When you’re amid the tulips you don’t know it.
Much has been written about the Great 17th Century Dutch Tulip Bulb Mania. I’m not going to dredge the channel anew.
But taking a skiff back to skim over the surface is worth doing, to remind us humans that what we think we know at a given time is incomplete at best and perhaps way off.
In the 1630s, tulip bulbs became the biggest financial market in history in Holland. People thought the sky was the limit for the value of tulip bulbs.
Like the Winklevoss twins saying bitcoin was headed to $400,000. Scott Minerd of Guggenheim Partners, a man of gravitas and reputation, concurred. FTX was worth $32 billion.
We didn’t know we were amid tulips again.
I’m sure that people in The Netherlands thought that if somebody was willing to pay as much for tulips bulbs as they paid for a house that somebody else would pay the value of two houses.
The trouble always is that forecasting higher prices for things supposes someone can and will pay a higher price.
And what causes higher prices?
The same thing always. Money. Seventeenth-century Holland was awash in gold from the new world. Inflation.
What about supply-chain issues, wars, basic enthusiasm? None of these can gain – pardon me – purchase unless there’s money available to spend.
Oil is back below where it was when Russia invaded Ukraine so all the talk about that war causing energy inflation is bogus. It was just tulips. Look, Ukraine’s economy is the same size as Denver’s. To suppose the use of fuel in Denver will price the global commodity market is just. Dumb.
Here’s a timeline using oil to illustrate the arc of tulips. On Mar 15, 2020, the US dollar as measured by the “dixie,” the DXY index, shot up to nearly 103. Call 108 parity with the euro. In Feb 2018 the DXY was near 89.
By Jan 2021, the dollar was back to 90 as floods of greenbacks sapped its value. Had not the whole rest of the planet also been hosing their economies in currencies, it might have been 70.
Meme stocks soared, oil soared, prices everywhere soared.
Then that stopped.
Between June 2021 and Sep 2022, the DXY rose from about 91 to 114.
That’s why oil fell and inflation has eased some. And why the stock market hit post-Pandemic lows. Everything becomes a tulip when it rains currency. Everything returns to earth when the rain stops.
But it’s not synchronized. One thing happens, the other follows.
The DXY dipped near 104 last week. Oil prices move inversely with dollars, as do stocks. So oil is headed back up. It’s messy but you can always find the currency inverse correlatives.
We just know exactly when or where. If the Federal Reserve sells assets off its balance sheet, trading them for dollars and removing dollars from circulation, the DXY will rise again.
And tulip prices will fall anew.
It behooves us to understand the characteristics of fields of tulips and the probability of wandering into and out of them.
Which leads us back to the stock market. I’m in Wilmington DE for a Board meeting where the Investor Relations Officer and the CFO have called together experts like ModernIR to help the Board understand how the market works.
It’s laudable. Every public company should do that – not so ModernIR can parade but so Board directors understand what’s controllable and what’s not.
The stock market is unique in history in its capacity to be insular for extended periods to the presence or absence of money.
If a machine wants to buy something now and sell it in less time than the blink of an eye for a tenth of a penny more, the presence or absence of money manifests differently than in tulip bulbs or cryptocurrencies.
Someone might well pay a tenth of a penny more. You don’t know you’re overpaying when the unit of measure is a tenth of a cent.
Compounded over time and through acceleration by machines manifesting vast seas of tenth-penny buys and sells, the market creates an illusion of efficiency and correctness.
It leads public companies to believe that over the long term, stocks reflect cash-flows.
No, over the long term, your stock reflects imbalances in Supply and Demand translated to the presence of money and the degree of comfort traders feel spending it on things.
I’d rather that wasn’t true! I’d like to tell you your stock’s value is a prudent read on the difference between your revenue and your expenses.
But it’s really a tulip bulb, in today’s stock market. It’s a thing that’s assigned a value based on the willingness of people with varying horizons from a few microseconds to years, to trade dollars for it.
And the purpose of the stock market is setting prices of everything in 100-share increments. It’s no longer a market matching equity investors with equity investments.
So, what are you paying for, issuers? Do you know that just 20% of trading in your stock, or less, occurs at your listing venue?
Tiptoeing through tulips sounds fun. It is till it isn’t. To see the tulip effect in the stock market, know how it works. This is the field of gold for investor-relations. And investors.
If you want to know more, the ModernIR team has a client educational session Dec 14 at 130p ET. Send me a note and I’ll share the invitation.