bub·ble /ˈbəb(ə)l/
Stock Market History
Historically lofty valuations, extreme market enthusiasm and irrational expectations prevail in today’s market driving everyone is speculate over whether (or not) the US stock market currently in a bubble.
Peter Koudijs says a bubble is “where investors buy an asset not for its fundamental value, but because they plan to resell, at a higher price, to the next investor.” And this is probably the best definition of what a bubble is.
But, why do we chose to label a market brimming with possibly over-priced financial securities as being a bubble?
What does Wall Street have against cute little bubbles?
Bubbles don’t inflate. They remain the same size for the entirety of their enlivening existence. They are ephemeral. Never lasting long enough to raise any concern.
There really is no logical reason to call a market a bubble unless you just hate bubbles. Which I don’t.
Balloons can be inflated and if they become over-inflated they burst spectacularly. Why not use the phrase stock market balloon?
It is certainly more accurate.
The association of bubble with financial markets reportedly began with the passage on 11 June 1720 of the Royal Exchange and London Assurance Corporation Act 1719, commonly called the Bubble Act (after the fact,) which forbade the formation of any other joint-stock companies unless approved by royal charter or special act of parliament and required any company with more than six shareholders to seek royal charter.
The Act’s intent was protect unwary investors and the general public (and people like Isaac Newton) from the risk of companies of dubious fundamental value that began to appear after the passage of the South Sea Bill on 7 April 1720 granting The Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America and for the encouragement of the Fishery, better known as the South Sea Company, a monopoly on trade with the west coast of Africa to the Americas.
The Bubble Act essentially set out to accomplish one thing. To closed down various disreputable companies. But what it did was monopolize the speculators attention (called stockjobbers at the time) on the one company they could speculate over. The South Sea Company.
Two months after the Bubble Act was passed shares of the South Sea Company fell 87%. To put this in perspective. That’s a lot. :)
An embarrassing result for the Bubble Act which not only did not protect the public it likely magnified the hysteria. And so the Act laid dormant for the next 87 years having one been used to bring charges once, in 1721. Similarly, only one person went to jail after the Financial Crisis. Kareem Serageldin. Maybe when the bitcoin or A.I. bubbles burst two people will go to jail.
Unlikely though.
But none of this history answers the questions asked. To get to the real answer you don’t even have to understand what a Qinncoinpoy is but it probably would help.
In the late 17th and early 18th century as the South Sea Company’s stock price was mooning having increased ~900% (£150 to £1000) from April through August, the word bubble meant to be fooled or tricked. It was a reference to something that appeared substantial but turned out to be just a vaporous apparition which makes sense.
Finally.
The bubbles referenced at the time were the other companies that didn’t exist or didn’t deserve to exist. Companies like the Water Engine Company which supposedly made water engines. The only other reference I can find is from 1887 of a company named the Compressed Air and Water Engine Company which I doubt is the same comany.
Bubble did not refer to the market as a whole though. And I don’t think it should today.
Bubbles deserve better. Long live Stock Market Balloons!
Here are the lyrics of a contemporaneous rap song.
Jews, Turks, and Christians, hear my song,
I'll make you rich before it's long ;
Sell Houses, Lands, and eke your Flocks,
And put your money in the stocks.
For Hubble Bubble's now in play,
Come, buy the Bubble whilst you may,
There's Hubble Bubbles night and day,
At Jonathan's and Garraway.
Ye Scotsmen who love Law so well,
Ye Irish who have Bulls to sell ;
Ye Dutch and Germans come and buy,
Leave off your trade in Qinncoinpoy.
Ye Hubble Bubbles high and low,
Who with your Stocks do ebb and flow.
Come o'er the hills and far away
To Jonathan's and Garraway.
Now purchase in both Fools and Wise,
For Stocks will either fall or rise ;
For how can they be at a stay,
When Time and riches fly away ?
Hubble Bubble come away,
Let every Bubble have its day ;
Here's brave new Bubbles for your pay.
At Jonathan's and Garraway.
Come all, who would by fishing gain,
Venture like Gamesters on the main ;Qinncoinpoy is a reference to John Law’s residence. John Law was principal to another economic bubble that occurred in France at the same time as the South Sea Bubble in Britain, the Mississippi Bubble. Speculators who profited off the run up were called millionaires and this is where the term originated.
Jonathan’s and Garraway is a reference to two of the coffee shops on Exchange Alley where shares of the South Sea Company were traded. Another coffee shop that operate on the nearby Tower Street but not mentioned in the song was Lloyd's Coffee House the great ancestor of the famous insurance company Lloyd’s of London.
Hubble-bubble is a reference to the sound of a hookah pipe and stems from the early 17th century.
Here is another rap song from the Georgian Era. I quite like this one
A Bubble is blown up in air,
In which fine prospects do appear ;
The Bubble breaks, the prospect's lost, Y
et must some Bubble pay the cost.
Hubble Bubble ; all is smoke, H
Hubble Bubble ; all is broke.
Farewell your Houses, Lands, and Flocks,
For all you have is now in Stocks. I can’t say if the word bubble derived from some 17th century English stoner but it seems likely based on the facts.
Not as interesting, but for completion’s sake, the South Sea Company survived the bursting of its bubble and reached peak revenue in 1725 and remained in business until 1853.
-AJ