Change is a constant whether perceived or not; but only when we see it do we believe it has occurred. Then, it is too late.
The phrase, speculative bubble, is used to describe the financial tumescence that characterizes the often manic unfounded rise of asset values. The phrase, however, is inadequate for it fails to convey the destructive aftermath that follows; for such purposes, train wreck, is a better description. In 2009, the largest train wreck in economic history is about to occur.
Unfounded manic speculation, e.g. the 2002-2007 real estate bubble, is not new. Similar manic speculation occurred in internet stocks in the 1990s, radio stocks in the 1920s, as it did in railroad stocks in the 19th century and in tulip bulbs in the 17th century. Manic speculation is as human as the markets.
THE DELUSION OF RATIONAL MARKETS
The first stock exchange in the world was the Amsterdam Stock Exchange, established in 1602. Amsterdam was also the site of the world first speculative bubble, Tulip Mania, which appeared shortly thereafter, 1621-1636
This is from Wikipedia’s recounting of Tulip Mania:
.. traders signed contracts before a notary to purchase tulips at the end of the season (effectively futures contracts). Thus the Dutch, who developed many of the techniques of modern finance, created a market for durable tulip bulbs.
Short selling was banned by an edict of 1610, which was reiterated or strengthened in 1621 and 1630, and again in 1636. Short sellers were not prosecuted under these edicts, but their contracts were deemed unenforceable…
As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus [a tulip-specific virus that caused more spectacular colored tulips]. By 1634, in part as a result of demand from the French, speculators began to enter the market.
In 1636, the Dutch created a type of formal futures markets where contracts to buy bulbs at the end of the season were bought and sold. Traders met in "colleges" at taverns and buyers were required to pay a 2.5% "wine money" fee, up to a maximum of three florins, per trade.
Neither party paid an initial margin nor a mark-to-market margin, and all contracts were with the individual counterparties rather than with the exchange. No deliveries were ever made to fulfill these contracts because of the market collapse in February 1637…
The contract price of rare bulbs continued to rise throughout 1636. That November, the contract price of common bulbs without the valuable mosaic virus also began to rise in value. The Dutch derogatorily described tulip contract trading as windhandel (literally "wind trade"), because no bulbs were actually changing hands. However in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt.
It is clear that today’s “complex and sophisticated” markets are not as unique as some would believe. What is new, however, are the circumstances and consequences of the current collapse. Today, financial markets are a global phenomena; and so, too, will be the consequences.
The invention of the stock market in Amsterdam in 1602 combined with the issuance of the Bank of England’s credit-based paper money in 1694 was to change the course of human history for the next three hundred years. That epoch is now ending.
The world that credit gave rise to is collapsing as is its credit-based foundation, turning like the proverbial carriage into a pumpkin at midnight, as the hoped for financial fairy tale turns instead into a nightmare of defaulting debt in 2009.
The collapse of global markets and global trade is a sign we have reached the end of this epoch. The current financial collapse is the beginning of its end. When it is over, so, too, will be the era it spawned. Human history moves in waves. Another is about to begin.
From "2009 The Train Wreck" by Darryl Robert Schoon
Click here for the full article.
I will go so far as to argue that the above applies to the entire stock market and the entire bond market including Treasuries. Not that all who purchase stocks and bonds are market-destructive, but that those who only view these paper proxies as a way to make a profit from price movements. This is completely a problem caused by Wall Street.
I am not against free markets by any stretch of the imagination. I am not one who blamed the short sellers or the speculators. But instead, I am blaming the system that Wall Street has built.
For example, bonds are a great investment for the retiree who just wants a fixed income from his capital investment. But the bond market is now driven by bond traders who have no interest in holding those bonds to maturity. Instead, they buy and sell bonds to reap profits from changes in price. And they place large bets on which companies may default on their bonds. In some cases these bets become self-fulfilling prophecies, leaving the poor retiree with no income at all.
In the stock market, most people know nothing about the companies they buy. They don't buy stock in a company because they believe in it's product, or because they want to support it's business. Instead, they buy the stock with the intention of selling it at a higher price. Contrast this to the way a Venture Capitalist invests in a young company to promote it's growth. Or the way Jim Sinclair invests in mining companies, after visiting the mine and meeting the management.
It is this disconnect from reality, this blind faith in the sustainability of paper markets, that is bringing down the system. As Darryl Robert Schoon said, this is the end of an era. And the new era which will arise will differ in the way I just described. Capital investments will be made by people with an actual interest in a real product, not just the profits that come from paper trades.
As Another said in 1997 and 1998:
If you owned an oilwell in your back yard and no-one could take control of it, then oil is the best investment. But, most people use various forms of western paper to trade oil and that paper will burn in a currency fire. Make no mistake, a currency fire is now in process and it has much fuel remaining.
If one owns real gold , it will be with ease to view the world currency developments. They will be truly of biblical proportions!
The US$ has risen on a flight of fear. That will now end as the LBMA shorts are given to wolves. If this fire burns too hot, gold will turn and it's trading halted. The price of oil will explode as gold becomes the "world oil currency"! Even now oil has locked the IMFs gold, Asia will bid against them no more. We come to extreme times.
Risk not your wealth in paper, we enter a period of truth.
In that day, debts will burn and currencies will war, and you sir will, with honor, raise your standard of living with Gold!
During this result, all paper will burn and the world economy will start over.
My proposition: Revalue gold to represent all currencies. Perhaps many thousands US/oz. and all governments buy and sell gold for these currencies, in the open. In this outcome, we find no more "black market physical gold" than there be "black market physical currencies"!
Few can, or will understand what makes a currency, a currency. Gold has not changed, nor has it lost it's place in the world as money. It is still the test of currencies, yesterday, today and tomorrow!