There Is Nothing New Under The Sun: Ecclesiastes 1:4-11
November 13, 2017
By Mike Moreland
Vice President of Investment Services
One of the recurring phenomena of global economies is the creation of revolutionary technologies or, more broadly, business opportunities. An idea is envisioned that will change the way the world works. Investors are found; early entrants succeed beyond their wildest dreams, and more and more investors jump in. Prices appreciate beyond all economic value. Eventually, something bursts the bubble: a default on a contract, recognition that a great theory is unworkable in practice, or the ultimate exhaustion of the pool of prospective buyers.
There have been three great bubbles in history: tulip mania, the South Sea Company, and the Mississippi Company. All three took place from the mid-17th to the early 18th centuries. The first, as you might expect, started in Holland; the second in England, and the third in France. The tulip bubble developed as bulbs became a medium of exchange; the rarer types carrying higher value. Very simply, prices rose until they couldn’t. Merchants and speculators found themselves left with debt and flowers. The collapse of tulip bulb mania pushed much of Europe into financial distress for years.
The South Sea and Mississippi episodes had similar beginnings in the early 1700s. The English and French crowns essentially granted monopoly trading rights to quasi-private entities to harvest the riches of South America and French territories in North America. Visions of fortunes pushed the values of their securities up. This being before the days of market regulation, insider trading and fraud were rampant. Both entities collapsed, again sending economies crashing.
More recently, the technology bubble of the late 1990s and the real estate bubble a half-dozen years later came to similar ends. The lesson from each is similar. When enthusiasm overcomes fundamentals, someone will suffer. It’s almost always the latecomers.
Which brings us to today. You’ve heard of Bitcoin – an electronic currency outside the purview of governments and regulators. It’s a peer-to-peer payment system without intermediaries. Its use is growing worldwide, and it may be the currency of the future. The value of a unit of currency has risen by about ten times in the last year. Its price chart is below; overlaid on those of history’s greatest asset bubbles. See anything familiar?
Source: The Wall Street Journal Daily Shot 11/9/17
One point of clarification is due: I am not suggesting the Bitcoin phenomenon is fraudulent in any way, shape, or form. I am suggesting that any asset or medium of exchange that rises tenfold in a few months has a day of reckoning ahead. It may be now or a year from now, but the speculative fervor will not last forever. Proceed with caution if you are entering its arena.
And before you do, read one the great books on crowd psychology available: Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay. Written in 1841, its lessons remain true to today.
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