
Historian finds tech bubble that didn't pop (180 years ago) - terpua
http://arstechnica.com/tech-policy/news/2010/03/historian-finds-tech-bubble-that-didnt-pop-180-years-ago.ars
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jswinghammer
I think this is what happens when you lack a coherent explanation of the
business cycle. If you think that speculation is the issue then things like
this might be interesting. The real question is "Was the speculation funded by
inflation or savings?" If it was funded by savings then failures aren't a
problem. The capital is liquidated and the investors rebuild their savings and
try again doing something. When debt is involved things get a lot worse in a
fractional reserve system. The equity bubble of the 90s was largely fueled by
inflation and the real estate bubble was as well. Both bubbles required
bailouts. See the failure of Long Term Capital Management for more information
on how the equity bubble of the 90s lead to instability.

"America's Great Depression" by Murray Rothbard provides a good introduction
to the Austrian Theory of the Business Cycle with a good historical analysis.
Rothbard also covers alternative explanations of the business cycle. Even if
you don't buy into the theory of the business cycle the book is worth reading
just to learn just how involved in the economy Hoover really was.

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benwalther
Relevant link:

<http://en.wikipedia.org/wiki/Railway_Mania>

It popped all right. The largest players that survived were a sound
investment. But then again, if you invested in Microsoft or Cisco in the tech
boom, you'd be sitting pretty right now (I think; didn't check stock prices).
Doesn't mean that it wasn't a bubble.

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Tuna-Fish
> if you invested in Microsoft or Cisco in the tech boom, you'd be sitting
> pretty right now

No you wouldn't. MSFT sits now at about a 20% discount to what it was in 2000,
while CSCO is trading at about a third of the price it had in early 2000.

This is the defining feature of a bubble -- not only do the bad companies
fetch exorbitant prices (there are plenty of those in any economy), but the
good companies with valid business models also trade at prices that cannot be
justified, meaning that no matter how well you pick the winners, you are still
going to get burnt when the bubble bursts.

There were losers in the british railroad bubble in 1830's, but the ones who
bought into the winners, did get out ahead. Meaning, the bubble never burst.

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Retric
Dell stock from 1990 to now had an _average_ return of ~30% _per year_. You
could have lost money if you bought at the peak but it would have still been
an awesome return over 20 years. So yes it's only worth ~200x you initial
investment now vs. ~800x I don't think anyone who bought in 1990 really cares
all that much. And it’s not just Dell Microsoft did the same thing as did
several others.

PS: From 1990 to now the Nasdaq beat the Dow.

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Tuna-Fish
Yes, dell has awesome returns from 1990 to today. We were not in a bubble in
1990. If you bought into dell between jan 1999 - august 2000, you are still in
the hole by at least 50%, and possibly by up to about 70%. If you bought it at
the peak, you were very badly screwed.

If you bought it in 1990, the correct investment decision would have been to
sell it in late 1999-mid 2000 when it seemed to plateau, and possibly buy back
in to it later. However you look at it, staying long in a bubble is always
irrational. Even if the company performed miraculously before the bubble and
will perform miraculously after it, you can only lose by holding it in the
bubble.

(Of course, this predicates knowing when the sector is in a bubble. Which,
suffice to say, is hard.)

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Retric
There are two definitions of a bubble you can look at the current value and
say the point where the market started to over value the winners at which
point dell, Microsoft, and Cisco where not in a bubble prior to 1997 and it
only lasted around 2-4 years.

Or you can look at the bubble from the point where explosive growth started
around 1998-1990 and died in 2000.

PS: Looking only at winners distorts the picture, so while MSFT was still
undervalued (relative to its current dividend adjusted price) in 1996 there
were also plenty of overvalued stocks in 1996 that tanked.

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mynameishere
Most bubbles are good, just not for the people who buy in at the top. These
tend to be "retail" buyers and so the least able to take the loss. But oh
well.

The recent housing bubble is actually distinguished by its particularly
useless allocation of capital. The tech boom gave us a number of healthy
companies as well as useful infrastructure. The housing bubble gave us a stock
of deteriorating future crack houses.

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jakarta
To say most bubbles are good is incorrect. Bubbles depend on whether they are
equity or credit-based.

Typically, credit bubbles are terrible for economies because they usually
start in one area and spread, infecting the entire economy.

Equity bubbles on the other hand are usually well contained. When the dot com
bubble popped, we didnt have banks collapsing and affecting other businesses.

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btilly
Not so fast. When the equity bubble collapsed we were near deflation, which
the Fed headed off with a generous credit policy that helped fuel the credit
bubble.

If we had gone into deflation then, that would have been bad. (Not as bad as
the cure may yet prove to be, but still bad and not well contained.)

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sethg
Does it make sense, analytically, to say that there was a healthy railway boom
in the 1830s and a bubble in the 1840s? It seems to me that most bubbles grow
from a legitimate investment idea; the problem is that as more and more people
bid for the securities in question, investors have trouble perceiving when the
price has become too high.

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synnik
I've got to believe that any truly revolutionary technology could be spun into
a story of a bubble that "Didn't pop."

The printing press comes to mind as the most obvious example. Literacy
ballooned after it, which led too the entire print medium, which in turn was
necessary before anyone would have thought of electronic text, and the
internet.

I think the key is that when a new underlying technology comes around, it
doesn't pop. The bubbles created from people creative usage of that technology
are what pops.

