All major financial euphoria episodes hold aspects in common. Among our favorite books on investing is John Kenneth Galbraith’s A Short History of Financial Euphoria. More than any other economist, we admire his understanding of the connection between the securities markets and the economy. Galbraith describes a speculative financial euphoria episode this way:1
Some artifact or some development, seemingly new and desirable captures the financial mind. The price of the object of speculation goes up. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.
In Galbraith’s view, the common denominators of speculative episodes are:
Extreme brevity of financial memory.
The specious association of money and intelligence.
Money as the measure of capital achievement. The acquisition of money is difficult. Accordingly, possession must be associated with some special genius.
Something new is in the world. In all speculative episodes, there is always an element of pride in discovering what is seemingly new and greatly rewarding.
Leverage gets attached to stocks and real estate.
They all crash. Galbraith explains: “This, invariably, will be a time of anger and recrimination.”
Are we in a speculative episode?
Investors have forgotten the technology stock crash of 2000-2003. Massive market capitalization is tied up in tech stocks, especially the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google).
Mark Zuckerberg, Jeff Bezos, Tim Cook, Reed Hastings, and Larry Page are considered universally brilliant in the media and have blanketed magazine covers and daily TV coverage.
The high net worth of these executives is associated with genius.
Social media, online commerce, inventive electronic devices and algorithms applied to data mining are everywhere and look like a gold rush.
Commercial/residential property and building projects in tech heavy cities have been leveraged and look legendary. Seattle appears to be a center of this episode (thanks to Amazon) and our tech-based boom is exemplified by this chart which chronicles the issuance of driver’s licenses in King County:2
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