Transcription
If you've been around for a while, you probably know where I'm going to go with this. The story has been told many times over, but I think it's important to tell it again so you understand what's happening in the world right now. So, I'm going to tell you a story about tulips, or more specifically, what happens when people get too excited about tulips. So, in this video, I'm going to tell you the story of the 17th century Dutch tulip mania and the whole irrational exuberance that surrounded it.
But before I get to tulips, a few days ago, Alan Greenspan, the 13th chairman of the Federal Reserve, died age 100. Greenspan earned his reputation as the maestro of American finance for his public service of almost 20 years. He covered four presidents and the 1987 stock market crash, the dotcom boom, and September 11. It's somewhat of a historical irony that the man who coined the phrase irrational exuberance put a lot of irrational faith into the hands of the markets and effectively taught a generation of investors that the Fed would always be available to pick up the bill.
But to his credit, he conceded before Congress that he had he had indeed found a flaw in his lifelong belief in the free market. And a lot of people have criticized him. But I think it's also important to acknowledge that he ultimately agreed that markets did in hindsight need some regulation, but he never really wavered in his view that the free markets were still the best way to organize economies. It's hard to know what Greenspan would make of today's AI bubble. My guess is that he would still have not have intervened and let the market fall in a heap, but then provide a backs stop to underwrite this irrational exuberance because just like the banks, he'd probably see big tech as too important to fail. Let's see what happens this time.
But now, let's go back to the tulips. In February of 1637, a group of men in the Dutch Republic gathered for a routine meeting where they would buy and sell tulips. These are like the, you know, the seeds that you grow to, you plant to grow tulip flowers. But on that day, something uneventful happened. Nobody bought anything. The buyers just weren't interested in buying tulips anymore. Well, certainly not at that price. There was no press release or grand announcement. People just stopped being interested in tulips. And within just a few days of that, the the price of tulip crashed by more than 90%.
There's no doubt that tulips were originally popular because they are beautiful flowers, but they're also quite different to the other types of flowers that were available in Europe at the time. But it wasn't the tulip farmers who were driving up the demand. The tulip bulbs themselves were seen as something exotic and valuable to own. People used to even give tulip bulbs as gifts which may never end up being planted. Giving tulip bulbs was a sign of sophistication and therefore the bulb itself started to have social value which was no longer tied to its intrinsic value as a flower.
But by the 1630s, people weren't really trading tulips to grow them. They were trading contracts on buying tulips. A single bulb of the most prized variety, the sea Augustus, which is the the beautiful red and white petals, was reportedly sold for the price of a house. the utility or the value that you could drive from that bulb, a beautiful flower, was fundamentally disconnected from the price. People were paying for things simply because they thought it would become more valuable tomorrow.
So now, what does this sound like? Can you think of another example where people have stopped measuring the value based on its utility and start measuring the value and what people think it might be worth in the future? Are there any examples out there where the price and value have been so disconnected? Oh yeah, AI. That's where we are right now. These big AI companies are on track to lose tens of billions of dollars this year. The valuation of the companies has stopped being about the value of the product, which we know to be pretty low, and more about the expectation that someone's going to be willing to pay a lot more for it tomorrow. This is classic irrational exuberance, as Alan Greenspan would call it.
We saw it already with SpaceX. That thing in my view will probably be worth a fraction of what people paid for it in the future. I'll be happy to be wrong, but history is on my side here. Once we detach the valuation of the company from the value of the product for customers, just like the Dutch traders did, we start entering this era of irrational exuberance. The problem with exational exuberance is that at some point suddenly the music stops and people stop wanting to buy that thing and that means the buyers just stop turning up. It makes no sense that somebody paid as much as a h as a house for a jullet bulb. And it's going to make no sense when the price of tokens are 10, 50, or 100 times more than what we're being charged today. Once they put up the price to become profitable, buyers will look at it and say, "No, it's it's not worth it." But right now, we're still in the middle of this 2026 version of Chulik Media where where price and value are wildly disconnected. But rest assure that one day, just like they did in 1637, buyers will turn up and say, "Yeah, nah."
I'm Dr. Brandt. If you enjoy my content, please like and subscribe. Feel free to connect with me on LinkedIn, and I encourage you to put your thoughts in the comments below. Thanks for watching, and I'll see you in the next one.