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In the 1630's, it was tulips. More specifically, it was Semper Augustus, a tulip of extraordinary beauty; deep, deep blue with a band of white and touches of crimson flares. In its day, it was the must have thing. There was one man who owned the dozen flowers known to exist. He was offered the equivalent of one year's annual income from a wealthy merchant for one bulb. He turned it down.Tulip prices increased throughout the decade as more speculators got into the game. In 1633, a farmhouse was traded for three rare bulbs. By 1636 any tulip could be sold for extraordinary sums. Futures markets started. Trades were made in fields or taverns, between farmers and merchants. Some bulbs were bought and sold 10 times in a day. One father left his seven children an inheritance of 70 tulips. One sold for the all-time record price of 5,200 guilders.
Then, one day in 1637 everyone decided to stop playing. No buyers showed up at the local tulip auction in Haarlem. Within days, panic started, then spread. Tulips that sold for 5,000 guilders soon went for less than 50. (Source: Tulipomania by Mike Dash)
The Roaring '20s earned the name. It was a new era of economic fundamentals with free trade, anti-inflation measures, less stringent anti-trust laws and higher worker productivity. It was the best of times which would never end. The idea of leverage came into being in big way. Consumer credit expanded exponentially as Americans bought cars and radios and stocks, especially stocks. Margin was stretched to the limits. Of course, once prices start to fall, margin accounts get calls. Lots of them. To meet those calls, stocks must be sold, adding more downward pressure to prices, eliciting more margin calls. The vicious cycle continues until everyone is out of leverage and mostly broke. We know what happened after that. The country didn't pull itself out of the Great Depression until WWII.
There were many other bubbles, such as the Japanese Bubble Economy in 1984 to 1989. There was the South Sea Bubble in 1720. The most recent one? The housing bubble, which famously burst in 2007 and is still, according to many, still deflating. History is full of times when people got a little crazy, spent way too much on a commodity or thing, then watched all the "value" go away the day the bigger fool stopped coming to buy or easy credit was gone.
Now let's look at oil and gold and silver and cotton, to name just a few. They have all pushed limits not seen in decades. Some hit new all-time highs. There are good reasons. Turmoil in the Middle East leaves a great unknown for oil flows. The natural response is to buy more oil since it's more valuable with constricted supply. Or gold. It's always a safe haven when times are troubled. Or silver. And cotton is going up because of useful demand.
But here's the thing. The oil is still in the ground. There are plenty of other countries with large reserves willing to sell into higher prices. Supply will ultimately fill demand. Cotton plants can be planted. Farmers are always anxious to plant new crops that pay more. Watch as many farms produce the white puff, taking out tobacco or other crops that are less in demand. As for gold, it's in limited supply no matter how much the Alaska TV troop finds. But it's being driven up by fear, not industrial demand. When the fear subsides so will the price of the yellow metal.
How far these commodities can run is unknown. But anyone thinking about buying into them now has to believe the worst is still ahead, that oil producers won't increase their output to take advantage of higher prices, and that no new supply of whatever commodity is hot won't be coming soon. Prices have reached the bubble stage in many sectors. And when the bubble bursts, it's never pretty.
Ted Allrich is the founder of The Online Investor, chairman of the board of Bank of Internet USA, as well as the author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he offers advice to investors who are just getting started.
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Reader Comments (Page 1 of 1)
2-26-2011 @ 5:39PM
william lindblad said...
Good piece Ted -
Porcelain was in vented in China ca. 1100-1200 around the Sung dynasty and first brought to Europe by Marco Polo. It was a big hit. Some 400 years later, Johann Bottger, in the service of Augustus, Elector of Saxony and King of Poland started making it for his ruler and it remained a very high priced item and available only to royalty. It took a few hundred years but the process secrets finally made there way to enough to make mass production possible - and the price came down. However, the company that originated the product in Europe is still in business - it's called Meissen and it's still not cheap.
Source: Henry Wark.
I guess you could consider this a bubble also.
What do you call DeBeers? Diamonds are still up there.
(diamonds are pretty abundant)
On the "roaring 20's" I don't buy the reasoning. If you review the CDC data from 1919 you will find that the Spanish flu epidemic (that a repeat is still feared) had a peculiar way of killing people. The vast majority of those that died were between 25-40 and that left the 20's being run by adventorous youth - party time. The market crash was only part of the depression. The other was monculture and the resultant dust bowl. Without FDR and the government there would have been food problems, and that in a day when most of the population was still pretty subsistant and not reliant on the grocery store.
On the commodity market cotton has seen it's high as in Ga. alone the plantings will be up 15%. Same routing as what happened to hops in Wash. Boom market - everybody plants the following year. Bust market.
On the metals - gold and silver will continue to climb. copper and alluminum could easily become "bubble".
On corn, soybeans, peanuts and the grains -up,up and away - it is NOT a bubble.
The weather is going to stay bad, not to mention plant diesease.
2-27-2011 @ 8:19AM
jangonago said...
Wow, OK this really does make a lot of sense dude.
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2-27-2011 @ 6:40PM
Peter Van Schaik said...
There are always plenty of reasons to claim this time it is different; this time even the sky is truly not the limit. If this were not true bubbles would not and could not exist in the first place. If the overpricing were obvious to all the bubble would burst long before it could really be labeled a bubble. Some manic markets may last longer than others, of course, but eventually alternatives will be found to replace the high priced, must have commodities of today. Humans are intelligent and resourceful: If the price of a commodity stays too high too long we will find a way to effectively deal with the problem. Definitely invest in any market that even resembles a bubble with a great deal of caution. http://sites.google.com/site/jpetervanschaik
2-28-2011 @ 7:03PM
william lindblad said...
Peter, in most cases what you say would prove true however, replacing food may prove difficult. The present approach is GM/E or genetically modified/engineered and this is not without drawbacks, nor court cases. I think that it could be bane or salvation, but that remains to be seen. I believe that you argued against inflation last year in saying that grocery prices were not really rising. I think that you should do a re-visit.
We do have a problem in this area. I don't know the cause either, but problems are problems and this may not have an easy solution. Items like sudden death and brown stem rot are soil borne. There is NO solution.
2-28-2011 @ 8:33PM
Peter Van Schaik said...
William, I've lost count of the number of doomsday scenarios thrust upon various societies throughout history by a wide variety of Chicken Littles who assure us the end is near. And THIS time, they continually assure us, they will be right! Meanwhile, throughout it all, the human race continues, for the most part, to survive and occasionally even prosper. Likewise I cannot begin to count the number of problems that we faced in the past that had "...NO solution..." that have now been solved.
I still think the actual cost of food in the United States is a bargain that would be the envy of humans throughout nearly the entire span of human history and even much of the world today. The increase of prices in one or even a few sectors is not necessarily due to inflation. It can simply be supply and demand at work. Inflation is the general rise in all prices due to an increase in overall purchasing power. We have seen an increase in the prices of food and fuel, yes, but prices in many other sectors are still lower than their pre-recession peaks.