Thanks to fears of easy money, there is once again an obsession with bubbles
Silver, stocks, commodities, emerging markets, etc. are all regularly accused of being in a bubble.
But how do they stack up against the biggest bubbles in history?
title=”The Dutch Tulip Bubble”
Crazy fact: According to Charles Mackay’s famous book ‘Extraordinary Popular Delusions and the Madness of Crowds’, the following was the amount paid for one single tulip root: Two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of beer, two tons of butter, one thousand lbs. of cheese, a complete bed, a suit of clothes, a silver drinking cup.
The story: When people think about really, really ridiculous bubbles, the Dutch Tulip bubble of the early 1600s must instantly come to mind.
How did people possibly get excited about freaking tulip bulbs?
Tulips came completely out of nowhere, having been imported from Turkey. They blew everyone’s mind, and ownership of them became a major status symbol for the elites. In addition to the great demand for them, a virus caused the supply to collapse, and thus the price to spike.
The ensuing rapid ascent of tulips became the very definition of the ‘greater fool’ theory in action.
In 2000, BusinessWeek reviewed Mike Dash’s book Tulipomania
Enter the tulip. ”It is impossible to comprehend the tulip mania without understanding just how different tulips were from every other flower known to horticulturists in the 17th century,” says Dash. ”The colours they exhibited were more intense and more concentrated than those of ordinary plants.” Despite the outlandish prices commanded by rare bulbs, ordinary tulips were sold by the pound. Around 1630, however, a new type of tulip fancier appeared, lured by tales of fat profits. These ”florists,” or professional tulip traders, sought out flower lovers and speculators alike. But if the supply of tulip buyers grew quickly, the supply of bulbs did not. The tulip was a conspirator in the supply squeeze: It takes seven years to grow one from seed. And while bulbs can produce two or three clones, or ”offsets,” annually, the mother bulb only lasts a few years.
Bulb prices rose steadily throughout the 1630s, as ever more speculators wedged into the market. Weavers and farmers mortgaged whatever they could to raise cash to begin trading. In 1633, a farmhouse in Hoorn changed hands for three rare bulbs. By 1636 any tulip–even bulbs recently considered garbage–could be sold off, often for hundreds of guilders. A futures market for bulbs existed, and tulip traders could be found conducting their business in hundreds of Dutch taverns. Tulip mania reached its peak during the winter of 1636-37, when some bulbs were changing hands 10 times in a day. The zenith came early that winter, at an auction to benefit seven orphans whose only asset was 70 fine tulips left by their father. One, a rare Violetten Admirael van Enkhuizen bulb that was about to split in two, sold for 5,200 guilders, the all-time record. All told, the flowers brought in nearly 53,000 guilders.
Soon after, the tulip market crashed utterly, spectacularly. It began in Haarlem, at a routine bulb auction when, for the first time, the greater fool refused to show up and pay. Within days, the panic had spread across the country. Despite the efforts of traders to prop up demand, the market for tulips evaporated. Flowers that had commanded 5,000 guilders a few weeks before now fetched one-hundredth that amount.
title=”South Sea Company”
Crazy fact: There was such ridiculous demand to invest in the South Sea Company — a UK chartered company — that it actually launched one venture with the description: For carrying-on an undertaking of great advantage but no-one to know what it is!! And yet people still snapped it up.
The story: In 1720, the South Sea Company was granted an exclusive charter by the UK government to trade in the south seas. The company also underwrote the government’s public debt, with a promise of 5% guaranteed interest. Investors went nuts for shares in the company. Shares surged 10x right off the bat. And the company was only too happy to oblige the public, issuing more and more shares to meet the insatiable demand.
The company issued shares for many different ventures, all promising great riches. The most famous of being the one noted above. When it all came tumbling down, the executives were arrested, hundreds of members of the government saw their fortunes evaporate, and suicides became a regular event.”
title=”The Mississippi Bubble”
Crazy fact: A hunchback, at the main street where the stock exchange took place, became wealthy by renting his back out for others to write on.
The story: This was France’s version of UK’s South Sea bubble. Whereas the South Sea company was granted an exclusive charter to trade in the South Seas, the Mississippi company was chartered to explore America and the Missippi river, in hopes of finding gold and silver.
The Mississippi company was started by Scotsman John Law, who was contracted by the government to solve its debt problem, which he did, basically, by establishing the use of paper money.
Demand for shares in his company went crazy, and, as with the South Sea company, Law was only too happy to oblige by expanding his share count like crazy.
The value of shares in the Mississippi Company rose dramatically as Law’s empire expanded. Investors from across France and Europe eagerly played in this new market. The financial district in Paris became so agitated at times with investors that soldiers would be sent in at night to maintain order. Shares in the Mississippi Company started at around 500 livres tournois (the French unit of account at the time) per share in January 1719. By December 1719, share prices had reached 10,000 livres, an increase of 190 per cent in just under a year. The market became so seductive that people from the working class began investing whatever small sums they could scrape together. New millionaires were commonplace.
The weak spot in Law’s scheme was his willingness to issue more bank notes to fund purchases of shares in the company. Stock prices began falling in January 1720 as some investors sold shares to turn capital gains into gold coin. To stop the sell-off, Law restricted any payment in gold that was more than 100 livres. The paper notes of the Bank Royale were made legal tender, which meant that they could be used to pay taxes and settle most debts. The company was trying to get people to accept the paper notes rather than gold. The bank subsequently promised to exchange its notes for shares in the company at the going market price of 10,000 livres. This attempt to turn stock shares into money resulted in a sudden doubling of the money supply in France. It is not surprising then that inflation started to take off. Inflation reached a monthly rate of 23 per cent in January 1720.
Law devalued shares in the company in several stages during 1720, and the value of bank notes was reduced to 50 per cent of their face value. By September 1720 the price of shares in the company had fallen to 2,000 livres and to 1,000 by December. The fall in the price of stock allowed Law’s enemies to take control of the company by confiscating the shares of investors who could not prove they had actually paid for their shares with real assets rather than credit. This reduced investor shares, or shares outstanding, by two-thirds. By September 1721 share prices had dropped to 500 livres, where they had been at the beginning.”
title=”The very first gold bubble”
Fans of gold should be aware: we’ve been down this road before. In the early 80s, gold spikes, seemingly out of nowhere to around $1,000/oz, only to see it fall violently back in no time.
What the heck happened? It’s not totally clear, but suffice to say, this current period isn’t the first time Americans felt deeply concerned about the stability and durability of the US.
BullNotBull: It may seem like ancient history now, but only because we know how the story ends. At the time, the Soviet invasion of Afghanistan, which began around Christmas 1979, was a terrible global shock. The Soviets had just signed a ‘bilateral treaty of cooperation’ with Afghanistan in 1978, but by the next year relations had deteriorated, and:
On December 27, 1979, 700 troops, including 54 KGB spetsnaz special forces troops dressed in Afghan uniforms seized all major governmental, military and media buildings in Kabul, including their primary target – the Tajbeg Presidential Palace, where they killed President Hafizullah Amin. [Before this was even completed,] the Soviets announced on Radio Kabul that Afghanistan had been liberated from Amin’s rule. [From Wikipedia]
It was a slap in the face to a cold war America already weakened by high inflation and unemployment, a struggling economy, and high energy prices. The future of the American economy and American power did not feel at all certain. As a safe haven in times of panic and strife, gold simply reflected that fear. But notice how quickly the buying panic subsided and in fact turned into a selling panic after the emotion had been digested and rationality returned. The all-time peak was immediatly followed by two consecutive limit-down days. When emotion subsided, it took the price of gold along with it. This marked the beginning of a 22 year bear market in gold.”
Crazy fact: Some have estimated that when Tokyo real estate hit a peak of $1 million per square meter, the Imperial Palace in Tokyo became worth more than all of the real estate in California combined.
Story: This should sound very, very familiar to readers.
Like many bubbles, Japan’s started on the basis of excellent economic fundamentals — the Yen was surging, helped by an amazing trade surplus , and an emerging banking system with a willingness to lend. Obviously, as noted in the prices above — $1 million/square meter — things got insane, and in many cases, prime real estate settled at a price 99% below peak.
A BOJ whitepaper listed the following contributors to the bubble. See if they sound familiar:
- Aggressive behaviour of financial institutions
- Monetary easing
- Pro-real estate tax policy
- A concentration of business activity in Tokyo
title=”The NASDAQ bubble”
Crazy fact: On October, 22, 1999 revenue-less networking company Sycamore Networks IPO’d with a market cap of over $14 billion.
The story: This bubble has gone by multiple names (the tech bubble, the .com bubble, the internet bubble, etc.), but whatever you want to call it, you can probably trace its origin to the IPO of profit-less startup TheGlobe.com.
Here’s how CNET.com’s Dawn Kawamoto reported the news on November 13, 1998:
TheGlobe.com had set a target price of 9 a share last night, then saw its shares soar as high as 97 a share this morning before settling back to close at 63.5.
The company ended the day by posting the largest first-day gain of any IPO, said Richard Peterson, an analyst with Securities Data. The previous record was held by Broadcast.com, which ended the day with a 249 per cent gain over its target price.
Just last month, The Globe.com’s IPO plans were all but dormant. The company lowered its pricing range due to sagging markets and waning investor interest before postponing the offering altogether.
This was not the first .com IPO, mind you. eBay (EBAY) and Yahoo both came before it, but this was the first one which showed how investors were going completely and totally nuts.
That being said, there were earlier warning signs that something was going on.
Few people remember it, but KTEL, the maker of cheesy music compilations, got caught up in it all earlier that year.
WIkipedia: In mid-April 1998 during the Dot com bubble, news that the company was simply expanding its business to the internet sent the thinly traded stock shooting from about $3 to over $7 in one day (3:1 split adjusted). In spite of the early gains, the company was deemed by many to be a complete bomb, and the short interest of the stock swelled. The price of the stock peaked at about $34 in early May, and began to decline, reaching $12 in November and eventually pennies. The vicious advance was fuelled mainly by a massive short squeeze that financially devastated traders who held short positions and were either ‘bought in’ or simply forced to cover the positions at very high prices because of the great losses.
K-Tel were unable to sustain the growth and profitability. The company was taken private in a 1 to 5000 reverse split on July 18, 2007 changing their symbol to KTLI and moving from the market to the Over-The-Counter market.
By late 1999, things were going completely nuts, with new, massive IPOs happening on nearly a daily basis. Day-trading was taking the country by storm, and though the market didn’t peak until March of 2000, the disastrous Time-Warner-AOL merger was the pscyhological high water mark of it all.
Overall, a stunning $5 trillion of value was wiped out in the bubble’s aftermath.”
content=”Peak: Late 90s
Crazy fact: One purple elephant stuffed animal sold for $3,000
The story: Weird, kind-of cute stuffed animals — this was a totally unpredictable bubble. But in the mid-90s, collectors, and yes, speculators went crazy for Beany Babies, the toys made by the company Ty.
Ty was the brainchild of billionaire toy mogul H. Ty Warner, who started his company in the mid-80s.
As the Seattle Time explained, what set them apart, was their low, low price ($5-$7), which made them collectible, unlike most stuffed animals, which you might just buy one of.
Seattle Times: If the dot-coms had their Henry Blodget and Mary Meeker — Wall Street analysts who became star cheerleaders for Internet stocks — the Beanies had Peggy Gallagher and Mary Beth Sobolewski.
Gallagher and Sobolewski both hail from the Chicago suburbs where Ty is located and where the Beanie Baby fad first caught on. In the early days, both women recall running up staggering phone bills tracking down scarce Babies. In the process, they formed large networks of collectors and dealers and got to know the products inside out.
Gallagher, who wrote one of the earliest articles about the craze, eventually quit her job as a paralegal at her husband’s law office when Beanies became a full-time obsession.
In February 1997, she self-published ‘The Beanie Baby Phenomenon,’ a 52-page paperback priced at $24. It sold 77,000 copies.
‘I made over $200,000 in a few short months,’ said Gallagher.
A Chicago publisher approached her in 1997, and suddenly Sobolewski was editor-in-chief of Mary Beth’s Beanie World magazine (later renamed Mary Beth’s Bean Bag World after some legal prodding from Ty).
Eventually, the whole thing collapsed, and in 1999, Ty said it would stop produing them, and that was that.
content=”This just happened, and we’re still dealing with it, so we won’t make you relive it.
Suffice to say, history repeats over and over again. Especially our stupidest parts.”
content=”How the Chinese economy could easily come tumbling down >>”