WEBVTT - This Is What All Great Stock Market Bubbles And Crashes Have in Common 0:00:09.039 --> 0:00:12.760 Hello, and welcome to another episode of the ad Thoughts Podcast. 0:00:12.800 --> 0:00:17.439 I'm Tracy Alloway and I'm Joe wisent. Joe. I am very, 0:00:17.560 --> 0:00:20.880 very excited about this episode because we are about to 0:00:20.920 --> 0:00:25.560 embark on our second series here at Odd Lots. Our 0:00:25.640 --> 0:00:31.680 first series was about financial crime and financial Shenanigan's right. Yeah, 0:00:31.760 --> 0:00:34.319 it was great. You must remember it wasn't that long ago. 0:00:34.400 --> 0:00:36.400 No no, no, no no, I no, I'm playing. Don't I 0:00:36.440 --> 0:00:39.320 do remember it? It It was very fun um and I'm 0:00:39.360 --> 0:00:43.640 excited about our new series. Yeah. So, in our grand 0:00:43.680 --> 0:00:47.839 tradition I guess of dealing in the worst of human character, 0:00:48.080 --> 0:00:50.920 we are going to be all about fear and greed 0:00:51.400 --> 0:00:54.480 in our next series. We're gonna be talking about bubbles. 0:00:54.960 --> 0:00:57.440 This is gonna be a great I'm really excited. Let's 0:00:57.440 --> 0:00:59.680 just be honest. Bubbles are when markets are at the 0:00:59.720 --> 0:01:02.560 most fun. I mean, there may be markets at their worst, 0:01:02.920 --> 0:01:07.040 but when markets are just trading on pure emotion, fear 0:01:07.160 --> 0:01:12.360 and greed, totally divorced from fundamentals. Panic, everyone wanted to 0:01:12.360 --> 0:01:15.319 get rich. It's hard to argue that that isn't when 0:01:15.319 --> 0:01:18.440 markets are there at their most interesting. No, I totally agree, 0:01:18.440 --> 0:01:19.920 and you hit the nail on the head, because if 0:01:19.959 --> 0:01:24.319 you think markets are reflection of human emotions and human nature, 0:01:24.760 --> 0:01:28.679 then the extremes are probably the most interesting facets of that. 0:01:28.800 --> 0:01:30.640 And I mean, I have to say the other thing 0:01:30.760 --> 0:01:33.120 about bubbles, and I think the real reason that everyone 0:01:33.280 --> 0:01:37.000 is always perpetually fascinated with them is that you can 0:01:37.160 --> 0:01:40.240 get rich during the bubble if you can time it 0:01:40.280 --> 0:01:43.160 perfectly right. And who doesn't want to get rich? So 0:01:43.200 --> 0:01:46.760 what bubble are we starting with? Are we starting with today? 0:01:46.800 --> 0:01:50.200 All right? We're going to start out with the quintessential bubble, 0:01:50.560 --> 0:01:53.800 in my opinion, um, and that has to be the 0:01:54.160 --> 0:01:58.520 sort of nineteen twenties stock bubble and the subsequent crash. 0:01:58.600 --> 0:02:01.160 And we're also going to be discussed saying some other 0:02:01.400 --> 0:02:04.320 stock market bubbles that happened along the way, including of 0:02:04.360 --> 0:02:09.040 course seven and we might even get to two thousand seven, 0:02:09.080 --> 0:02:12.320 two eight. I can't wait. I mean, obviously there's bubbles 0:02:12.320 --> 0:02:15.040 in many things, in many things. We've had some episodes 0:02:15.040 --> 0:02:19.400 in fact about bubbles, including beanie babies and catfish and 0:02:19.480 --> 0:02:22.440 probably some others. But I do think that when people 0:02:22.480 --> 0:02:25.560 think bubble, they probably first think stock market bubbles. So 0:02:25.600 --> 0:02:27.480 I think, you know, the sort of some of the 0:02:27.560 --> 0:02:29.920 history of the big ones in the United States is 0:02:29.919 --> 0:02:34.480 a great way to start. We're starting out very very classical, alright. 0:02:34.520 --> 0:02:38.320 So here with us to talk about various stock bubbles 0:02:38.560 --> 0:02:41.920 is Scott Nations. Uh. He is the author of a 0:02:42.360 --> 0:02:46.280 book called A History of the United States in five crashes, 0:02:46.360 --> 0:02:49.960 stock market meltdowns that defined a nation. I actually know 0:02:50.120 --> 0:02:53.720 him from his other job, which is president of Nations Shares. 0:02:53.919 --> 0:02:56.680 It's a company that's been building a lot of indexes, 0:02:56.760 --> 0:03:00.919 including some interesting volatility indexes, so we might even ask 0:03:01.000 --> 0:03:13.800 him about those later in the show as well. Scott, 0:03:14.040 --> 0:03:16.400 thanks so much for coming on. It's great to be here. 0:03:17.040 --> 0:03:19.680 So Scott, you know your book I think is probably 0:03:19.720 --> 0:03:24.040 the perfect one for us to begin this series. But 0:03:24.200 --> 0:03:26.600 just to set the scene for us, I want to 0:03:26.639 --> 0:03:32.920 start with crash. If you could pinpoint one thing that 0:03:33.120 --> 0:03:37.040 sort of sparked the euphoria that led to that initial 0:03:37.160 --> 0:03:40.520 nine twenties stock bubble, what would it be. It would 0:03:40.560 --> 0:03:43.160 have to be a friendship. And I know that sounds goofy, 0:03:43.200 --> 0:03:45.560 but it was a friendship between the head of the 0:03:45.600 --> 0:03:49.760 Federal Reserve Bank in New York and the governor of 0:03:49.800 --> 0:03:53.320 the Bank of England, and these two wonderful guys, Montague 0:03:53.360 --> 0:03:57.960 Norman and Benjamin Strong had a wonderful friendship, and they 0:03:58.000 --> 0:04:00.040 were trying to help each other, and in doing so, 0:04:00.200 --> 0:04:05.120 Benjamin Strong kept interest rates in the United States ridiculously low. 0:04:05.240 --> 0:04:07.160 It's not the first time the Fed has done that, 0:04:07.800 --> 0:04:10.800 but he kept interest rates in the United States ridiculously low, 0:04:10.960 --> 0:04:14.080 even lower than they had been during the emergency level 0:04:14.080 --> 0:04:17.839 of World War One. And that is really what fed 0:04:17.880 --> 0:04:21.880 the bubble that became the nineteen twenties and then ultimately 0:04:21.960 --> 0:04:25.440 the nineteen nine crash. And it's it's easy to think 0:04:25.440 --> 0:04:30.320 about these crashes in numbers, but their dramas. Each of 0:04:30.360 --> 0:04:32.000 them is a drama. Each one of them is a 0:04:32.040 --> 0:04:35.720 fascinating drama. And in nine it's a little bit like 0:04:35.760 --> 0:04:38.320 the story of the Titanic. We know how it ends, 0:04:38.400 --> 0:04:43.000 and it ends badly, but it's a fascinating story. I 0:04:43.040 --> 0:04:45.440 don't want to skip ahead to another bubble, so I'm 0:04:45.480 --> 0:04:48.000 not going to. But in when when I've read about 0:04:48.000 --> 0:04:52.560 the nineteen twenties, something that struck me was, you know, 0:04:52.880 --> 0:04:56.200 analogies to the late nineties bubble, because in addition to 0:04:56.240 --> 0:04:59.280 the good financial conditions you characterized, there were a lot 0:04:59.320 --> 0:05:03.719 of genuine, the genuine reasons to be excited about things. 0:05:03.760 --> 0:05:07.120 It was peace, There was the increasing wide spreadness of 0:05:07.160 --> 0:05:12.680 the automobile, the radio, the new communications technology was taking off. 0:05:13.040 --> 0:05:16.000 But there was just a all kinds of non financial 0:05:16.000 --> 0:05:19.440 reasons for people to start start to get excited. Absolutely 0:05:19.640 --> 0:05:22.520 all of Europe had been devastated by World War One. 0:05:23.320 --> 0:05:28.680 The American industrial base had been untouched. People were buying automobiles. 0:05:28.760 --> 0:05:32.520 There was another invention, relatively new invention that everybody had 0:05:32.560 --> 0:05:35.719 to have. It was the radio. Our ci a Radio 0:05:35.800 --> 0:05:39.239 Corporation of America started the decade as a two dollar 0:05:39.360 --> 0:05:42.919 stock and after splits it into the decade while almost 0:05:42.920 --> 0:05:46.800 into the decade at about five seventy dollars, So you're 0:05:46.839 --> 0:05:50.640 absolutely right. Everybody felt great about America and America's place 0:05:50.680 --> 0:05:54.440 in the world. Interest rates were low. The Treasury had 0:05:54.480 --> 0:05:58.120 also made the country a country of investors by selling 0:05:58.160 --> 0:06:02.799 them war bonds, and that bled into them buying stocks 0:06:02.800 --> 0:06:05.679 once the war was over. So you have this mix 0:06:05.680 --> 0:06:10.320 of low interest rates, relatively positive economic growth, a lot 0:06:10.360 --> 0:06:15.640 of optimism about the future of fairly steady geopolitical landscape. 0:06:15.960 --> 0:06:19.360 When did the wheels start to come off and what 0:06:19.400 --> 0:06:24.039 were the signs that trouble was potentially ahead. Unfortunately, in 0:06:24.120 --> 0:06:28.520 nine we really didn't get any clues until very late 0:06:28.600 --> 0:06:31.760 in the game. There were certainly some people that were worried, 0:06:32.520 --> 0:06:36.440 but it wasn't really until September of nineteen nine that 0:06:36.520 --> 0:06:40.280 people started to worry and and and talk about their 0:06:40.320 --> 0:06:43.919 worry out loud. The striking thing about each of the 0:06:43.960 --> 0:06:46.800 five crashes that I talked about is that each has 0:06:46.839 --> 0:06:50.560 a catalyst that has very little to do often very 0:06:50.600 --> 0:06:54.359 little or nothing to do with finance. And it had 0:06:54.400 --> 0:06:56.360 a little to do with finance. There was a fraud 0:06:56.400 --> 0:06:59.960 ster in London by the name of Clarence Hatchery who 0:07:00.440 --> 0:07:05.479 uh simply started counterfeiting stock certificates and in a day 0:07:05.480 --> 0:07:10.040 when everything was on paper, he managed to completely undermine 0:07:10.160 --> 0:07:13.080 the stock market. And he wasn't found out until September 0:07:13.120 --> 0:07:18.040 of nine, and that's when the wheels tracing your in 0:07:18.040 --> 0:07:21.320 your phrase really started coming off. One thing I like 0:07:21.440 --> 0:07:25.680 about crashes is it really is, I think impossible to 0:07:25.880 --> 0:07:28.480 pinpoint what caused the crash because you can point to 0:07:28.560 --> 0:07:32.080 a million things. I know one of the is so minor, 0:07:32.160 --> 0:07:34.400 but I think, uh, one of the things people point 0:07:34.440 --> 0:07:39.520 to was some regulator in Massachusetts preventing a utility company 0:07:39.680 --> 0:07:43.880 stock from splitting, the most minor thing in the world. 0:07:43.960 --> 0:07:47.560 But it freaked out utility investors, pointing to if this 0:07:47.720 --> 0:07:51.160 one minor regulatory body in Massachusetts can freak out investors, 0:07:51.160 --> 0:07:54.200 how fragile the whole edifice. Because you make a great point. 0:07:54.320 --> 0:08:00.480 Until then, this financial regulator had allowed any any utility 0:08:00.480 --> 0:08:03.440 that wanted to split its stock. They had allowed them 0:08:03.520 --> 0:08:06.520 to do so. Uh. They were essentially a rubber stamp. 0:08:06.560 --> 0:08:09.920 But then a utility in Massachusetts came to home and said, 0:08:09.960 --> 0:08:12.560 we'd like to split our stock for for one their 0:08:12.600 --> 0:08:16.560 reason was because it's the fashion of the day. No 0:08:16.600 --> 0:08:18.720 more reason than that, it's the fashion of the day. 0:08:18.760 --> 0:08:21.360 And finally the regulator had had enough and they said, nope, 0:08:21.720 --> 0:08:26.720 your stock is already trading much higher than any intrinsic value. 0:08:27.080 --> 0:08:29.400 If we allow you to split, it will get even worse. 0:08:29.800 --> 0:08:31.680 And this is our line in the sand. And was 0:08:31.760 --> 0:08:34.839 finally somebody who had said, somebody, an authority who had 0:08:34.880 --> 0:08:37.800 said this is not right and this needs to stop. 0:08:37.920 --> 0:08:41.720 I love the idea that maybe a regulator in Massachusetts 0:08:41.720 --> 0:08:45.800 of utility companies could possibly be responsible for the stock 0:08:45.880 --> 0:08:49.319 market crash on the subsequent create depression. Well, they they 0:08:49.360 --> 0:08:52.440 certainly helped. They certainly helped things on their way. Okay, 0:08:52.480 --> 0:08:56.640 so you get these sort of idiosyncratic things happening and 0:08:56.679 --> 0:09:00.680 people start to get a little bit nervous and stocks, uh, 0:09:00.720 --> 0:09:04.600 I guess they really start coming down on Black Tuesday, right, 0:09:04.640 --> 0:09:07.000 I always got it mixed up with Black Thursday. But 0:09:07.040 --> 0:09:10.360 Black Tuesday was the first big drop, is that right? Well, 0:09:10.360 --> 0:09:13.520 there were two, there were two nearly identical drops. They 0:09:13.800 --> 0:09:17.200 and the twenty nine that it actually started just after 0:09:17.320 --> 0:09:20.760 Labor Day, that was the day after Labor Day was 0:09:20.960 --> 0:09:24.280 the peak of the market. But you're right, the twenty 0:09:24.360 --> 0:09:27.559 ninth of October when the market both of those days, 0:09:27.600 --> 0:09:29.280 the market was down about twelve and a half or 0:09:31.000 --> 0:09:34.000 that's when it that's when it really really really got bad. 0:09:35.120 --> 0:09:38.240 So how do people how are people reacting in that 0:09:38.280 --> 0:09:42.560 time period, because whenever we see stocks drop nowadays, you know, 0:09:42.600 --> 0:09:45.600 we always get the chorus of people talking about how 0:09:45.640 --> 0:09:49.440 this is a healthy correction, to use the cliche. I 0:09:49.480 --> 0:09:54.160 wonder if the same thing happened in I don't think 0:09:54.200 --> 0:09:57.640 people understood, well, certainly people didn't recognize what the nineteen 0:09:57.720 --> 0:09:59.600 thirties were gonna look like and there's no way they 0:09:59.640 --> 0:10:01.880 could a I think what they were doing was they 0:10:01.880 --> 0:10:04.080 were looking back to what had happened in nineteen o seven. 0:10:04.120 --> 0:10:06.360 The panic of nineteen o seven is the first crash 0:10:06.400 --> 0:10:09.040 I talked about, and that was a panic, and each 0:10:09.040 --> 0:10:11.760 of the each of the crashes have heroes and villains. 0:10:12.280 --> 0:10:15.520 The hero in nineteen o seven was undeniably JP Morgan, 0:10:15.600 --> 0:10:18.040 and I mean the man, not the bank, because he 0:10:18.240 --> 0:10:22.120 nearly single handedly stopped the crash. Well. In nineteen there 0:10:22.200 --> 0:10:24.480 were a bunch of financiers who thought that they could 0:10:24.520 --> 0:10:27.440 be the modern day JP Morgan, and they tried to 0:10:27.480 --> 0:10:30.400 do that. They tried to step in, raise some capital, 0:10:30.640 --> 0:10:33.960 buy some stocks, and so I think that for most 0:10:34.120 --> 0:10:39.720 of October of nine, I think most people thought this 0:10:39.840 --> 0:10:42.559 is bad, but it will stop and then we'll go 0:10:42.600 --> 0:10:45.040 back up and it will be like every other break 0:10:45.280 --> 0:10:48.040 that we've had in the market. They didn't realize that 0:10:48.240 --> 0:10:50.360 they were going to end up making things worse than 0:10:50.400 --> 0:10:51.960 it was going to get. As bad as it did, 0:10:52.520 --> 0:10:54.520 I feel like we could actually probably just do the 0:10:54.559 --> 0:10:59.400 whole episode one because it's so rich and we should 0:10:59.400 --> 0:11:02.200 move on to and one other right nugget I really 0:11:02.240 --> 0:11:04.360 like from it I remember during the two thousand and 0:11:04.360 --> 0:11:06.839 eight crash. You know, there was that famous um Warren 0:11:06.880 --> 0:11:09.040 Buffett up ed in the New York Times. I think 0:11:09.040 --> 0:11:11.400 he's like, buy stocks. I know I am. And there 0:11:11.440 --> 0:11:14.920 was something similar. John Rockefeller had did a similar thing. 0:11:14.960 --> 0:11:16.880 He sort of came out of seclusion. He's like, I'm 0:11:16.920 --> 0:11:19.400 buying American shares. It's a good it's a good deal. 0:11:19.600 --> 0:11:22.560 Like all these attempts by the sort of business legends 0:11:22.559 --> 0:11:25.800 to just instill confidence with their words alone. Well, John D. 0:11:25.920 --> 0:11:29.760 Rockefeller in nine said my son and I are buying stocks. 0:11:30.320 --> 0:11:33.920 And he at the time he mentioned some outlandish number 0:11:34.000 --> 0:11:37.959 he had spent, a number that only Jape that that 0:11:38.120 --> 0:11:41.920 Rockefeller could spend. But for the most part, people weren't 0:11:41.960 --> 0:11:47.480 really afraid in a way that that Rockefeller could could calm. 0:11:47.520 --> 0:11:50.520 I mean they were, they were They ultimately were really afraid. 0:11:50.559 --> 0:11:52.880 They were afraid that they were gonna lose everything. Yeah, 0:11:52.960 --> 0:11:55.280 And it's funny we still see that happening. I mean 0:11:55.320 --> 0:11:57.200 all the way up to two thousand and eight, when 0:11:57.320 --> 0:12:00.400 Warren Buffett came in and invested in Goldman Sack Shares, 0:12:00.480 --> 0:12:03.800 a right in the middle of the banking crisis. I 0:12:03.840 --> 0:12:06.200 have a feeling that Joe wants to move on to 0:12:06.600 --> 0:12:10.120 a later stock market bubble and crash, and that would 0:12:10.160 --> 0:12:14.480 be the events of night seven. That sounds good, Let's 0:12:14.480 --> 0:12:20.400 talk about eight seven. Um, you know, uh, Well, it's 0:12:20.440 --> 0:12:23.520 interesting because we hear so much about quants these days, 0:12:23.559 --> 0:12:25.960 and people are sort of nervous that the quant machine 0:12:26.559 --> 0:12:29.160 are going to malfunction. We're gonna get this like wave 0:12:29.280 --> 0:12:33.040 of uncontrollable selling from computers and everything's gonna melt down. 0:12:34.480 --> 0:12:38.480 Seven was kind of a precursor to these fears. It's 0:12:38.520 --> 0:12:41.720 interesting there. The five crashes that I discussed pan more. 0:12:42.440 --> 0:12:46.800 They span more than a century, but each one is 0:12:47.040 --> 0:12:50.439 abetted by some sort of I call and financial contraption 0:12:51.240 --> 0:12:54.839 that is new, it's novel, it's poorly understood, and it's 0:12:54.920 --> 0:13:00.000 untested under stress. And in seven, probably the prototypical contract 0:13:00.000 --> 0:13:04.280 option was portfolio insurance. It seemed like a like an 0:13:04.400 --> 0:13:08.079 ingenious invention by a couple of academics at cal Berkeley, 0:13:08.200 --> 0:13:10.920 and it was a way they way they expressed it 0:13:10.960 --> 0:13:15.600 as a way for investors, institutional investors to make certain 0:13:15.600 --> 0:13:19.720 that their stock portfolio never fell below a certain value. 0:13:19.760 --> 0:13:23.920 It required regular regimented selling of stocks as they fell. 0:13:24.600 --> 0:13:27.360 The problem is that we and we know now we 0:13:27.400 --> 0:13:31.120 should have known then that when we demand liquidity is 0:13:31.160 --> 0:13:36.760 when it evaporates. And that's what happened. It was the typical, prototypical, 0:13:36.840 --> 0:13:40.319 really financial contraption. The interesting thing is that in the 0:13:40.360 --> 0:13:46.320 worst of the crash, of the guys that had created 0:13:46.360 --> 0:13:50.520 this Leland, O'Brien and Rubinstein were running a business that 0:13:50.520 --> 0:13:55.640 would sell futures to affect this insurance, and their trader, 0:13:55.760 --> 0:14:01.520 at one point on October seven, refused to sell anymore futures. 0:14:01.559 --> 0:14:04.480 His quote was, if I sell all the futures that 0:14:04.600 --> 0:14:07.720 I'm supposed to, I'm certain I will drive the market 0:14:07.800 --> 0:14:12.120 to zero. Wow. So did he save the world. Well, 0:14:12.120 --> 0:14:14.400 I'm not sorry he saved the world, but he he 0:14:14.679 --> 0:14:18.120 helped stop the bleeding. If somebody saved the world, it 0:14:18.200 --> 0:14:21.240 might it might have been Alan Greenspan the next morning 0:14:21.280 --> 0:14:26.680 with a wonderfully terse um comment that consistent with its 0:14:27.040 --> 0:14:29.440 position is the Central Bank, the FED is ready to 0:14:29.600 --> 0:14:33.800 essentially give anybody anything they want. And then the Federal 0:14:33.840 --> 0:14:37.040 Reserve got on the line with banks and said we'll 0:14:37.080 --> 0:14:40.600 give you anything you want. Now I don't I'm worried 0:14:40.640 --> 0:14:43.000 we're cheating a little bit here because we talked about 0:14:43.040 --> 0:14:47.840 the crash of but this is the bubble series. Was 0:14:47.920 --> 0:14:52.120 their exuberance? What was the pre October seven vibe in 0:14:52.160 --> 0:14:55.560 the market where people are just thinking that things would 0:14:55.560 --> 0:14:58.280 just go straight up? Exuberance doesn't even begin to cover it. 0:14:58.800 --> 0:15:02.680 The first thirteen days, the doll did something it had 0:15:02.720 --> 0:15:04.560 never done before and it has never done since. It 0:15:04.600 --> 0:15:07.840 gained thirteen straight days in a row. At the market's 0:15:07.880 --> 0:15:11.200 top in August, it was up forty three for the year. 0:15:11.600 --> 0:15:13.400 I think that would have made it the sixth or 0:15:13.440 --> 0:15:16.200 the eighth best year ever if it could have just 0:15:16.280 --> 0:15:19.760 held onto that. So exuberance doesn't even begin to describe it. 0:15:20.280 --> 0:15:23.080 Much of it was a function of corporate raiders who 0:15:23.120 --> 0:15:28.600 had started to recognize the unrecognized value previously unrecognized value 0:15:28.600 --> 0:15:30.600 and a lot of stocks, and they were buying them up. 0:15:31.000 --> 0:15:33.520 And so we gotten into a situation where everybody felt 0:15:33.560 --> 0:15:36.800 like they could buy a stock confident that some raider 0:15:36.840 --> 0:15:39.600 would come along and bid it even higher. Yeah. Really, 0:15:39.680 --> 0:15:44.320 the era of greed is good. To Joe's earlier point, 0:15:44.680 --> 0:15:47.200 I'm wondering, you know, nowadays we talk a lot about 0:15:47.200 --> 0:15:50.840 the potential for quant funds or systematic funds or risk 0:15:50.920 --> 0:15:54.040 parity funds to spark a broad sell off in the 0:15:54.160 --> 0:16:00.040 style of portfolio insurance in the eighties. Was anyone talking 0:16:00.080 --> 0:16:03.040 about the risks of portfolio insurance or you know, the 0:16:03.120 --> 0:16:06.840 downsides of black shoals before it actually happened. Even the 0:16:06.880 --> 0:16:11.640 inventors of portfolio insurance realized that it had some limitations 0:16:11.880 --> 0:16:14.040 when they go into when they went into sales meetings, 0:16:14.040 --> 0:16:17.720 they would say that this will work until something like 0:16:17.800 --> 0:16:21.200 in the analogy they used was the Soviets invade Iran. 0:16:22.120 --> 0:16:24.040 There were some other people who were talking about it, 0:16:24.120 --> 0:16:26.560 but you really had to be pretty geeky in order 0:16:26.600 --> 0:16:30.160 to have gotten that message. It was actually precisely a 0:16:30.160 --> 0:16:33.400 week before the crash that an article appeared in the 0:16:33.440 --> 0:16:38.600 Wall Street Journal by Beatrice Garcia that really introduced people 0:16:38.640 --> 0:16:44.440 to the fear of portfolio insurance. Alright, I want to 0:16:44.560 --> 0:16:48.200 uh skip ahead to actually what I think is. I 0:16:48.240 --> 0:16:50.560 don't know if it's my favorite crash, but it's the 0:16:50.560 --> 0:16:52.640 one that I feel like I know the best because 0:16:52.880 --> 0:16:54.640 I sort of came of age during it, and that 0:16:54.800 --> 0:16:58.560 is the late nineties bubble. As a student in high school. 0:16:59.000 --> 0:17:01.440 I got really tessed with the market then and I 0:17:01.480 --> 0:17:04.240 think it is a good chance that due to that 0:17:04.320 --> 0:17:06.920 timing is the reason I'm in financial media today because 0:17:06.920 --> 0:17:10.920 I just found the whole thing, uh fascinating. What in 0:17:10.960 --> 0:17:14.440 your when did that bubble start? In your view, that's 0:17:14.440 --> 0:17:17.359 a great question. Once I don't talk about what happened 0:17:17.400 --> 0:17:19.879 in two thousand, two thousand, two thousand and two in 0:17:19.920 --> 0:17:22.040 my book. I don't consider that quite a crash. It 0:17:22.640 --> 0:17:27.080 took place over actually several years. It had several down legs, 0:17:27.240 --> 0:17:29.760 first of all, starting in March up two thousand and 0:17:29.760 --> 0:17:34.280 then with nine eleven. Uh. But when did when did 0:17:34.320 --> 0:17:38.320 the bubble of of the es start? I think it 0:17:38.400 --> 0:17:41.639 would have to I look at it as something that 0:17:41.760 --> 0:17:45.600 started with the the Apple Super Bowl ad that ran 0:17:45.720 --> 0:17:49.360 one time, because that really started to put the personal 0:17:49.359 --> 0:17:53.719 computer and personal technology front and center in people's thinking. 0:17:54.160 --> 0:17:58.480 And that's I think when that market really started taking off. 0:17:59.720 --> 0:18:04.880 I've conceptual question, which is, uh, you know, after bubbles burst, 0:18:05.320 --> 0:18:08.800 we always talk about the pricing is having been irrational, 0:18:09.400 --> 0:18:13.440 But the run up to all these bubbles actually often 0:18:14.119 --> 0:18:18.840 has a rational explanation. There's usually a narrative to accompany it, right, Oh, yeah, 0:18:18.840 --> 0:18:25.440 there's always an explanation. Unfortunately, So in terms of those explanations, 0:18:25.480 --> 0:18:28.320 I mean, what is it about human nature that we 0:18:28.440 --> 0:18:32.360 always buy into those explanations and we're never more skeptical 0:18:32.600 --> 0:18:36.080 of the story that we're hearing. It's a phrase that 0:18:36.119 --> 0:18:40.280 we've used before, and the phrases it's different this time. 0:18:40.359 --> 0:18:44.560 It is so easy to convince ourselves that it is 0:18:44.640 --> 0:18:50.520 different this time in we had not really seen we've 0:18:50.560 --> 0:18:55.720 seen a single modern stock market crash in nine seven. 0:18:56.440 --> 0:18:59.119 In seven, it had been so long since we've had 0:18:59.119 --> 0:19:03.040 a crash fifty years that I think people just forgot 0:19:03.080 --> 0:19:05.000 that they could happen, and they thought we are much 0:19:05.080 --> 0:19:09.919 more sophisticated, much smarter now than we were then. I 0:19:09.960 --> 0:19:13.280 think it's just the hubrists of humankind where we just 0:19:13.359 --> 0:19:16.639 think we're smarter and it's different this time. I have 0:19:16.680 --> 0:19:21.120 another human nature question, and it concerns the post crisis period, 0:19:21.640 --> 0:19:25.000 because since two thousand and nine, we've essentially been in 0:19:25.040 --> 0:19:28.960 this NonStop bowl market. Uh, there's been a few blips 0:19:28.960 --> 0:19:33.600 along the way. That being said, throughout this rally, numerous 0:19:33.600 --> 0:19:35.960 people have been talking about bubbles or the crash is 0:19:35.960 --> 0:19:39.359 going to come back anytime soon, and so in a way, 0:19:39.680 --> 0:19:42.800 rather than this period being characterized as care freeness are 0:19:42.840 --> 0:19:46.160 buying into a new story. There's been this underlying deep 0:19:46.200 --> 0:19:49.320 pessimism that's prevented a lot of people from actually participating 0:19:49.320 --> 0:19:52.440 in this rally, and this belief that the next two 0:19:52.440 --> 0:19:55.160 thousand and eight could happen any minute from now. Well, 0:19:55.200 --> 0:19:57.479 and a lot of those people have something that they 0:19:57.600 --> 0:19:59.560 want to sell, and they want to sell you a 0:19:59.600 --> 0:20:01.919 news utter. They think that you should be buying gold 0:20:02.000 --> 0:20:04.440 or whatever. But I think you make a great point, 0:20:04.480 --> 0:20:07.000 and that is, if there's so much skepticism, it's hard 0:20:07.040 --> 0:20:09.440 to think that we're going to have a crash. Now 0:20:09.480 --> 0:20:12.480 we know the market can pull back substantially. Nobody is 0:20:12.520 --> 0:20:15.960 saying that it can't. But with interest rates as low 0:20:16.000 --> 0:20:18.800 as they are, if interest rates would go substantially higher 0:20:18.840 --> 0:20:21.639 over the next couple of years, uh, in, the market 0:20:21.680 --> 0:20:23.760 could very well be in trouble. But I I just 0:20:23.800 --> 0:20:26.320 think that you're absolutely right. There's so much skepticism that 0:20:26.359 --> 0:20:28.120 it's tough to think we're really going to get say, 0:20:28.160 --> 0:20:32.480 bubble shous. There's skepticism. But on the other hand, uh, 0:20:32.560 --> 0:20:35.200 you know, I really like the way city analysts once 0:20:35.240 --> 0:20:38.119 phrased or once characterized a bubble. They said it was 0:20:38.200 --> 0:20:41.359 something that I get fired for not owning. And in 0:20:41.400 --> 0:20:44.239 that sense, you can complain about valuations as much as 0:20:44.280 --> 0:20:46.680 you want, but if you have to invest money, well, 0:20:46.840 --> 0:20:49.359 then you have to put it somewhere other than cash. 0:20:49.400 --> 0:20:52.680 And so it's either going into stocks or credit. Um. 0:20:52.720 --> 0:20:56.359 But Scott to uh, to Joe's point, if there was 0:20:56.560 --> 0:21:01.199 one thing that you could pinpoint as a suspicious sign 0:21:01.480 --> 0:21:04.600 when it comes to identifying a true bubble, what would 0:21:04.640 --> 0:21:08.840 it be? That's a great question. I in my experience, 0:21:08.880 --> 0:21:12.560 in my in my book, I talked about several similarities 0:21:13.480 --> 0:21:17.520 that each of the crashes share. UM. There is there's 0:21:17.600 --> 0:21:21.280 always some new financial contraption. I think that if we 0:21:21.320 --> 0:21:25.480 can see something that is starting to um capture too much, 0:21:26.080 --> 0:21:29.720 too many assets, uh, then that would be a problem. 0:21:30.240 --> 0:21:33.200 Uh it interest rates too low for too long are 0:21:33.240 --> 0:21:37.520 the reason. And then two thousand and eight happened. So 0:21:38.119 --> 0:21:40.320 if you want to look now and say, boy, interest 0:21:40.400 --> 0:21:42.080 rates have been too low for too long, and the 0:21:42.119 --> 0:21:46.080 Federal Reserve seems just terrified of raising Fed funds rate 0:21:46.160 --> 0:21:50.040 past one or of starting to shrink the balance sheet, 0:21:51.040 --> 0:21:53.320 that might be the thing that would scare people right now. 0:21:54.600 --> 0:21:57.359 And as Tracey you mentioned in the beginning. One of 0:21:57.400 --> 0:21:59.920 the really well, let's be honest, one of the cool 0:22:00.040 --> 0:22:02.439 things about bubbles is that you could get rich in 0:22:02.480 --> 0:22:05.200 a really short period of time. And the only thing 0:22:05.240 --> 0:22:07.760 you have to do to get rich during a bubble 0:22:08.560 --> 0:22:11.720 is to sell before everybody else sells. As long as 0:22:11.720 --> 0:22:14.680 you could do that, that bubbles are great. So when 0:22:14.680 --> 0:22:17.160 you look at these crashes and you know, your book 0:22:17.240 --> 0:22:19.840 is a history of the United States and five crashes, 0:22:20.600 --> 0:22:23.920 are there any common themes out there that sort of 0:22:24.160 --> 0:22:27.720 foretell the imminent collapse so that people know to uh, 0:22:27.760 --> 0:22:30.399 you know, get out the door before everybody else does. Well. 0:22:30.440 --> 0:22:33.119 The problem, it's a it's a fascinating question. The problem 0:22:33.160 --> 0:22:35.480 is that and I mentioned these catalysts, and there's always 0:22:35.480 --> 0:22:38.359 a catalyst. The problem is that the time between the 0:22:38.400 --> 0:22:42.440 catalysts and the crash is collapsing. It was a year 0:22:42.480 --> 0:22:45.199 between the catalysts for the nineteen o seven panic and 0:22:45.240 --> 0:22:48.920 the actual panic. Um it was a year. Uh. In nine, 0:22:49.800 --> 0:22:52.320 it was about a month between hatchery and the crash. 0:22:53.000 --> 0:22:56.240 In seven, it seemed the friday before the crash seemed 0:22:56.320 --> 0:22:59.119 like we'd finally gone to war with a ran. So 0:22:59.200 --> 0:23:01.879 that was a weekend and we haven't talked about two 0:23:01.920 --> 0:23:04.320 thousand and tend the flash crash, but the catalyst for 0:23:04.359 --> 0:23:07.160 that happened the day before the crash. So we've gone 0:23:07.200 --> 0:23:09.919 from waiting a year and then a month, and then 0:23:09.960 --> 0:23:13.280 a weekend, and now a day. The problem is as 0:23:13.320 --> 0:23:16.720 the time between the catalysts and the crash collapses, then 0:23:16.760 --> 0:23:20.000 there's less opportunity for people to do what you're suggesting. 0:23:21.080 --> 0:23:24.920 Real quickly, Well, you mentioned the catalyst for flash crash. 0:23:24.960 --> 0:23:27.240 What do you identify that as? Oh? I think it 0:23:27.320 --> 0:23:31.240 was clearly the rioting, arson and murder in the streets 0:23:31.240 --> 0:23:34.720 of Athens on May five, two and ten. It seemed 0:23:34.760 --> 0:23:39.000 just absolutely obvious that that all of the Greeks, all 0:23:39.040 --> 0:23:41.520 of Greek society, was going to come apart, and that 0:23:41.640 --> 0:23:45.679 as a result of the Eurozone was going to come apart. 0:23:45.880 --> 0:23:48.600 It seemed absolutely certain A million people were in the 0:23:48.640 --> 0:23:52.480