Once again
we've got another group of experts claiming we are heading for a stock market
crash.
Experts from
around the world have said that we are in a financial bubble but then this is
no different then what we have been hearing for the last couple years.
And I’ve
heard the rumors about Warren Buffett preparing for a crash as well.
But keep in
mind that during World War II, the stock market advanced which makes me believe
that over time it will continue to advance.
American
businesses are going to be worth more money, dollars are going to be worth
less, so that money won't buy you quite as much but this doesn’t mean that businesses
are going to be worthless.
The problem is
that the same groups of people who have caused us to be where we are today are
the same group of people trying to convince us that they have created secret
systems that will allow them to see the crash coming before it happens.
I find it
sad that people would look to take advantage of people and use scare tactics to
try and get you to invest with them.
If I had any
musical talent I would be contacting a producer like James Citkovic now. Of course since I lack the talent I can only rely
on hard work but either way if at the end of the day I end up with any money
left in my pocket it is a farm that I would be looking to buy.
What Causes Bubbles?
With the
benefit of hindsight, we can examine past bubbles and learn a great deal. One
of the earliest, if not the first, recorded bubble involved tulip bulbs.
Here’s how the
story unfolded.
Tulips
originated in the Iberian Peninsula (Spain and Portugal) and North Africa. The
University of Leiden, in The Netherlands, hired Flemish botanist Carolus
Clusius who established a botanical garden in 1593.
The newly
hired professor planted his collection of tulip bulbs in what is now the oldest
botanical garden in The Netherlands and one of the oldest in the world. The
tulip began to increase in popularity as it was distinctively different from
all other flowers.
Then the story took an interesting
turn.
Many bulbs
contracted the mosaic virus which caused a variegation in the tulips and petals
gave the appearance of a flame. This
alteration made the flower even more coveted which caused prices to rise to the
point where people began to view the tulip more as an investment than an
adornment.
Everyone from nobility down to the
chimney sweep dabbled in tulips.
Moreover,
the belief that prices would continue to climb became the new paradigm.
While
skeptics sat on the sideline, their friends and neighbors made handsome profits
speculating on the bulbs. Call options were even created which allowed
investors to pay a small fee for the right to buy tulip bulbs at a designated
price within a specified time frame.
As
speculation increased, prices soared and, in the final years of tulip mania
(1634-37), people were hocking land, jewelry, and just about everything else to
buy these amazing bulbs. Greed was
rampant as everyone believed this was the way to become wealthy.
One day a
sailor returned to Holland bringing good news to a local merchant that a
shipment of goods had arrived. The
merchant was so pleased that he rewarded the sailor with a free breakfast.
As the
sailor sat eating, he noticed what he thought was an onion sitting on the counter
nearby. The sailor used the “onion” to
enhance the flavor of his breakfast. However,
it was not an onion at all.
Rather, it was a rare Semper Augustus tulip bulb.
This bulb
was so valuable that, if it were sold, the proceeds from the sale could have
fed the entire crew of his ship for full year.
What became of this sailor?
He was
arrested on a felony charge and spent several months in jail. But there’s more to this story.
When Bubbles Burst
What causes
a bubble to burst? In the case of the
tulip, which is the typical bubble-bursting process, people began to sell their
bulbs and take profits.
As more and
more investors sold, panic-selling began and prices literally collapsed. The
decline was swift and steep.
In fact,
despite the government’s best efforts to calm investors, the “boom to bust”
shock was so great, and so widespread, that it was followed by an extended
depression in Holland.
Hence, bubbles are caused by
speculation, excessive demand, mania, greed, etc., and they burst when
investors take profits.
Other words,
as the greedy stock brokers try and scare us into making a purchase they could
be the very reason for the crash.
I do agree,
things are not going to get much better as technology is replacing the worker.
