Economic Bubbles of Past and Present: When Disaster Looms & Sheep Keep Flocking

There’s nothing like hindsight. Looking backwards on the perils of the past often gives way to a false sense of confidence about the future. We believe that knowing how the mistakes of the past came about will safeguard us from the dangers ahead. Newsflash—there are no soft comfy mattresses laying beneath us in the real world. When we fall, we often hit hard ground and it hurts. Sure, getting back up builds character and … yawn—eventually you won’t get back up. Here’s a quick dive into some of the most unprecedented disasters in modern history (some which didn’t get much mention) and what can be learned about how much we can’t safeguard against them in the future.

The Housing Bubble

In the late days of 2007 an overextended and absurdly leveraged mortgage securities market began showing the first signs of trauma. We know now that major hedge fund managers and financial institutes were well aware of the potential doom which lurked ahead.

We now know that secret meetings were taking place. We now know that insiders were dumping shares of mortgage-backed securities as quickly as possible, and we now know that unless someone had a tip from the inside—they were sh$t out of luck.

As much as we’d like to think we learned our lessons; learned the signs to look for, we have only learned history. The truth is that our lack of knowledge of the housing market didn’t cause it to collapse, and neither did the amount of houses that were being bought and sold. This last part is really important—actual purchases of houses had nothing to do with the root cause of the housing market collapse. The abstraction of physical goods into the realm of computer-algorithm trading and derivatives put a pinch on the banks willingness to finance a lot of these transactions. Well, not so much their willingness as much as their ability!

The Tech/Dot-Com Bubble

In the early 1990’s there was a surge of interest in anything related to the internet. Email providers, search providers, and even silly things like clipart repositories were seeing a flood of money from venture capitalists. If your company had anything to do with computers or online services it’s likely that you were able to stumble into funding to a tune of millions without even trying.

Luckily for most people, this bubble started expanding long before computers and online infrastructure were becoming integral to people’s lives. For example, the disappearance of Netscape didn’t cause Joe’s Pizza Shack to lose any business. Today however, if there were to be a tech bubble collapse—considering how deeply integrated most businesses are with some type of software—it could affect us all. This omits acts of terrorism, hypotheticals, and otherwise improbably scenarios that would take a rare balancing of universal forces to even suggest the possibility.

This type of disaster could happen simply by the greed of a nation’s investors, the maliciousness of an enemy’s, or the blind belief by consumers that our tech companies are too big to fail.

The Mattress Industry

Continuing our move downward in order of lesser impact or importance; consider the mattress industry. 10 years ago there were mattress stores in nearly every small town in America and every night consumers were peppered during commercial breaks by Sleep Number ads. Well, now there are 3 mattress stores in every small town and consumers are assaulted by ads for mattress brands on nearly every medium.

The bubble here is going to be much more affective towards manufacturers than consumers—likely dropping prices for end-users. The thing that most people don’t realize about the mattress industry is that the markups are unbelievable. Sure, you may think you know about retail markups, but mattresses are among the best scams on Earth.

Consider the following; a mattress is priced at $900, sold during a special for $750 by an affiliate website that earns $150 per sale. That means that the revenue for that mattress is now $600. Let’s assume a standard 50% markup on retail price here and say the cost of that mattress to manufacture is around $300. That’s $600 in extra markup on the price!

The crazy thing—that’s the price for the new generation of mattresses that have disrupted the entire market because they’re so affordable!

Yes—affordable.

These new mattresses sell for as much as 65% less than comparable store brands because they’re sold directly to consumers rather than being pipelined through retail stores. A $900 mattress online has traditionally seen a comparable store model sell for $2500! Think they cost any more to produce? No.

Brands like Casper and Tuft & Needle have been raking in unprecedented profits in recent years by offering these lower-priced mattress options. Again, VCs have been flocking to mattress startups trying to get a hand in the jar. Just consider how many different brands there are on the market today, all of which offer the ‘new’ consumer-based models with free shipping.  The market is nearing saturation and I’ve a feeling that we’re about to see a LOT of these newcomers losing their shirts!

Connecting the Dots

So what do these three bubbles have in common you might ask?  Probably more than anyone would ever piece together but the basics are simple enough. These bubbles all came about as a direct result of investors. Poor regulations, over-zealous consumers, and even public support are all products of initial investor support during these periods. One entity starts with an idea, finds some success, and everyone else starts flocking to it. Once the numbers start piling in, the bubble starts forming. It happens every time; people tend to get caught up in the romance of making money too deeply to realize it’s time to pull out. This hits the big companies, the brands directly involved, but only trickles to consumers inasmuch as they’ve swallowed the Americana pill—that one that says buy a house, get married, invest in the stock market, and life will turn out fine. Truth be told—most people would be better off putting their cash under the mattress.