Crisis Chronicles: Tulip Mania, 1633-37 The Plague and Tulip Mania

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Comments of the Day

18 February 2021

 

Video commentary for February 17th 2021

 

Eoin Treacy’s view

A link to today’s video commentary is posted in the Subscriber’s Area. 

Some of the topics discussed include: oil prices continues rebound, copper firm, bond yields ease, stocks steady, gold weak, total return on bonds trends lower, bitcoin extends uptrend. 

 

Clubhouse Conversations

I’ve been granted early access to the Clubhouse app so I was thinking that a forum for the Collective to talk about markets might be welcome. I think right after the market closes, or on a weekend evening, might be the best time for these get-togethers but please let me know how what everything thinks the best time might be.

 

Eoin Treacy’s view

Email of the day on real returns

Where can I find a chart plotting real returns of interest rates Thanks in advance.

 

Eoin Treacy’s view

Thank you for this question which is not easy to answer. The primary tools used by the market to monitor real returns on fixed income are heavily influenced by Fed actions.

For example, the Fed is buying large swathes of the inflation-protected securities market (TIPS). That’s supressing the yield.

 

Crisis Chronicles: Tulip Mania, 1633-37 The Plague and Tulip Mania

This article from the New York Fed may be of interest to subscribers. Here is a section: 

A number of factors contributed to the conditions that caused Tulip Mania. To start, the coin debasement crisis of the 1620s was followed by a period of prosperity in the 1630s. This prosperity coincided with an outbreak of the plague, which caused a labor shortage and increased real wages and surplus income. At the same time, there was a strong belief that social mobility was a Dutch birthright and that there was money to be made in every profession.

Prior to the 1630s, tulip bulbs were only physically traded among growers in the summer, when they could be safely pulled from the ground, in what evolved to be an informal spot market for individual commodities where cash and real assets traded hands. By the 1630s, the market for tulips began to grow as florists started buying and selling tulip bulbs still in the ground using promissory notes. The notes provided welcome credit and liquidity to help finance planting and limited credit risk to a known borrower with the borrower’s bulbs as collateral. However, the notes created a limited opportunity to inspect bulbs or to see them flower, provided no guarantee of quality, nor proof that the bulbs actually belonged to the seller, or even existed. Because delivery of the bulb was often months away, this financial innovation ultimately encouraged speculation as florists bought and sold promissory notes, which were in turn resold, creating a futures market. A legitimate need for financing real assets led to a financial market in which people with no stake in the actual underlying bulbs could participate. As Dash points out, it was “normal for florists to sell tulips they could not deliver, to buyers who did not have the cash to pay for them and who had no desire to plant them.” Such a financial market served the liquidity and credit needs of growers and florists, but it also led to highly leveraged speculation by those who could borrow to finance their investments with little of their own capital at stake. Promissory notes quickly transformed from a credit and liquidity mechanism to an instrument of speculation.

Beers Instead of Beurs Fuel the Market
Bulbs were traded not at the exchange buildings in Amsterdam, the beurs, but rather in local pubs where each trade was celebrated with a toast. The in het ootje method of trade required the seller to pay a commission independent of the seller’s acceptance or refusal of the bid (typically the equivalent of a round or two of drinks), which placed a premium on accepting a decent bid, further fueling the market.

The mania climaxed in January 1637, which marked the greatest influx of new florists. Many of these novices leveraged savings and mortgaged their goods or tools to take part in the bulb trade, just as we saw farmers turn to coin clipping during the Kipper und Wipperzeit. The absolute speculative peak is believed to be an auction on February 5, 1637, which raised 90,000 guilders. To put this in perspective, the wealthiest merchants of the day might’ve accumulated wealth of half a million guilders.

 

Eoin Treacy’s view

All true manias that see prices soar to multiples of what even the most bullish early investor thought reasonable require a number of factors.

A financial innovation unleashes the fuel necessary to support price increases. Tulip investors used futures contracts, in the 1920s trading on margin was popular and options helped revolutionise trading in the 1990s. Today bitcoin is the financial innovation, although no one is quite clear how it will used.

 

Email of the day on cryptocurrency charts

I hope that you and your family are well. Please could you set up a section in your favourites for the various crypto coin charts. thanks in advance

 

Eoin Treacy’s view

Thanks for this suggestion. Unfortunately, I don’t have access to a feed for cryptocurrency prices. The only charts Bloomberg supply are the various bitcoin forks, Ethereum and Litecoin. The instruments we have can be found in the cryptocurrency/digital assets in the Funds section of the Chart Library.

 

Kraft Heinz, Conagra may raise some product prices as grains, edible oil costs surge

This article from Reuters may be of interest to subscribers. Here is a section:

Conagra CEO Sean Connolly said the company, which makes Duncan Hines cake mixes and Marie Callender’s pulled pork mac and cheese bowls, will need to implement inflation-justified price increases this year so it can also continue to fuel sales growth through innovation.

Ingredient and packaging costs represent 60% to 65% of Conagra’s total cost basket, Finance Chief Dave Marberger said on the sidelines of the Consumer Analyst Group of New York virtual conference.

With people on lockdown cooking more at home – and still stockpiling in some parts of the world – prices for commodities like sugar, wheat and soy are surging, forcing food companies to absorb higher costs.

U.S. consumers on average paid 3.7% more for food consumed at home in January than they did a year earlier, according to the Bureau of Labor Statistics Consumer Price Index. Year-over-year increases in food prices have topped 3.5% each month since last April, the longest such stretch in nearly a decade.

“We have inflation, we are seeing inflation, we are concerned about inflation. We have to mitigate that inflation, or at least part of it, with hedges and with efficiencies in the factories,” Kraft Heinz Chief Executive Miguel Patricio told Reuters in a recent interview. “Will we have price increases in food this year? Maybe in some categories that are very exposed to specific commodities.”

“Where we are seeing (inflation) is in grains and everything related to grains … It’s across the board. Sugar has big inflation; mac & cheese because it has wheat; mayo because it has oil; salad dressing because it has oil; all sweet products like desserts,” Patricio said.

 

Eoin Treacy’s view

Agriculture prices are rising for a confluence of reasons. Supply chains have been disrupted by weather, shipping issues resulting from the pandemic, swine flu (which is resurfacing again) and plagues of locusts. On the demand side, consumers have been panicking at these interruptions so they are buying on a precautionary basis. That is also being funded with higher savings rates and a safety-first mindset. That will be difficult to shift.

Precautionary buying for fear of higher prices in future, demands for higher wages to offset these kinds of pressures and the perception of easy money policies into infinity are fuelling the perception inflation is rising. With inflation perception is at least as important as reality because of its effect on behaviour.

 

Eoin’s personal portfolio – stop triggered on hedge position

Eoin Treacy’s view

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.

 

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