Oil, Nasdaq and tulips - what do these things have in common? A prediction...

From the Associated Press on April 20th: OPEC Secretary-General Abdullah el al-Badri said Sunday oil prices would likely go higher and that the group was ready to raise production if the price pressure was due to a shortage of supply — something he doubted. “Oil prices, there is a common understanding that has nothing to do with supply and demand,” al-Badri said…

When someone says that the law of supply and demand are not in affect, run away as fast as you can, but check for your wallet first.

The price of oil has been going ever higher despite a slowdown (even recession?) in the US. An economic slowdown means that people and companies cut back - travel less, make less, spend less. If supply remains constant then the law of supply and demand would predict a reduction in price. But that isn't happening - the price of oil contiinues to go up and up.

But this isn't the first time this has happened. First, let's visit the Netherlands in the 1630s, where the beautiful tulip has arrived from Constantinople (Istanbul). Here is some of the story of tulip mania. Read more here.


Could a mere tulip bulb be worth $76,000? It is if people are willing to pay for it! It may sound preposterous, but this is exactly what happened in Holland in the 1630’s.

The seeds of this craze were planted in 1593. A man by the name of Conrad Guestner imported the first tulip bulb into Holland from Constantinople, in present day Turkey. After a few years, tulip bulbs became a status symbol and a novelty for the rich and famous. Eventually, tulip bulbs became a hot ticket item in neighboring Germany, as well. After some time, a few tulip bulbs contracted a non-harmful plant virus called mosaic. The effects of this mosaic virus were tulip petals with beautiful “flames” of color. This unique effect furthermore increased the value of the already rare and highly exclusive tulip bulb.

Initially, only the true connoisseurs bought tulip bulbs, but the rapidly rising price quickly attracted speculators looking to profit. It didn’t take long before the tulip bulbs were traded on local market exchanges, which were not unlike today’s stock exchanges. By 1634, tulip mania had feverishly spread to the Dutch middle class. Pretty soon everybody was dealing in tulip bulbs, looking to make a quick fortune. The majority of the tulip bulb buyers had no intentions of even planting these bulbs! The name of the game was to buy low and sell high, just like in any other market. The whole Dutch nation was caught in a sweeping mania, as people traded in their land, livestock, farms and life savings all to acquire 1 single tulip bulb!

In less than one month, the price of tulip bulbs went up twenty-fold! To put that into perspective, if you had invested $1,000 and came back on month later, your investment would have ballooned to $20,000! Now you can understand the mad rush to buy tulip bulbs at any cost. Tulip bulb mania affected the public psyche to an extreme. One drunk man in a bar started peeling and eating what he thought was an onion, while it was in fact it was the bar owner's tulip bulb on display. This man was jailed for many months!


All common sense and logic was thrown to the wind, and even scoffed at. This is exemplified by how many USEFUL items it cost to buy 1 single tulip bulb:

• four tons of wheat
• eight tons of rye
• one bed
• four oxen
• eight pigs
• 12 sheep
• one suit of clothes
• two casks of wine
• four tons of beer
• two tons of butter
• 1,000 pounds of cheese
• one silver drinking cup.

Mind you, these valuable items COMBINED only equaled the value of 1 tulip bulb! The modern day value of these items is over $40,000!

In 1636, tulips were trading hands on the Amsterdam stock exchange as well as on exchanges in Rotterdam, Harlem, Levytown, Horne and many other exchanges in other nearby European countries. These exchanges started to offer option contracts to speculators. These option contracts allowed tulip bulbs to be speculated upon for a fraction of the price of a real tulip bulb. This allowed people of lower means to speculate in the tulip market. Additionally, options allowed for leverage. Due to leverage, option buyers were able to control larger amounts of tulip bulbs, allowing a greater profit. In a previous example, we showed how a $1,000 dollar investment would have yielded $20,000 in one month. As if this weren’t enough, option leverage allowed this same investment of $1,000 to balloon into $100,000! Unfortunately, leverage is a double-edged sword. If the tulip bulb price moved downwards ever so slightly, the option buyer’s investment would be lost and they might even owe money! Talk about risky. But at this point, it was commonly believed that the tulip market was immune to crashing and that it would “always go up”.

The financial devastation that followed the tulip bulb crash lasted for decades, crippling Dutch commerce. The price of tulips at the height of the mania was $76,000; 6 weeks later they were valued at less than one dollar! The only people who prospered from the insanity were the smart money who liquidated at the top.

Now move forward in time 360+ years.

From one of my favorite blogs - Dinocrat:

The NASDAQ doubled from March 1999 to March 2000 to over 5000 on flimsy fundamentals, and then had a little problem — it crashed, falling 70% to a low of 1600 or so. It is axiomatic that no one who bought at the high believed they were buying at the high.



Just like the NASDAQ, in the 12 months from April 2007 to April 2008, the price of oil has doubled, while forecasts of demand have been repeatedly lowered over the period. We’re not saying that prices can’t go higher, but everyone in the world, even the most sophisticated investors, seems to be on the same side of this trade — and that in itself ought to be a red flag.

So where does oil go fom here? Again from Dinocrat:

It looks like the insanity in the oil market may be nearing, or has possibly even reached, an end. A great unwinding may be at hand from the Tulipmania or NASDAQ 5000 of these times.

We’ve compared the spike in oil and other commodities like gold with the decline in the dollar since the fall of last year, and, up until recently, there was an outstanding correlation — going long oil, gold or other commodities was pretty clearly an effective way to short the dollar in an almost risk free environment. Something has changed, however, in recent days.



Since early April, gold and oil have moved in opposite directions. Gold’s price, in our view, has retreated as the market has judged, correctly, that the dollar’s decline is nearing an end for multiple sound reasons (a halt to interest rate cuts, global slow growth or recession, etc.). Meanwhile, oil’s price has become completely untethered from reality in an insane speculative frenzy, even versus other commodities (which have had their own bull markets).

It’s over, or at least coming to an end, in our opinion. The fundamentals do not support current oil prices, as industry veterans say, and that situation is ever more glaringly evident each day, as economies weaken in the West. Of course, we may be wrong about this — but the last man who bought an insanely expensive tulip bulb, or an internet stock in March 2000, thought that the price would go yet higher. Peaks are only understood in retrospect.

In addition to my prediction that the dollar has already or soon will reach bottom, I add a second prediction that oil has also peaked, or soon will. From the lofty $117 a barrel today I foresee a reduction to the more common (at least until recently) range of $60-$75 a barrel. I find that my predictions are often right, they just take longer than I originally estimate (this is part of what I call the "Tischler Effect", which I will post on later).