The Israeli Postal Stamp Asset Bubble and Why it Burst.

By Shahar Rotberg*

Through conversation with my father, I recently became aware of an asset bubble that formed in the Israeli postal stamp market around 1955-1957.

During that time, the price of postal stamps in Israel shot through the roof and people made fortunes by buying and selling these stamps. To understand the magnitude of the phenomenon, imagine that people quit their day-jobs or schooling and became full-time stamp speculators, making enough money to buy apartment buildings. Some would borrow money from banks and others to line up in front of the postal office on the days of new stamp releases to buy them and sell at higher prices.

Then, pretty much over night, this market collapsed to near 0. I wondered — Why?? I thought that maybe if I had some insight into the rise and fall of the Israeli stamp market, maybe I could have more insight into recent bubbles. Because my father saw this with his own eyes, I thought he could point me to the right information and I asked him if he could find something on the topic. And sure enough, he sent me this article, printed in 2008 in Ha’Haretz (the article is in Hebrew, so if you don’t speak Hebrew, try Google Translate it).

Now, this article is by no means an economic analysis of the stamp market, but rather a story told by the son of a stamp speculator at the time, who made millions only to lose it all and owe thousands later on. But in between the lines, I think I was able to glean important information about asset bubbles. Here are my insights:

1. The Israeli stamp market was a small niche market where true collectors used to buy and sell for the purpose of actually owning these stamps. They would not buy in an expectation to sell shortly after to make a gain. The value of stamps was not too significant early on.
2. Random events lead to increases in speculative demand. In the article above, the writer explains that his father overheard two people speak privately in Yiddish about the stamp market while riding the train. He then realized there were profits to be had. So, word-of-mouth probably spread rumors and brought more speculators into the market. I think of this process as an exponential process initially – at first demand is pacing rapidly as more people join, but as more people join and speculative demand nears its peak, the exponential growth and speculative demand simply disappear all at once. While demand is growing, each new speculator is added to new demand, which raises the price of the asset.
3. As long as you can keep pumping the demand up, there will be a new speculator who will buy the asset from you at a higher price, believing it will increase in value.
4. It seems to me that you can tell a bubble is about to burst when almost anyone, regardless of profession, begins speculating. Once this happens, there are no more new speculators raising demand — that is, the demand for the asset has been exhausted and the pyramid has reached the top. And then, all speculators are left with the asset without someone else to buy it from them at higher prices and the speculative demand simply disappears completely like in a magic trick – “puff”. In the Israeli market, the bubble burst precisely after you could observe huge line-ups to the postal office, including school-age children.
5. The bursting is fast – faster than the growth. As soon as the market hits saturation, the price of the asset can drop within minutes! And so, if you see an asset dropping in minutes with no apparent reason related to fundamentals, you can be quite certain speculative demand has disappeared from the market.
6. When a bubble bursts, the price would drop close to the asset’s fundamental value, which is determined by the real demand, or core demand. In the Israeli stamp market, this demand was that of true collectors. And stamps are still worth something today – just not very much. Thus, if you want to understand where the asset price will drop to, try to figure out what the core demand is and what is driving this core demand. In the case of Bitcoin for instance, I believe that current core demand is illegal activity and once this disappears, Bitcoin’s demand will be pretty much purely speculative.

My personal take from the Israeli stamp bubble is the following: if you speculate on an asset, at least be among the first to do it!

*Disclaimer: This post was written by Shahar Rotberg on his own time and capacity, and the views expressed herein do not represent the views and opinions of the Canada Mortgage and Housing Corporation.