What Is a Speculative Bubble?

Speculative bubbles refer to an exchange rate movement that is inconsistent with basic economic variables, and this movement is self-reinforcing. Speculative bubbles can be divided into rational speculative bubbles and irrational speculative bubbles. The common point of both is that they attach importance to the role of expectation. The difference is that the former takes the rational expectation hypothesis as the basic premise, while the latter takes the negative expectation hypothesis as the starting point.

Speculative bubbles

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In the financial world, "

Hot Fried Tulips

The first speculative frenzy in the world with a lot of written records occurred in the Netherlands in the early seventeenth century and was historically known as the "tulip frenzy". Of course, tulips became the first recorded "bubble" for this product. At the height of the tulip hype, all the wealth of even a family was buried on a plant bulb.

The tulip name comes from Turkish, which means "scarf" flower. In the mid-16th century, travellers traveling through Turkey were moved by the beauty of this flower and brought it back to Vienna. Soon it caught the attention of Europeans, and within a few years it began to grow in Germany, then Belgium, and then the Netherlands. It was spread to England in the late 1670s. Soon, this novel flower became popular in the court.

Unlike other flowers, tulips are not only elegant in shape, but also have "variant" characteristics. Artificially cultivated tulips often have noticeable mutations, such as artificially cultivated red tulips, and their offspring may become red and white varieties.

Since people at the time did not know much about the genes of plants, this mysterious "mutation" of tulips undoubtedly increased the speculative interest of tulips in Europe. At that time, tulip growers were bound to do one thing every day-visit the flowerbeds, and search for "variant" flowers. If the color of the flower is beautiful, the owner can expect a high-priced buyer. Buyers then use such flowers to cultivate the next generation of flowers and sell them at high prices. Tulips with yellow stems (called "dirty bottoms") or ugly shapes are eliminated, and perfect flowers become "flower seeds."

In the early 1720s, enthusiasm for tulips and their "variant" characteristics began to land in the Netherlands. The rarest seed at the time could be sold for thousands of florins (a British silver coin valued at two pounds, discontinued in 1971), a number almost equal to the wealth of a middle-income family at the time. Gradually, this fanaticism spread from a small group of people to the entire Dutch society. Soon, almost all families built their own tulip flower beds, which were almost covered with every inch of available land in the Netherlands.

At first, the transactions took place during the winter. Speculators may bring some samples and a certain amount of bulbs to the tulip trader's hotel. There, the trader can use the "General Drump" bought by five hundred Florin plus two hundred Florin cash in exchange for "Marshal Bor", and then hope that one thousand Florin will be exchanged within one week. Shot.

In this way, the price of tulips began to rise wildly. By 1634, from coolie to aristocracy, almost all people from all social classes in the Netherlands were "mobilized" into the tulip hype. Soon, the transaction changed from winter to year-round, and the two parties could sign a futures contract and then deliver it in the next spring. What we call "call" and "put" options were created and widely traded at that time.

Speculators at that time were not really interested in the delivery itself, and did not intend to have the actual tulips they bought. When they buy a contract for delivery, they often quickly sell his contract to other enthusiasts at a profitable price. This is known today as "short selling."

In "Bryanville Travels", such a plot is recorded, which seems to reflect the crazy price of tulips. A young sailor was rewarded with a breakfast by a businessman for reporting the news. The tulip speculator later discovered that the goods were missing a flowering stem worth 3,000 florins, named "Eternal Augustus". When he found the sailor in a hurry, the young man was chewing on the salted fish with gusto "the thing he used as an onion".

According to historical records, a "Governor" bulb can be exchanged for four cows, eight pigs, twelve sheep, four carts of rye or two carts of wheat, two barrels of liquor or four barrels of beer, two barrels of butter and half a ton of cheese, plus Plenty of furniture. "Augustus" with red and white stripes on the blue color is priced at twice the value of cash, plus a carriage with full horses. The Dutch are beginning to believe that not only Dutch speculators, but also other foreign speculators will be willing to accept ever-rising prices. In fact, previously in France, a rare bulb was used to pay the full price of a precious gem.

A story can explain the atmosphere and the mood of people at that time. When all Dutch families had been cultivating tulips, a shoemaker in The Hague eventually cultivated a black tulip on a small plot of plantation. A group of growers from Heilham visited him and persuaded him to sell them flowers. The shoemaker sold the baby to them for 1,500 florins, and one of the buyers immediately dropped the black tulip to the ground and trampled it with his feet until it turned into a puddle of mud. The shoemaker was stunned. Buyers explained that they also cultivated a black tulip, and destroying this one, their own flowers are unique. They are willing to pay everything, and if necessary, 10,000 Florins will not hesitate. The heartbreaking shoemaker was sullen, and it was said that he soon died of over-annoyance.

When the frenzy escalated, almost all other economic activity slowed. In 1636, the stock exchanges in Amsterdam, Rotterdam and other places opened the Tulip Exchange. The rise and fall of flower prices have created a large number of rich people, and every rise in flower prices has convinced more people that this road of wealth can be extended forever, and the rich people around the world will run to the Netherlands regardless of the price To buy all the tulips. Even before a flower emerges from the ground, it has changed hands with rising prices. People with no money mortgaged real estate loan investments, and huge loans continued to pile up on small stalks.

Tulip trading is similar to futures trading, but in the seventeenth century, tulip trading encountered more problems than today's commodity futures. Because there is no support from the member company behind the contract, and if anyone finally wants to receive delivery of a specific bulb in a few months, he can't be sure that he has got the target stipulated in the contract, and it will have to wait until it really blossoms. To regulate this activity, the Netherlands has enacted a new law, setting up a "special notary" for tulips, which specifies a fixed place for tulip transactions.

The "bubble" will one day burst. I don't know from which day, for some reason, some smarter or timid people began to leave. After this sign was noticed, the sell-off immediately turned into panic, and the flower price dived down from the cliff. When crazy prices finally collapsed, the entire Dutch economic life collapsed. There are so many debt lawsuits that even the courts are unable to hear them. Many large families have died down because of this, and famous old names have closed down because of this. It was not until many years before the Dutch economy was restored.

Towards the ultimate foam break

Milken didn't stop at trading junk bonds. At the same time, he devised a new financing method-using underwriting junk bonds to finance SMEs. This makes Milken an important figure in the history of American finance. It is no exaggeration to say that the development of this new financial product completely changed the development of the United States from the 1970s to the 1980s.

Under Milken's guidance, junk bonds have gradually become a very sought-after investment product. Milken also built a large customer network with accurate judgment. However, new problems are gradually emerging. Due to the limited number of junk bonds, it is no longer possible to satisfy the desire of many funds to buy. And just relying on natural disasters, it took too long to wait for the credit crisis and debt crisis of the enterprise, and Milken thought of a good way for this.

Rather than wait for the credibility and downgrade of those companies with junk bonds, it is better to find some developing companies yourself. If they lend money to them, their credit is similar to those of junk bond companies, but they are in the development stage, and the quality of bonds is much better than the bonds of companies with declining returns and desperately reducing losses. As a result, Milken created a junk bond issuance market.

The emerging industries at the timethe development of the optical fiber industry and the mobile communications industry were closely related to junk bonds. The reason why McLaugh Mobile Communications and Cable Network (CNN) became today's big households in the United States was thanks to Milken's Funding from junk bond underwriting. The cooperation with MCI is a classic. MCI was founded in 1963 and started with just $ 3,000. When MCI challenged AT & T, the world's largest telecommunications company, Milken became a powerful backing for their financing. He raised $ 2 billion in junk bonds for MCI, ensuring MCI's expanded funding sources, and enabling MCI to successfully break AT & T's monopoly on the long-distance phone market.

Junk bonds have also entered the field of mergers and acquisitions. In 1982, Milken's company began to issue a large proportion of loans through junk bonds to merge businesses. The most extreme example is the merger of oil companies. At that time, an unknown man named Karl Icahn wanted to hostile purchase of American Petroleum Company, but unfortunately he lacked $ 8 billion, which would hinder the implementation of his plan. Icahn asked Milken for help. As a result, he received a letter the following morning stating that the company was "highly confident" that it could raise sufficient funds. Although in the end Icahn abandoned the hostile acquisition of Philips Oil, the era of hostile acquisitions of the company began here, and junk bonds helped a lot.

Milken became the God of Wealth for SMEs and investment companies, and his personal income soared. For years, his salary has been fixed, at $ 1,000 per week, and his real income is transaction commissions. In 1986, his commissions reached $ 550 million.

However, the tree is making a big splash. Since the mid-1980s, people have repeatedly sued Milken for operating illegally, and eventually brought him to court. The court confirmed Milken's six counts in 1990, but none of them related to internal transactions, manipulation of stock prices, and bribery. Milken's charges were unprecedented, and no one has ever been charged with these charges beforehe covered up stock positions, helped clients evade taxes, concealed accounting records, and ultimately sentenced to 10 years in prison, compensation and a fine of $ 1.1 billion ( Among them, a fine of 200 million US dollars, a compensation of 500 million U.S. dollars, and 400 million U.S. dollars in taxes paid to the government), and barred him from engaging in the securities industry.

After Milken's imprisonment, the bubble of junk bonds was blown up. In 1988, the market for junk bonds had reached 200 billion US dollars. Under the pressure of the potential bear market after the stock market disaster in 1987, from 1988, junk bond issuers were unable to pay high interest rates. In the end, junk bonds were still difficult to overcome "high risk, high interest rate, high burden, high arrears, The "higher risk" vicious circle is in a sudden decline. The bubble burst.

Junk bonds have a reputation

After the burst of the tulip bubble, speculative bubbles have emerged in financial history. One of the most sensational stories is the speculative wave of junk bonds initiated by "junk bond" king Milken.

After the Second World War, the United States gradually improved financial supervision measures aimed at protecting bond investors from losses due to corporate bankruptcy or default. Milken was keenly aware that the lower the credit rating of the bond, the lower the investor's return after the default.

At that time, almost no one was trading high-yield bonds with no or insufficient grade. Not to mention buying these bonds, it is very difficult to inquire about its price, because in the eyes of all investors, they are like garbage that can not bring any return.

Milken lobbied for his new discovery, looking for someone willing to buy. He explained to high-return funds the benefits of buying these bonds. In contrast to traditional bond transactions that focus on short-term benefits, Milken defines their junk bonds as "ownership bonds" worth having. He believes that these bonds can remain stable during periods of high interest rate risk, because the returns obtained are linked to the company's development prospects, not linked to interest rates.

Milken does not think that the risk of junk bonds is high. Instead, he thinks that junk bonds are much less risky than buying stocks or bonds of companies with credit ratings, especially when the market is down or the market is volatile. in this way. The bold investment company was first convinced by him, and some insurance companies and retirement funds were willing to follow up on Milken's theory. Soon, the annual yield on junk bonds invested by his lobbying agency reached 50%. Under the wealth effect, more and more buyers of junk bonds have gradually formed a market. The profits of the bond trading department managed by Milken also accounted for 35% of the company's total profits at the beginning and nearly 100% in 1975.

In 1974, due to the deterioration of the macro economy, many bonds were downgraded. Many funds are eager to sell low-grade bonds in order to avoid affecting the quality image of the fund. At the time, the "First Investor Fund" also faced such a problem. However, after studying the fund's investment portfolio, Milken advised fund managers not to sell their junk bonds. Since the fund solicits customers under the slogan of high returns, if the high-yield bonds are thrown away, the efficiency of the fund will be reduced.

The First Investor Fund accepted Milken's opinion. From 1974 to 1976, the fund became the nation's best performing fund for three consecutive years. Fund sales have therefore increased significantly. Milken also became famous for his involvement, and he became the focus of high-yield bond trading.