MarketInsight | Double, Bubble, Toil, and Trouble
Tulip Mania swept across Europe in the 1600s. The first bulbs had arrived from Turkey in the hands of an ambassador of the Holy Roman Empire in the late 1500s. They were immediately coveted. Prices rose rapidly and the higher the price went, the more precious the flowering bulbs became. Trading in tulip bulbs reached near hysteria in the Netherlands, where futures markets were founded to trade in bulbs that had not even arrived yet. Prices rose to inexplicably lofty levels, convincing speculators to sell everything to capture the future gains that seemed certain. At the height of the mania, a single bulb brought the price of a 12-acre estate. After the market crashed in 1637, that same bulb was worth no more than the cost of an onion.
Bubbles thrive on human emotion. As prices rise, more and more people get drawn in, afraid they will be left behind and convinced that easy money is at hand. Each of these speculators knows they are behaving foolishly and overpaying and each expects to find a “greater fool” to buy their overpriced asset in the future. At some point, the bubble bursts and the speculators are ruined. Bubbles are usually easy to recognize in the beginning, but they tend to run on and up, defying all logic until they no longer seem illogical.
There are three rules for bubbles. They tend to last much longer than expected. They tend to accelerate at the end. They tend to burst only after everyone is sucked in.
There has been a lot of talk recently about a stock market bubble. I agree. I think we are in one — but I think we are still in the initial stages. Stock prices have gone up a lot, but there are still plenty of sceptics out there convinced that the market will crash soon. The time to worry is usually when everyone believes! I think this could be a very powerful bubble, one that carries the stock market to dizzying levels. There are no guarantees, the market might correct or crash tomorrow, but it feels to me like a powerful bubble is brewing on the horizon. It might run on for several years.
There is another bubble out there. Rampant speculation has driven the price of BitCoins to dizzying heights this year. In 2010, a bitcoin was worth less than a penny. Today each one is valued at more than $7000. The first real world purchase using bitcoins took place right here in Jacksonville. A man bought a pizza for 10,000 bitcoins. Today those same coins would be worth more than $70 million. That’s an expensive pizza! Unlike the stock market bubble, I think this one is getting long in the tooth. In April, bitcoins were at $1200. They are now over $7000. More distressing, I have heard many start to rationalize why they will keep going higher. The argument is that they are used by criminals on the “dark web.”
I have been picking investments for people professionally for more than 35 years. I am Scottish. When I see something go from the price of a meal to the price of a yacht in a mere seven years, I suffer from a natural incredulity. Needless to say, I won’t be buying any bitcoins.
Scott A. Grant is President of Standfast Asset Management in Ponte Vedra Beach. He welcomes your comments or questions at email@example.com.