Bubble Economics!

31st of January, 2018

When testifying before Congress Allan Greenspan famously said “Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best.”

How do you spot a bubble while it’s occurring?

It’s a little daunting if the world’s most celebrated central banker says it’s very difficult if not near impossible to do.

But you need to remember that Greenspan is the King of Bubble Economics as William A. Fleckenstein wrote in his book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, “Greenspan bailed out the world’s largest equity bubble with the world’s largest real estate bubble.”

You see in the above quote from the Bubble King himself, he refers to “hundreds of thousands of informed investors”.

But informed investors can act in the most irrationally exuberant manner.

So here are just a few recent examples of how ridiculous the actions of hundreds of thousands of informed investors can be.

 

Last Drinks

How does an unprofitable Hicksville based company that sells non-alcoholic, Long Island Iced Tea beverages ramp its shares up as much as 289%?

Easy, rebrand itself within the Blockchain industry by changing its name to Long Blockchain. Yep I’m serious – as part of a broader shift in corporate strategy the beverage company recently shouted, “lasts drinks” and is now “focused on developing and investing in globally scalable blockchain technology solutions….”

The company proudly says its in the “preliminary stages of evaluating specific opportunities involving blockchain technology.” (my emphasis)

The question must be asked – what right does a beverage company have in mutating into a blockchain business in the first place?

A new Kodak moment – KODAKCoin

Shares of Eastman Kodak surged nearly 150% after the once trailblazer of the photography industry leapt onto the cryptocurrency bandwagon.

According to its website “KODAKCoin allows participating photographers to take part in a new economy for photography, receive payment for licensing their work immediately upon sale, and sell their work confidently on a secure blockchain platform.”

Technology devastated Kodak once, it looks like it could happen again!

A $869,257 payday

In a previous life, Riot Blockchain was a struggling biotech company Bioptix. It changed its name and attention to the Blockchain and in response its shares soared 648% between September and December of 2017.

What’s interesting about this story is according to public documents its President, CEO and Chairman Mr John O’Rourke sold 30,383 shares at a weighted average price of about $28.61. That’s a $869,257 payday.

Andrew Left, from Citron Research, believes that Riot is “misrepresenting” the scale of its blockchain-related investments and the stock fell over 30% between 18-22 December.

Riot postponed its December shareholders meeting due to “insufficient participation” and then two days later O’Rourke hit the market with his selling.

I don’t think this will be the last or the worst of questionable behaviour by those involved in this sector….

Conclusion

Block chain technologies, Bitcoin and other crypto currencies are the current flavour of the month. It’s just a repeat of the 2000’s dot.com bubble.

Remember when those “informed investors” rush to buy any old dog that re-branded itself with an internet related prefixe or a “.com” suffix?

BOOM! Up went the price.

The value of the Nasdaq Composite Index, which includes many technology companies, rose from 1000 in July 1996 and peaked above 5100 in March 2000     following the hysteria of the Y2K Bug.

During this boom, IPOs (Initial Public Offering) raised huge amounts of capital, then opened well above their issue price and continued to trade higher, even though they had NEVER made a profit. Often, they never realised any material revenue whatsoever!

In 2000, the Nasdaq Composite Index peaked at 5132, and subsequently fell 78% in the following 30 months.

The more things change, the more they stay the same.

“Same Same. But Different”…..

Let’s get started

If you want to avoid the mistakes of not understanding the dangers of investing without an understanding of the Economic Cycle, then why not have a chat to us about how we can help?

You have nothing to lose except a few minutes of your time and everything to gain.

So… let’s get started.

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