of shares was outlawed to prevent any future bubbles. This law was in effect until 1825. Despite all of the efforts of the government, Britain’s economy was in shambles. The economy didn’t fully recover until one century later. Several generations were adversely affected by the stock market crash. The corporate management con artists fled to other countries with their fortunes.
Every bubble and market crash has the same important elements. Greed and unrealistic expectations will continue to foul people’s judgment as it always has.

Financial Crisis History ( Tulip Bulb Mania )

Tulip Bulb Mania
Could a mere tulip bulb be worth $76,000? It is if people are willing to pay for it! It may sound preposterous, but this is exactly what happened in Holland in the 1630’s.
The seeds of this craze were planted in 1593. A man by the name of Conrad Guestner imported the first tulip bulb into Holland from Constantinople, in present day Turkey. After a few years, tulip bulbs became a status symbol and a novelty for the rich and famous. Eventually, tulip bulbs became a hot ticket item in neighboring Germany, as well. After some time, a few tulip bulbs contracted a non-harmful plant virus called mosaic. The effects of this mosaic virus were tulip petals with beautiful “flames” of color. This unique effect furthermore increased the value of the already rare and highly exclusive tulip bulb.
Initially, only the true connoisseurs bought tulip bulbs, but the rapidly rising price quickly attracted speculators looking to profit. It didn’t take long before the tulip bulbs were traded on local market exchanges, which were not unlike today’s stock exchanges. By 1634, tulip mania had feverishly spread to the Dutch middle class. Pretty soon everybody was dealing in tulip bulbs, looking to make a quick fortune. The majority of the tulip bulb buyers had no intentions of even planting these bulbs! The name of the game was to buy low and sell high, just like in any other market. The whole Dutch nation was caught in a sweeping mania, as people traded in their land, livestock, farms and life savings all to acquire 1 single tulip bulb!
In less than one month, the price of tulip bulbs went up twenty-fold! To put that into perspective, if you had invested $1,000 and came back on month later, your investment would have ballooned to $20,000! Now you can understand the mad rush to buy tulip bulbs at any cost. Tulip bulb mania affected the public psyche to an extreme. One drunk man in a bar started peeling and eating what he thought was an onion, while it was in fact it was the bar owner's tulip bulb on display. This man was jailed for many months!
All common sense and logic was thrown to the wind, and even scoffed at. This is exemplified by how many USEFUL items it cost to buy 1 single tulip bulb:
• four tons of wheat• eight tons of rye• one bed• four oxen• eight pigs• 12 sheep• one suit of clothes• two casks of wine• four tons of beer• two tons of butter• 1,000 pounds of cheese• one silver drinking cup.
Mind you, these valuable items COMBINED only equaled the value of 1 tulip bulb! The modern day value of these items is over $40,000!
In 1636, tulips were trading hands on the Amsterdam stock exchange as well as on exchanges in Rotterdam, Harlem, Levytown, Horne and many other exchanges in other nearby European countries. These exchanges started to offer option contracts to speculators. These option contracts allowed tulip bulbs to be speculated upon for a fraction of the price of a real tulip bulb. This allowed people of lower means to speculate in the tulip market. Additionally, options allowed for leverage. Due to leverage, option buyers were able to control larger amounts of tulip bulbs, allowing a greater profit. In a previous example, we showed how a $1,000 dollar investment would have yielded $20,000 in one month. As if this weren’t enough, option leverage allowed this same investment of $1,000 to balloon into $100,000! Unfortunately, leverage is a double-edged sword. If the tulip bulb price moved downwards ever so slightly, the option buyer’s investment would be lost and they might even owe money! Talk about risky. But at this point, it was commonly believed that the tulip market was immune to crashing and that it would “always go up”.
After some time, the Dutch government started to develop regulation to help control the tulip craze. It was at this point that a few informed speculators started liquidating their tulips bulbs and contracts. It was these people, or the smart money, that secured large profits that were now in the form of cold hard cash. In addition, more tulip bulbs were added to the supply due to people harvesting new tulip bulbs. Suddenly tulip bulbs weren’t as quite as rare as before. The tulip market began a slight down trend, but shortly after started to plummet much faster than prices went up. Suddenly the market began a widespread panic when everyone started realizing that tulips were not worth the prices people were paying for them. In less than 6 weeks, tulip prices crashed by over 90%. Fortunes were lost. Wealthy became paupers. Bankruptcies were everywhere due to the negative side of option leverage. People that traded in farms and live savings for a tulip bulb were left holding a worthless plant seed. Many defaults occurred, where speculators couldn’t pay off their debts.
The Dutch government avoided intervening, only to advise tulip speculators and owners to form a council to attempt to stabilize prices and mend public confidence. Every one of these plans failed miserably, as tulip prices plummeted even lower than before.
Assembled deputies of Amsterdam nullified all of the contracts purchased at the height of the mania. The supreme judges of Amsterdam declared all tulip speculation to be gambling, and refused to honor these contracts. As a result, payments were not enforced by any of Holland’s courts. This further fueled the market crash.
The financial devastation that followed the tulip bulb crash lasted for decades, crippling Dutch commerce. The price of tulips at the height of the mania was $76,000; 6 weeks later they were valued at less than one dollar! The only people who prospered from the insanity were the smart money who liquidated at the top.
In market manias, the investors are acting irrationally. Excessive greed causes people to feel financially invincible and make decisions that cause financial devastation. This process occurs regardless of if the market is a commodity market or a paper market like stocks. The moral is clear; the only way to survive is to be the smart money.