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Ahh. It warms the cockles of a market geek’s heart to see this exchange in the comments section of a recent post:
Anonymous wrote: Oil – The Tulips of 2011 … Oil prices bubble is going to burst like every other bubble since 17th century. If you are institutional manager holding oil futures, time to get out is NOW. Stop rolling. You will lose BIG if you wait till oil falls back to $40 a barrel as it did two years ago.
Chris wrote: Oil may be overvalued right now, but Tulips? Surely you suggest that in jest! Tulips are nice to look at (and were back then) but you can't burn them to power cars, commercial trucks, planes, power plants, and the economy in general. Also, the tulip bubble of centuries ago was largely localized while oil is a global commodity subject to geopolitical risk, emerging markets, and currency manipulation.
Yes, that’s right, these markets wonks are talking about the famed Tulipmania that peaked in Holland in the 1630s, when an obsession with tulips blossomed into one of the first financial frenzies in modern memory. Made famous by Charles Mackay in his 1841 investment classic “Extraordinary Popular Delusions and the Madness of Crowds,” the tulipmania was indeed an extraordinary period when investors briefly paid more for a tulip bulb than for a house. Demand for the flower, which first spread across Europe from Turkey in the late 1500s, spurred such lofty valuations that one bulb of the variety Tulipe Brasserie was exchanged for a successful brewery in France. Mackay wrote:
“A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot. . . .”
In 1988, Brown Economics Professor Peter Garber penned this in The Journal on the roots of Tulipmania:
Here are the few facts that Mackay tells us: The tulip entered Europe from Turkey in the mid-16th century and spread to the Netherlands, which became a center for the cultivation of new varieties. A market for rare varieties of bulbs generated high prices. For example, a prized Semper Augustus bulb fetched 2,000 guilders in 1625, an amount of gold worth about $18,000 today. At the peak of speculation in 1637, a single Semper Augustus bulb sold for 5,500 guilders. (By comparison, Rembrandt was commissioned in 1638 to paint “The Night Watch” for 1,200 guilders.) During the Tulipmania, prices for all bulbs — rare and common — escalated. In February 1637, speculation suddenly terminated.
Mike Dash, in his book “Tulipomania: The Story of the World’s Most Coveted Flower and the Extraordinary Passions It Aroused,” described the collapse thusly:
“Demand for tulips comprehensively outstripped supply, and the mania then began, in effect, to consume everything around it. . . . Sooner or later even those who still believed the trade was fundamentally healthy would become unable to afford the next price rise and hesitate to commit themselves. Thus, by the beginning of February, money and bulbs–the twin fuels of the flower mania–were both exhausted. And like a sun that has burned the last of its fuel, the tulip mania ‘went supernova’ in a final, frenzied burst of trading before collapsing in on itself.”
For the record, we’re not saying that oil is anywhere near tulip territory. (Though, as we mentioned before, Goldman sees a short-term pullback likely.) But it’s always helpful to pull one’s head up from the day-to-day market movements and take a moment to think about some of the major lessons of market history as you keep an eye out for the next mania to grip the markets.
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GREED AND MARKET TIMING
Don’t even think for a moment you will be able to pick the high or low point in the oil market, or any other commodity market (gold) for that matter. Forgetaboutit! If you buy low enough and wait long enough, (years) you can make a reasonable profit using gold or silver as a diversification tool. Call it hedging your portfolio, if you will. In contrast, trading and timing is all short term speculation and 95% of traders get their head handed to them by the market, sooner or later. So, be careful!
MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. The Wall Street Journal's Chief Markets Commentator Dave Kansas and MarketBeat lead writer Matt Phillips spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Dave at dave.kansas@wsj.com or Matt at matt.phillips@wsj.com.
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