Feeling Fine at the End of the World

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.

It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it
And I feel fine.
- R.E.M.

In the late 1500s, the first tulip bulbs came to Holland from Turkey, setting in motion events that would lead to what was perhaps the first full-fledged bubble in world history. Over the course of several decades, bulbs grown in the area developed a virus which made the color of the flowers more brilliant and created patterns that made the flowers seem even more exotic.

Due to their enhanced beauty, tulip bulbs were soon in high demand which drove prices upward. People of all classes desired not only a high quantity of these bulbs, but also searched out the most unique and interesting color designs. Pretty soon, the rapid increase in price led many to believe tulip bulbs were a terrific place to store their wealth.

It’s true that you could not use these bulbs for any useful purpose. They were of no use in the manufacture of shoes or other goods, for example, and they were not important in the daily life of any Dutch citizen. You couldn’t eat them and they didn’t provide any helpful medicinal value in any way. They were interesting to look at and that was about it.

At the height of the crisis, many traded entire fortunes for just single bulbs. According to Charles Mackay in his Extraordinary Popular Delusions and the Madness of Crowds, 12 acres of land were once offered for a single Semper Augustus bulb, though many now say he overstated the height of the bubble. But no one seems to contradict the extreme rise in tulip bulb prices which far outpaced any real inflation measures from the time.

The bubble finally burst in 1637 and prices plummeted, wiping out many who put entire fortunes into the useless bulb.

Everything is big in Texas  

A few weeks ago, the University of Texas Investment Management Company* took delivery of some $1 billion worth of gold. The gold bars will be stored in a vault in New York City, the value of which will deplete with the cost of storage, security and insurance. Of course, this is intended to be offset by a corresponding rise in price of the metal.

What is the purpose of this strategy?

It is difficult to imagine how taking delivery of a closetful of gold bars will pay off. Should the world fall into such disarray that futures contracts are not honored (as was the case for tulip bulb futures in 1637 Holland), what good will the actual gold bars be?

Imagine this Armageddon-like scenario where unemployment, though incalculable because government has dissipated, is 40–50 percent. Who in his right mind would trade his services or goods for a useless yellow rock?

“Useless?” you might ask?

Well, much like tulip bulbs, gold cannot be used in the manufacture of shoes or other goods. It’s not important for the survival of any person in their daily lives. You can’t eat it and there’s certainly no medicinal value of the metal. In fact, its one redeeming quality may be that it can conduct electricity — but just barely.

Oh, but it is pretty, isn’t it?

*The University of Texas Investment Management Company (UTIMCO) is the first external investment corporation formed by a public university system. It oversees investments for Texas A&M University systems as well as that other well-known public university located in Texas. As a former student of Texas A&M University, I am strongly discouraged to mention the name of that other Texas university — you know, the one founded in 1883, seven years after the Agricultural and Mechanical College of Texas?