Capital Perspectives: History lesson Tulip Mania.
I can calculate the motion of heavenly bodies, but not the madness of people. - Sir Isaac Newton The above quote, attributed to Issac Newton, came in the wake of the great scientist losing a large sum of money speculating in shares of the South Sea Company in the early 1700s, the financial bubble of his day. However, it is also especially fitting for the bubble that inflated and later popped about a century prior in Holland, a financial power of the time, which later became known as Tulip Mania. Tulip Mania was first popularized in Charles Mackays 141 book, Extraordinary Popular Delusions and the Madness of Crowds. While more recent analysis has challenged the magnitude of the rise and fall in the price of tulips in Holland during that time and the depth of the economic downturn that followed, it is widely recognized that tulips rose to especially high price levels from at least 1634 before collapsing in early 1637. Imported from Turkey in the late 1500s, tulips were a status symbol, so it is reasonable to assume that the beautiful and durable flowers took on the characteristics of a Veblen good (we discussed Veblen goods in A Digression on Diamonds) whereby higher prices spurred more demand and, therefore, higher prices. However, it appears that the mania did not fully take hold until several decades later when some tulip varieties were infected by a benign virus that caused the petals to develop multi-colored patterns. Like all other speculative bubbles, the fact that prices had risen became confirmation of an otherwise half-baked investment thesis (i.e. foreigners would have an insatiable appetite for Dutch tulips). Official price data from the period is sparse. However, at its peak, the most favored tulip varieties apparently fetched prices many multiples of not only a full years wages for an average worker, but also that of a typical home. The flowers were also reportedly used as currency in some property sales. The speculative hunger for tulips was also fed during that time by poor legal protections and ill-conceived public policies that introduced enough moral hazard into the market for tulips to make officials tasked with regulating the U.S. housing market in the mid-2000s blush. Despite the present day being separated from this episode in 17th-century Holland by several centuries, the parallels that can be drawn between Tulip Mania and the current manic speculation in cryptocurrencies like bitcoin, which will be the subject of an upcoming submission,are striking. Now, this is not to say that the current craze wont serve some long-term societal good. Just like the lessons learned from Tulip Mania helped form modern futures markets, the proving out of a new technology, blockchain, is likely to increase trust and logistical ease across global supply chains. Having said that, we do expect this current round of hot potato will end much like those that preceded it. Chas Craig is president of Meliora Capital in Tulsa (www.melcapital.com). This column has been prepared by an employee of Meliora Capital, LLC. This column is for information and illustrative purposes only. It is not, and should not be regarded as investment advice or as a recommendation regarding any security mentioned herein. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable parties may disagree about the opinions expressed herein. The representations made in this column are based upon publicly available information and assumptions about future economic variables which may or may not be reflective of actual occurrences. Meliora Capital, LLC its employees or affiliates may have an economic interest in the securities identified herein. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions. This information is provided with the understanding that with respect to the material provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. By accepting this material, you acknowledge, understand and accept the foregoing.
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