Andrew Van Sickle editor@moneyweek.com
Isaac Newton, of all people, should have known that what goes up must come down. So I was intrigued to learn this week that he lost around $20m in today’s money in the South Sea bubble. Not only that, says financial historian Edward Chancellor on Breakingviews, but he sold his stock at an early stage before re-entering the market and investing his whole fortune in the South Sea Company. “Although Newton died a rich man, his niece said that he hated being reminded of these losses.”
We are all susceptible to hype, and it must have been bedazzling to witness the surge. Between January and August of 1720, the South Sea Company’s stock rose by a factor of seven. At the apex the company was worth twice as much as all the land in England.
Echoes of previous bubbles
Financial history always rhymes. The South Sea Company’s value eclipsing that of England’s land echoes the widely quoted statistic about Japan’s bubble in the late 1980s: the grounds of the Imperial Palace were thought to be worth more than all the property in California. It also calls to mind the tendency of stockmarket bubbles to embark on a final surge, when they are said to “melt-up” or “go parabolic”.
We appear to have reached the stage where much of the financial press is speculating about the scope for the surge to continue and accelerate. This week we were reminded by Germany’s WirtschaftsWoche that following US Federal reserve chairman Alan Greenspan’s warning about irrational exuberance in1996, the Nasdaq Composite index surged by another 400%.
Japan’s Nikkei almost doubled between the start of 1988 and the peak in late 1989. There comes a point when previously sceptical investors, fearful of missing out on large gains, begin to be seduced by the hype and pile in. We may now have reached it. Strategist Ed Yardeni of Yardeni Research agrees: he said this week that there could be a melt-up in the S&P 500 as exuberance over artificial intelligence (AI) boils over, with the S&P 500 gaining another 30% to 6,500 in the next two years.
There are certainly plenty of signs that we are in a bubble. Business Insider’s Jennifer Sor notes that the long-term earnings growth estimates for the top-eight mega-cap technology stocks in the American market have reached a record high. Another sign of the widespread excitement, says Futurism, is venture capitalists piling into AI companies yet to
