Friday, 18 December 2015


Not valid at present - but no doubt it will be ....


            Most people these days have heard of "Tulip Mania", the episode in history when investing frenzy first registered on the public consciousness. Just to recap, it was in the first half of the 17th century, in Holland (even then the tulip capital of the world, although the plants were still a comparative novelty), when enthusiasm for buying and selling these new bulbs spread from collectors to investors and thence to speculators and sharpsters. In the beginning, it was the merchants and the upper bourgeoisie who bought and flaunted their tulips - rare, because they had to be imported from the East, and special, because the blooms were exotic and strange. Soon however the need to keep up with the Jones's meant that demand outstripped supply, and prices began to rise; sailors began to smuggle in these rare goods, and the market began to broaden. Prices were quoted in the press, public interest was aroused, the opportunity for profit became evident.

            High prices were normal from the time of their initial introduction from Turkey into Europe some time after 1550, but from around 1630 until 1637, when the market peaked, tulip prices rose inexorably. Until around 1633 the market was mainly among professionals - growers, specialists, and their wealthy patrons; for the next three years, however, everyone wanted a piece of the action - it was, after all, a one-way market, with "guaranteed" profits. Stories were told of farms being mortgaged, extraordinary barter deals were arranged, forward contracts became common - all to take advantage of these ever-rising prices. The craze was not limited to Holland - a French brewery was reportedly swapped for one tulip bulb, and the English were in the market as well, but the Dutch were the principal participants.

            However, early in 1637, the market suddenly found a vacuum; without any warning, the buyers were no longer there. Sellers began looking for bids, buyers kept their heads down, financially over-stretched speculators became increasingly anxious, buyers ran away from their forward contracts, which were anyway classed as gambling, and not legally enforceable. Prices collapsed, and panic ensued. The Government was asked to help, and (after some consultation) a proposed "scheme of settlement" was put forward, but this found no friends - after all, close-outs at 3-1/2 percent of contract value were not particularly attractive. With prices having risen twenty- to twentyfive-fold during January alone, value was hard to establish.

            So the Dutch - those solid, dependable citizens of Europe who could be relied upon to keep their heads when dykes were springing leaks - were swept off their feet by "irrational exuberance". There were perhaps extenuating circumstances at the time: a major outbreak of the plague which had decimated some cities in late 1636 had created a psychological climate of "short-termism", and the continuing war with Spain was a constant background factor. But the main reason for the buying mania was the expectation of profit - the knowledge, based on recent experience, that there would always be (tomorrow, or perhaps next week) a buyer willing to pay more than you had paid. The fact that tulip bulbs were basically useless had nothing to do with either the rise or the fall in prices; academic theorists who have worked out that - given time - the most expensive bulb (costing around US$50,000), if properly propagated, would have paid for itself well inside a hundred years are looking at economic logic rather than truth. The fact is that this was an example of unbridled greed.

            And there are innumerable other examples of this sort of mass enthusiasm. It has been pointed out often enough that men, however sensible and logical they may be individually, change in character and thought process once they become part of a crowd. And the crowd does not have to be a gathering of many people in one place - it needs only a commonality of purpose, an agreement on what appears to be an obvious outcome, for the crowd mentality to become operative. That is why newcomers are so frequently "flamed" when they join a new Internet forum - they are not yet part of the crowd, they are still individuals waiting to become assimilated. And that is why the Internet - although it may seem an isolating process - is taking the place of the town square as a meeting place for individuals who may transmogrify into a crowd.

            Other examples of financial manias which are often quoted are the South Sea Bubble (around 1715-1720, in England) and the Mississipi scheme (in France at around the same time). In both cases the public became so enthusiastic about the prospects of easy money that common sense went out the window - for a while. In both cases, the end came quite suddenly and unexpectedly; it is very hard to judge the top in cases like these. Occasionally, however, common sense and dispassion can provide the opportunity for profiting from a contrarian view. In 1959, an attempt was made to squeeze  May Wheat futures in Chicago; for a time, the market moved inexorably upwards, but it happened that deliverable supplies were available (although they were held outside Chicago), and - such was the conviction that the squeeze would succeed - it was possible to sell at good prices even after wheat began to move into Chicago in volume. But then this was a squeeze rather than a wild burst of enthusiasm, and the psychological underpinnings are very different.

            Squeezes, or "corners", are in fact rather more frequent than manias, and depend on supply and demand rather than greed, fear or envy - as such, they tend to be seen more often in the commodity markets, where control of deliverable supplies appears easier to arrange. The most famous (attempted) squeeze of recent times culminated in 1980, when the Hunt brothers (famous oil billionaires) managed to ratchet the Silver price up from around $6/ounce in January 1979 to almost $50 a year later, spending and subsequently losing millions in the process. More recently, fears of a squeeze in the Palladium market took prices during  February 2000 from $491 at the start of the month to $815 three weeks later (basis NY spot), and - to be flippant for a moment - the current Pokemon craze among youngsters shows evidence of both a squeeze and a mania, as carefully calculated supply is measured out to frenzied buyers.

            But a true squeeze, as we said, has a different psychological effect on the traders in the market; it is (or may become) a fact, and (depending on the perceived likelihood of the squeeze succeeding), buyers may join in or not while shorts decide to cut or run their positions. A mania affects the public rather than the specialist, and depends on emotion rather than thought. In the move upwards, panic is evident among the buyers at the thought of opportunities missed - in a squeeze, the panic is likely to be among the sellers, or shorts.

            Because equities have appealed to a wider public for a longer time than commodities or currencies, there are more examples of speculative excess to be found in the stock markets than elsewhere: railroads - particularly in the US - provided a wonderful playground for the bulls in the 1850s, with the big bust coming on one day, August 24th, 1857. Radio was one of the technological wonders of the 1920s, but the share price of RCA (a very successful and profitable company during that era) fell 95% in the four years after 1929. Whether that was as the result of a preceding mania may be arguable, but it demonstrates the difficulty of establishing value in times of excess.

            And that is the problem with financial mania: there always appears to be good reason for the advance in prices to continue, because (after all) "things are different this time".  The 1920s were years of great technological change, particularly in the transport sector, and previously valid cost and profit calculations were "obviously" no longer applicable; but, for the time being, there was nothing else to take their place. Price, therefore, took the place of value, and  buying on dips became a habit, since cheapness was rare and the opportunity had to be seized.

            Sometimes an exogenous shock will halt a mania, sometimes the hot air simply cools; there is no sign hung out when the end comes, but a symptom is when serious, conservative investors who have held out against all previous blandishments finally admit that they might have been wrong, and the last remaining buyers come into the market. Watch out for such symptoms, and beware!

[Written Sep 2000]