Tulip Mania is deemed to be the first major example of a speculative bubble. Studying the first market bubble and the cyclical nature of inflation onboard a submarine can help us invest in real-estate in 2022.
Submarine Exchange a Microeconomy
If you’ve ever served on a deployment, you’ll know how certain goods gain value the longer you were underway.
I literally would purchase goods I had zero desire to consume just to trade underway. Things like candy, chips, tobacco, books, and even pop became more valuable the longer you were underway. Especially if a port call was cancelled or moved.
For me the most important thing was dunkin donut coffee. (Our captain cut our coffee budget, but why should I suffer?) and a couple bags of chips I could make last months. I didn’t bring most of my treats for myself however, life aboard a submarine is about keeping yourself entertained. I enjoyed bringing luxury goods to trade for cash, help with maintenance or to bribe my chiefs lol I specifically brought a case of Pepsi under weigh while qualifying to help ensure qualified superiors had time to do a check out with me or waste time reteaching something to me lol.
You can imagine how this microeconomy is the perfect example of supply and demand. I remember selling a soda for $20 at one point…and to be honest I did it begrudgingly.
Anyhow this is the most basic example of supply and demand. I think its important to get off on the right foot when talking about market bubbles. I’m sure it very easy to appreciate that the scarcity of the good increases its price. It’s not necessarily that the dollar was worth less and less as we were out to sea, it was that the availability of Pepsi became more and more scarce. Especially with a consumable that has an addictive element like caffeine.
This scarcity and fear of missing out, FOMO, drives the price of Pepsi on deployment just as it does in the world of finance. And just like in the financial world a large influx of Pepsi via a port call will reset prices. Especially if your stix are full of amine and people prefer fresh… Now your commodity may be worthless. This sudden drop in demand however is usually cyclical, as we leave port the value is slowly restored and demand rises again.
How does this have anything to do with the inflation bubble we are facing now? Why don’t we recognize this trend over and over and what does any of this have to do with tulips? Well let me show you.
Comparison#between#VOC#Share#Price#Index#and#Tulip#Price#Index#(AïtUSahalia,# Parker#and#Yogo,#2004)(Gelderblom#&#Jonker,#2003)#(Garber,#1990)(Krelage,# 1942)(Thompson,#2007)
Tulip Mania is deemed to be the first major example of a speculative bubble. This tulip bubble, as I’ll call it, happened between 1634 and 1637 and as you might expect had to deal with the tulip market. The tulip was the tesla of its day, symbolizing new things arriving from emerging sea trade and a fashionable way to show off your wealth. People began to collect them, the rarer the tulip you had the higher your social status. So, trade of tulip bulbs became associated with finance. After all what better investment is there than money that literally grows on trees…or plants I guess?
Now here’s the fun part. This is actually an amazing investment financially…as long as people want to buy the flower from you because each season you could end up with your bulb giving off a couple of clones and literally doubling or tripling your money in a year…at least that was the argument. And for those long-term investors, a tulip can be propagated through both seeds and buds. Seeds from a tulip will form a flowering bulb after 7–12 years. When a bulb grows into the flower, the original bulb will disappear, but a clone bulb forms in its place, as do several buds. Properly cultivated, these buds will become flowering bulbs of their own, usually after a couple of years.
Obviously these financial speculations appealed to more people than those excited about a pretty garden. Folks began to buy, sell and trade tulips as a currency. Since tulips were only able to be dug up in the fall, futures trading, contracts and notaries emerged to trade the still planted flowers. Everyone wanted tulips! The price only goes up! Well until it didn’t.
This is the part of the story where the bubble pops. You see tulip trading becoming such a thing that people were trading their houses and livestock for the investment. The more rare the flower, the higher the price. So obviously to get the highest bidder people began to auction off these art pieces to the highest bidder.
At the start of February 1637 the rarest and most beautiful tulip went to market. It was a major deal because it could set a new standard for how high tulips could rise, the entire market was listening. Some tulips were selling for three times a tradesmans yearly earnings, could this secure their retirement?
When the tulip failed to sell, the entire market collapsed. Tulips went from an gold to weed in the span of a month. Something once worth a house was now worth a gallon of beer.
Ok so why is this important for those of us investing in real estate, stock, or looking for easy money? We need to be aware of bubbles as they happen because being stuck holding the bag can be a frustrating situation.
Right now we are seeing a situation where there are more investors in the market than consumers of the actual product. Easy money has lead to more people buying real estate for short periods of time to flip, wholesale or BRRRR with the expectation that the demand will be the same when they are ready to complete their project.
I’m not sure how many of you were looking at properties last year in 2021, properties I would expect to be selling at $20,000 were now selling at $50-$60k sometimes even higher. People were buying fixer uppers for a marked up price, then selling to investors who were then fixing them up and upping the price again. When the property sold it just reinforced that the market value was going up in that neighborhood.
I’m not saying all this inflation is unreal, or that when the stock market calms back down we will see an immediate crash in the housing market. Just realize as investors are outnumbering normal consumers the speculation will artificially pump up the market. And just like the best tulip, the best house may not sell….the market will react accordingly.