Why We Can’t Avoid Bubbles

Whether looking at 1637 or 1997, markets and bubbles always seem to find each other.

A Tulip Bulb Calamity

The wealthy merchant had only wanted to say, “Thank you.” He appreciated the information that the seaman had shared and, in return, gave him a juicy red herring to enjoy for breakfast. Thinking that the “onion” bulb resting on the counter would complement the herring perfectly, the seaman popped it into his pocket and left.

Horror is the only word that comes close to describing the merchant’s response to his missing bulb. Rather than an onion, the seaman had consumed a tulip bulb for which the merchant had paid 3,000 florins–a huge sum of money in seventeenth century Holland. At that time, a suit would have cost 80 florins and one thousand pounds of cheese, 120 florins.

The tulip had first been introduced to Europe in 1559 or so—approximately when Elizabeth ascended to the British throne. Gathering popularity, especially in Holland, tulips had been displayed for their beauty. Eventually though, the quantity that was demanded exceeded the amount available. Unwilling to wait for a blossom, the rich and the poor started to trade the bulbs in markets that sprouted where buyers and sellers met. With buyers far outnumbering sellers, bulb prices skyrocketed.

In February 1637, tulip bulb prices plunged. All who had dabbled in the tulip market suffered. Even if the sailor had never appeared, the merchant would have seen his investment evaporate.

The Beanie Baby Bubble

Fast forwarding to 1997, we could have read the following CNN reports.

• “Meet Hippity the Bunny, Inch the Worm and Wrinkles the Dog. These lovable creatures are among the 77 Beanie Babies taking the country by storm. Yet just in time for Easter weekend, the Beanie Babies are disappearing from the stores.”
• Or, as one woman explained, “I’ve gone to Zany Brainy’s, Hello Kitty, two Hallmarks and Enchanted Treasures. I have like 45 of them. I call every morning at 10 o’clock.”

Like the price of 17th century tulip bulbs, Beanie Baby prices had reached the stratosphere. Having sold for $5.00 in stores, they were going for an average of $30 on eBay with a select few attracting more than $5,000. At the height of the mania, in 1998, a Beanie Baby sold for $10,000.

Humphrey the Camel, Patti the Platypus and Spot (below) were among the first and most expensive Beanie Babies:

From: the fiscaltimes

Meanwhile, by retiring a Beanie Baby design, by having relatively small runs, by publicizing a production problem as a limited edition, Ty, the manufacturer, fed the frenzy. Through less supply, it buoyed the resale market.

Add to all of that the Beanie Baby magazines with pages of price lists, the families who were accumulating hundreds to pay for college educations and individuals who were doing arbitrage. It was a classic bubble that burst soon after 1998.

Our Bottom Line: Bubbles

Bubbles start with something new that captivates the market. As euphoria builds, so too do demand driven price increases. Then, with speculative purchases escalating, prices move even higher. But always, the euphoria switches to panic, sellers multiply and the market crashes. On the way up, participants like to say “This time it’s different.”

But, for tulip bulbs and Beanie Babies…and cupcakes…and houses…and tech…it never is.