Bubbles and Tulipomania

In 1623. A single tulip bulb sold for a thousand Dutch florins, seven times the average annual wage. The average tulip trader made sixty thousand florins a month. 400 times the annual wage. 40 bulbs sold for 100,000 florins. You could have bought 3,333 pigs for the same price. People were selling possessions to speculate in the tulip market. One sailor mistakenly ate a bulb with herring, thinking it an onion. It would have paid his ship’s crew for 12 months. Some tulip traders started selling tulips that had only just been planted. Others sold bulbs they intended to plant in an early version of the Futures market. They called it “wind trade” at the time, because that’s all the tangible assets you had, thin air. There has been a lot written about bubbles, and how to spot them. Here are the lessons from 400 years ago. How to spot a bubble:

• Everybody is making gains.
• People believe the passion for stocks will last forever.
• Your ordinary industry is neglected.
• Tangible assets are converted to cash to speculate in shares. (Equity mate).
• Other asset classes are deserted.
• Luxuries of every sort rise in price.
• Assets are bought to sell, not bought for their return.

Now let’s turn this on its head and see the opposite of a bubble, A period in the stock market when everyone is undervaluing everything, when everyone is being too bearish. If so then the following should be happening:

• Nobody is making money.
• People believe long-term investment is over forever.
• Everybody is concentrating on keeping their jobs.
• Everyone is trying to pay down their debts.
• Other asset classes are swamped (term deposits).
• Luxuries of every sort fall in price (discretionary retailing in a hole).
• Assets are bought for their return not to sell (income stocks favoured).

When “sentiment” is blinding people to value all you need is a catalyst for the market to pivot, at the top or bottom, something that turns the focus away from fear to greed, or greed to fear. The higher or deeper the mood, the less significant the catalyst needs to be. With the GFC and the pandemic, the catalyst was cash, printed money spilling into the markets, busting out of the central banks. Consumer, investor and corporate balance sheets were reassured and could afford, with near zero returns in defensive assets (bonds) to take risk…again. At the top? The Short Squeeze episode three weeks ago almost took the market down, there was one sharply bad day. It was quickly forgotten, rightly so, but the market’s vulnerability went on display. The fear about interest rates has topped the market in the last couple of weeks but was quickly hosed down by Jerome Powell. They don’t want a repeat of 2018. The interest rate fear could still develop (it is far more fundamental than the short squeeze). THE SIGNS BACK IN THE GFC Pre-GFC there were signs of a Bubble about to burst - there are always signs:

• Patersons (Perth broker that I worked for) put their name on Subiaco Oval and the whole AFL community had to start saying Paterson Stadium. Not sure the residents of Perth ever adopted the name.
• Three stock brokers listed in 2007 - they all ended up falling 90%. Bell Financial Group (BFG) listed in December 2007 - it hit its highest price on the open on the first day at 241c and in under 3 months was under 40c. Wilson HTM (WIG – now PNI) listed at 200c in June 2007 at 200c, hit 438c by the end of the month and fell to 57c. Can’t remember the other one. Then there was Rams Group of course (RHG) – Rams Home Loans – one of the greatest timing coups of all time for the founder who took $650m in an IPO just before it collapsed from the listing price of 250c unable to fund $6bn of loans. Almost went bust. Who says brokers can’t time the market!

• The resources analyst at Patersons also tells a story of being on the boat of a CEO of a small resources stock Patersons listed that year ripping across to Rotnes Island from Fremantle for the channel swim in September 2007 when another CEO’s boat (populated with the brokers who had handled their much larger IPO that year) ripped past and almost sank them in its wake. And then a helicopter, full of brokers, buzzed that boat flicking “V”’s at the brokers on deck. The analyst reputably then left the drinks party, went below deck, got on his mobile phone and sold every stock he had, later professing that “It doesn’t get to look any better than that”.

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