This Is What All Great Stock Market Bubbles And Crashes Have in Common

Tracy Alloway (0:09)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, I am very, very excited about this episode, because we are about to embark on our second series here at Odd Lots.

Joe Weisenthal (0:25)

Our first series was about financial crime and financial shenanigans, right?

Tracy Alloway (0:31)

Yeah, it was great. You must remember it, it wasn't that long ago.

Joe Weisenthal (0:35)

I'm playing dumb, but I do remember it. It was very fun, and I'm excited about our new series.

Tracy Alloway (0:41)

Yeah, so in our grand tradition, I guess, of dealing in the worst of human character, we are going to be all about fear and greed in our next series. We're gonna be talking about bubbles.

Joe Weisenthal (0:54)

This is gonna be great. I'm really excited. Let's just be honest, bubbles are when markets are at the most fun. I mean, there may be markets at their worst, but when markets are just trading on pure emotion, fear and greed, totally divorced from fundamentals, panic, everyone wanting to get rich, it's hard to argue that that isn't when markets are at their most interesting.

Tracy Alloway (1:17)

No, I totally agree. And you hit the nail on the head because if you think markets are a reflection of human emotions and human nature, then the extremes are probably the most interesting facets of that. And I mean, I have to say, the other thing about bubbles, and I think the real reason that everyone is always perpetually fascinated with them is that you can get rich during a bubble if you can time it perfectly, right?

Joe Weisenthal (1:41)

And who doesn't want to get rich? So what bubble are we starting with today?

Tracy Alloway (1:46)

All right, we're gonna start out with the quintessential bubble, in my opinion.

And that has to be the sort of 1920s stock bubble and the subsequent crash. And we're also gonna be discussing some other stock market bubbles that happen along the way, including, of course, 1987 And we might even get to 2007, 2008

Joe Weisenthal (2:10)

I can't wait. I mean, obviously, there's bubbles in many things. We've had some episodes, in fact, about bubbles, including Beanie Babies and Catfish and probably some others.

But I do think that when people think bubble, they probably first think stock market bubbles. So I think some of the history of the big ones in the United States is a great way to start.

Tracy Alloway (2:31)

We're starting out very, very classical. All right, so here with us to talk about various stock bubbles is Scott Nations.

He's the author of a book called A History of The United States in Five Crashes, stock market meltdowns that defined a nation. I actually know him from his other job, which is president of NationsShares. It's a company that's been building a lot of indexes, including some interesting volatility indexes. So we might even ask them about those later in the show as well.

Joe Weisenthal (3:03)

Well.

Tracy Alloway (3:13)

Scott, thanks so much for coming on.

Scott Nations (3:15)

It's great to be here.

Tracy Alloway (3:17)

So Scott, you know, your book, I think, is probably the perfect one for us to begin this series.

But just to set the scene for us, I want to start with the 1929 crash. If you could pinpoint one thing that sort of sparked the euphoria that led to that initial 1920s stock bubble, what would it be?

Scott Nations (3:40)

It would have to be a friendship. And I know that sounds goofy, but it was a friendship between the head of the Federal Reserve Bank in New York and the governor of the Bank of England. And these two wonderful guys, Montague Norman and Benjamin Strong, had a wonderful friendship, and they were trying to help each other. And in doing so, Benjamin Strong kept interest rates in the United States ridiculously low. It's not the first time the Fed has done that, but he kept interest rates in the United States ridiculously low, even lower than they had been during the emergency level of World War I.

And that is really what fed the bubble that became the 1920s and then ultimately the 1929 crash. And it's easy to think about these crashes in numbers, but they're dramas.

Each of them is a drama. Each one of them is a fascinating drama. And in 1929, it's a little bit like the story of the Titanic. We know how it ends, and it ends badly, but it's a fascinating story.

Joe Weisenthal (4:42)

I don't want to skip ahead to another bubble, so I'm not going to, but when I've read about the 1920s, something that struck me was analogies to the late 90s bubble, because in addition to the good financial conditions you characterized, there were a lot of genuine reasons to be excited about things. There was peace, there was the increasing widespreadness of the automobile, the radio, this new communications technology was taking off, but there was just all kinds of non-financial reasons for people to start to get excited.