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Brand Bubble

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nd bubbleWall Street values brands higher than Main Street. Watch out.

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6 Spring 2009

BuBBle
John Gerzema
“Time destroys the speculation of men, but it confirms nature.” —Cicero, 106-143 B.C. As we leave behind 2008, the numbers are both historic and dismal. The S&P 500 declined by 38 percent, and almost 2 million jobs were lost. The median home price fell by 22 percent, while almost 7 trillion dollars in market value evaporated from the Dow Jones 5000 Index. Taxpayers funded $700 billion to bail out financial institutions, with another $17.5 billion to keep General Motors and Chrysler operating into the new year. The credit crisis intertwined virtually every economy and sector in the world, shattering consumer confidence to its lowest point in decades. The market bubbles in the S&L crisis of the 1980s, the dot-coms of the early 2000s and the home equity markets of today all exemplify the regular and recurring danger of rampant speculation, when unfettered zeal bids prices up to levels that far exceed the real value of the assets they represent. Yet bubbles are, as Shirley Bassey sings, “Just another case of history repeating.” Tulipmania. One of the first bubbles on record occurred some 400 years ago, in Holland. And the asset that perpetrated this bubble was a tulip bulb. The Dutch aristocracy had acquired a particular fondness for a type of tulip from Turkey that grew very well in the fertile lowlands of Holland. Citizens from all walks of life, from businessmen to average workers and paupers, quickly jumped at the opportunity to invest in tulips. Some even took out a crude form of futures contracts on unplanted tulips. The market for tulips created such frenzy that no one stopped to question if the cash flows would continue in perpetuity. No one paused to discount the risks inherent in the trade and instead continued to reinvest in more bulbs. And

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