Many of my friends that own businesses are working every day to increase the value of their venture. They are investing their time, money and intellectual resources into building something that provides a service to the public and value to their future. I was talking to one of my business acquaintances this week and he told me about his buddy that was making a killing by investing in the oil market. He was frustrated because here his buddy sat at a computer all day making trades and helping drive the price of oil up and because the price was so high gas is now $4.00 a gallon. The high price of the gasoline is hurting the small business owners. He said it was enough to drive entrepreneur spirit out those who were building something of value for their community and family.
I started thinking about what is going on in our country with the real estate bubble burst and the oil prices rising so quickly. I began to connect the present to the past.
Legend has it that the tulip craze that hit Holland in the seventeenth century is arguably the most famous financial bubble in all of history. The most popular stories about what happened tell us that prices for tulips began to rapidly increase in 1636 as news spread that rich people were willing to pay large amounts of money for tulips. Soon almost everyone that had a little bit of money saved up joined in the speculative fervor, many people using their life savings in order to buy bulbs, believing they could resell them at windfall profits. At the height of the mania, a single bulb cost as much as an expensive house. Eventually reality set in and in 1637 panic selling commenced as people realized they were never going to make a return on their investments, and the price of bulbs crashed, losing over 90% of their value. Many people were financially ruined.
As a history major in college have to tell you that the Tulip story is a wonderful and helpful legend but not all of it is true. The tulip speculative bubble really did occur, but some of the wilder stories told about it are exaggerations. Still, Tulips make a fitting symbol for anything like oil or real estate or stocks and bonds or gold or diamonds whose small intrinsic value is vastly inflated by speculation.
Speculation is when you buy anything you don't intend to use yourself, but only to resell when the price goes up.
History tells us that with the Tulips, most buyers simply refused to pay for the bulbs after the crash. In today’s computer world our financial markets people don't have that kind of luxury. With a single click of a mouse, all your money instantly and forever disappears.
I wonder how many people lost/lose big money on Beanie Babies, Pokémon Cards, and baseball cards over the years?
How much of the oil futures' market has become a bubble? As hedge funds and such start bidding the price up as a way to mitigate the falling dollar, how many other institutional investors are following suit? Is foreign demand in developing countries really accounting for all of the price increase? As its selling price rapidly approaches $150 barrel, how many believe that its true value is still closer to $60. If the bubble does burst, what does it do to the financial industry? This ought to be a big concern for various retirement plans around the world. It has become a damned if we do, damned if we don't scenario. The current high prices of gasoline are affecting the economy, but a collapse of the oil market could carry serious consequences of its own.
I am not an economist but I don't think the price of oil is set by a cartel. I’ll admit I don't fully understand the oil market and all the players, but I don't think it is OPEC setting the price right now. It seems to me that OPEC controls the supply of much of the world's oil, thus heavily influencing the price. When OPEC cuts output, prices tend to go up, when they increase output, prices tend to go down.
But for some reason, right now no matter what OPEC is doing, the price just continues to climb. It the price we hear of a barrel of oil the real value or just the speculative value?
The closest thing I can like oil too is the way diamonds are valued. What do you think the "true" value of a 1 carat flawless diamond is? Maybe 50 bucks? Try negotiating that price in NY's diamond district.
But, it's not just oil; it's pretty much all commodities. Look at the history of popular investment rushes like the 1990’s dot com stocks or the current US real estate market.
So, the question is not whether it's a bubble or not, it's where will all that money go when this one bursts?
I am old enough to remember that the words gold standard was not allowed to be used in the United States. When I was a child it was illegal for an American citizen to hold gold and they were all forced to sell it to the government at a fixed rate that was below market value and that was not that long ago. I remember in the 1960’s that gold in the United States was priced at about $35 per an ounce.
Back in the gold rush, gold miners that didn’t starve to death used banks to store their gold and the gold was weighed and a hand written receipt was given out. As is often the case, soon people discovered that these hand written receipts for gold could be forged and hence the need for a official receipt that became known as the American dollar.
Later this gold was lent out but soon that gave way to checks and before too long the value of the paper money was far in excess of the value of the gold held by the banks and when the miners discovered this discrepancy they were offered something new at the time called interest payments to keep them all happy.
What the miners soon became unhappy about was another new invention called inflation where a ten dollar bill was suddenly worth only nine grams of gold and not the ten they had originally deposited with the bank.
Fast forward to today and we have shorts, longs , stop losses , petrodollars, futures , derivatives , CDO’s, and something I just came across on the news called the sub prime crisis that gave you all a 0.25% cut in interest rates but also lead to the GBP buying you 1.5% less from abroad.
Now hands up all of us that have a pension fund or an IRA Mutual Fund and can honestly say they know what money really is invested in. Why do so many of us want to take the short cut but find out too late that we were taken.
Why not invest in your community, in that independent business owner right down the street that serves you and your family and make life better for us all? You can see the growth and the value each time you stop in or drive by.
The one thing about history I have learned, people never seem to learn from their past mistakes. Are you prepared for the almost certain burst in the current bubble?
Maybe P. T. Barnum was right. But don’t even take that bet; because Mr. Barnum in reality never said those famous words, “ A sucker is born every minute”. Even that is a myth.
The price of ExxonMobil stock seems to be staying between $80 to $90. Investors clearly believe that there is a bubble, otherwise the stock price would soar.
Posted by: Michael Ejercito | June 16, 2008 at 03:33 PM
I always do what I can to shop locally. I love keeping money flowing in the community. Being an ambassador for the SBO just cements that philosophy even more.
It bugs me to no end to see how much speculation seems to rule the world these days. Not that speculation is anything new, but you just want to shake some of these people. The American Dream used to be about achieving whatever you wanted with hard work, ambition. Now it seems to be about getting rich quick or getting rich quicker.
How many ads do we see now that's all about getting cash now? Whether you're selling your old gold, signing up for that stupid fox website, flipping foreclosures, or becoming a distributor for any number of vitamins...the entire principle of what it means to be an American and have the freedoms that come with it fly right out the window. And you're right, people don't learn. That's why the Nigerian scams still proliferate.
My long-winded point it, that's why I patronize local businesses over chains whenever I can help it (franchises notwithstanding). Those are people who put in the time, the money, the effort, and the sweat. They are trying to make a life, not a quick buck. And how can you not support that?
Posted by: Michelle Courtney / WellthyLifeStyle NC | June 24, 2008 at 01:17 PM