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In the long run we know that investing can result in values multiplying over time and potentially providing enough income for investors to live happily ever after. But we also know that over the course of a typical lifetime, there is a good chance of a financial crisis (sometimes related to war) that can threaten people's financial lives. Whether crisis and crashes can be predicted reasonably well in advance is debatable, but it is reasonable to do stress tests and ask how investments and portfolios may be impacted during times of crisis.
There are many very worthwhile books documenting the history of human created bubbles, manias, and crisis including the following.
- Extraordinary Popular Delusions and The Madness of Crowds (first published in 1841 by Charles MacKay)
- Manias, Panics, and Crashes: A History of Financial Crises (first published in 1978 by Charles Kindleberger)
- A Short History of Financial Euphoria (first published in 1990 by John Kenneth Galbraith)
- Devil Take the Hindmost: A History of Financial Speculation (published in 2000 by Edward Chancellor)
The list of manias, bubbles, and crisis includes the following.
- Tulip Mania 1634-1637
- South Sea Bubble 1719-1921
- Mississippi Bubble 1718-1720
- The roaring stock market in the 1920's prior to the Great Depression
- Japanese Stocks 1982-1992
- Technology and internet bubble 1994-2002
- Global Financial Crisis - Financial Stocks Crash 2006-2009
- Bitcoin and cryto-currencies 2014->
Over a decade has passed since the critical events of what has come to be known as the Global Financial Crisis (GFC)...
"I must say I’ve never seen in my life people who on one side are so arrogant in their views, who are total zealots and fanatics about this new asset class, while at the same time completely and totally ignorant of basic economics, finance, money, banking, central banking, monetary policy."Nouriel Roubini "The Mother and Father of All Bubbles" (3/6/2019)13
Chapter 27 Notes - The Footnotes in the Book are sequential and for this chapter start at #489 and end at #507.
These notes are provided for those that have purchased the book and would like to access the notes and links directly.
1. Opinions about causes of crisis and crashes can change over time. For instance, regarding what caused the stock market crash of 1987, few initially chose the cause that is widely now believed. Just 15% of Americans chose at that time identified automated computer trading programs that caused stock sales to cascade as ever-lower sell points among the six causes offered. See http://news.gallup.com/vault/220706/gallup-vault-no-clear-reason-seen-1987-stock-market-crash.aspx
2. See http://gfcresearch.com
3. Manuel Adelino, Antoinette Schoar, and Felipe Severino, "The Role of Housing and Mortgage Markets in the Financial Crisis" Annual Review of Financial Economics, November 2018 https://www.annualreviews.org/doi/full/10.1146/annurev-financial-110217-023036
4. Stefania Albanesi, Giacomo De Giorgi, Jaromir Nosal, "Credit Growth and the Financial Crisis: A New Narrative" NBER Working Paper No. 23740, August 2017 https://www.nber.org/papers/w23740
5. See http://investorhome.com/predicted.htm
11. https://www.cnbc.com/2018/05/05/warren-buffett-says-bitcoin-is-probably-rat-poison-squared.html (Charlie Munger, Berkshire's vice chairman said trading in cryptocurrencies is "just dementia.")
14. Didier Sornette, Peter Cauwels, Georgi Smilyanov "Can We Use Volatility to Diagnose Financial Bubbles? Lessons from 40 Historical Bubbles" April 19, 2017 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3006642
19. Laurence Siegel, “Black Swan or Black Turkey?” The Financial Analysts Journal, July/August 2010 http://www.cfapubs.org/doi/pdf/10.2469/faj.v66.n4.4
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