NOTE: This blog was originally written on 2/14/2011. Noteworthy is the fact that the gold bubble did indeed burst, dropping roughly 40% from it’s high in 2011. Additionally, the bond bubble has not yet burst. I bet in 2011 you would have bet bonds would have been crushed by now and gold would have continued it’s trend higher! Just goes to show you cannot predict the markets…
Stock market bubbles – Learning from Tulipomania
When you’re in the market to sell something, the value you personally place on your item is meaningless. What matters is the perceived value in the eyes of your prospective buyers. It’s the same with your used car, your house, and even your stock holdings – they’re only worth what someone will pay for them. What you “think” they’re worth matters not!
Tulipomania – the best history lesson
It’s hard to believe that in the 17th century one of the most sought after items was something as simple as a tulip bulb. It started in 1593 when a botanist from Constantinople brought tulips to Holland and planted them in his garden. He refused to sell any to the locals as they were deemed strictly for medical research. Outraged, a couple of local “entrepreneurs” broke into his garden and stole some of the bulbs, starting the “Dutch Tulip Trade.” Based simply off of its sheer beauty, the demand for the bulb skyrocketed. Subsequently, so did the price of the bulbs.
Over the next half century or so, the sheer volume of bulbs bartered became outrageous. A contemporary author by the name of Munting documents one such trade as follows.
One Viceroy tulip was notably traded for:
- Two lasts of wheat
- Four lasts of rye
- Four fat oxen
- Eight fat swine
- Twelve fat sheep
- Two Hogsheads of wine [commonly, a hogshead = 63 gals.]
- Four tuns of beer [commonly, a tun = 252 gals.]
- One thousand lbs. of cheese
- A complete bed
- A suit of clothes
- A silver drinking-cup
Reality set in
Eventually, the tulip trade died down and the people of Holland came to their senses. The tulip market shows no signs of rebounding to the once astronomical prices of the tulip and to this day, yet the Dutch remain one of the world’s largest exporters of theses flowers.
It reminds me of market bubbles… the tech bubble, the real estate bubble. Will gold be the next bubble? It has all of the makings. Is the bond bubble bursting before our eyes? It also has many of the makings of a bubble bursting at the seams.
History tends to repeat itself, but in an unpredictable and seemingly irrational fashion. Let’s not forget about bubbles of the past, and learn from the Dutch as they sacrificed vast fortunes (of that day) for something as trite as a tulip.