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PERSONAL, UNDILUTED VIEWS FROM TOM WINNIFRITH

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The Tulip bubble of 1637 and the China Walnut bubble of 2012

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- Tom Winnifrith

We have all lived through various bubbles of which the 1991-2001 dotcom bubble was the most famous. After each bubble bursts everyone (with hindsight) says “oh, that was a bubble, we will never be that stupid again.” And then they are. I shall be sinking my teeth into New Media this autumn. But at least no-one has been mad enough, until now, to go back to the insanity of the Tulip bubble of 1637. But now… step forward China and walnuts.

For those who have forgotten, tulip bulbs were a collectable in Holland in the 17th century. But for some reason folks started speculating on them as the price moved higher and in the end a whole nation became obse4sses with owning tulip bulbs. They forgot that you can always create new tulip bulbs (and so there is no scarcity value – something that defines any investment, notably “alternative investments”) and that the bulbs had no real innate value – ultimately they can just be used to produce a flower. But by 1637 people would sell their house to buy bulbs. The most expensive bulb was trading at a price equivalent to 10 times the annual salary of a skilled craftsman. Folks pawned real assets and leveraged up to buy bulbs.

Of course at some stage reality set in and some took profits, some became forced sellers and some became panicked sellers and then the whole nation woke up and realised that a tulip bulb was not really worth anything at all and the whole market collapsed. Families were ruined. The whole Dutch economy suffered a terrible setback as all this misallocated capital went off to money heaven. Surely no-one could be mad enough to do this sort of thing again. Er……

Step forward the Chinese. Just as the Dutch have always had a liking for tulips, the Chinese have always liked walnuts. Playing with a pair of walnuts in your hand calms you down. But they grow plentifully and so who cares. Sadly it seems rather a lot of people do as there is now a booming market in walnuts. Not just antique walnuts but new ones which may have pleasant patterns, etc. Prices of walnuts in special walnut shops and on-line walnut brokerages are up by 1000% in ten years. And now (especially with shares and property having taken a bit of a knock) the mania is accelerating as folks look for sure fire winners as this Reuters video makes clear.

Listen to the end. The reporter says that the boom may not last as Chinese farmers are now planting more walnut trees. May not last? Of course it will not last. Right now I am seeing if I have any old walnuts from last Christmas to FedEx over to China tomorrow morning. Walnuts are grown across the world and their innate value is virtually nothing. China Walnuts = Dutch Tulips.

And of course the Chinese Government has just announced massive fiscal and monetary stimulus to keep the real economy growing. If you need evidence of its problems, I refer you to an article I have just published on the subject of socks. I am not kidding, it is more interesting than it sounds and can be read HERE.

But if China is going to cut the cost of credit why should I invest in dull old sectors like coal mining or textiles when I can make 200% a year by buying Walnuts? You and I know the answer but there will be enough fools who do not and so this bubble will just get blown bigger by economic stimulus. And then when the bursting happens it will be all the more dramatic.

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