In the stark, flourescent-lit breeding shed at Spendthrift Farm, the stud grooms put on their gloves and white smocks and signal for the next mare.

She has already been washed and her tail has been wrapped to lessen the chances of infection. Now her groom leads her in the door and the men quickly go to work.

First they tie the mare's legs in leather straps so she won't be able to inflict any harm on her suitor. Next they pull her upper lip through the loop of a twitch. They twist its broomstick handle, tightening it so the lip is painfully pinched, further discouraging movement.

As these preparations are being made, the clip-clop of the stallion's hooves echoes on the walk that leads from his stall to the breeding shed. Outside the stall is a plaque that reads, "The Commonwealth of Kentucky honors Affirmed on the date of his retirement to Spendthrift Farm." It is signed by the governor of the state.

"Affirmed is real easygoing here, just like he was on the track," a groom remarks as the Triple Crown winner enters the breeding shed. He approaches the mare, and his interest in the proceedings immediately becomes manifest. He is pulled back to a corner of the shed, where one of the men washes him, and then is permitted to move toward the mare again.

In less than a minute the act has been consummated and he is led back to his stall, having earned his $150,000 stud fee.

A few minutes later two new animals are led in, the stud grooms put on fresh smocks and gloves, and the Spendthrift Farm assembly line keeps rooling along.

The elemental act that is the basis of the thoroughbredbreeding industry surely has not changed much since men started raising horses in Kentucky after the Civil War. The nature of the entrepreneurs and hustlers who breed those horses has probably not changed much either. But in the last year or two, the world has changed dramatically around them.

Members of the once-clubby and insular breeding business find themselves caught in a dramatic and spectacular boom, one that rivals anything ever seen in the stock market or the gold market or the real estate markets. When a succession of regally bred 1-year-old horses is led through the auction ring at the Keeneland Selected Yearling Sale in Lexington Monday and Tuesday, the people there will be looking at the prices and wondering whether the world has gone mad.

The average price of a yearling at Keeneland is a barometer of the whole thoroughbred market; it is the industry's version of the Dow Jones Industrial Average. Five years ago the average yearling at the sale cost $53,000. Last year the figure had skyrocketed to $200,000. At the very top of the market the prices defy credulity; some observers would also say that they defy all logic:

Just a few years ago, Secretariat -- who may have been the greatest racehorse of all time -- was syndicated for $6 million, a sum that seemed astonishing. This spring the horse who finished 18th in the Kentucky Derby, Proud Appeal, was syndicated for $10 million. Spectacular Bid went to stud with a value of $2.2 million. And the next truly great stallion prospect might be worth as much as $40 million.

When Northern Dancer won the Kentucky Derby, he earned $114,300. Today his stud fee for servicing a single mare is $225,000. But even at that price, the demand is so great that the average owner of a mare has virtually no chance of purchasing Northern Dancer's services.

In the whole history of thoroughbred racing, only 26 horses have earned $1 million in their careers on the track. But in the last two years 10 yearlings -- horses who had never even see a race track yet -- were sold at action for $1 million or more.

The prices have skyrocketed simply because so many new investors, looking for any hedge against inflation they can find, have created the demand.

The prices of horses have become detached from what used to be the one objective measurement of their value: how much they can earn on the track. While the cost of the animals has been rising so sharply, their earnings potential has grown only slightly. Because America's racing industry is not in robust health, the increase in purse money has lagged far behind the rate of inflation, and very few owners of racehorses can manage to make a profit.

So when a realistic buyer spends $1 million for a yearling, he is hoping the horse will perform well enough in competition to take a decent reputation to stud. When that animal procreates, people will be paying so much for his offspring that that initial $1 million investment looks like a bargain. The buyers who purchase these offspring will be looking forward to the time when the offspring's offspring will make them a profit.

This whole procedure sounds suspiciously like the greater-fool theory in operation on a massive scale. Forbes, a respected financial publication, suggested recently the thoroughbred business is due for a crash, and the man who runs the Saratoga Yearling Sales confessed he shared some of those fears. John Finney said he has a recurrent dream that when he is in the auctioneer's stand at Saratoga he is selling not horses, but tulips -- a reference to history's classic example of a senseless speculative mania.

Maybe the bubble is about to burst. Maybe the average prices of the yearlings sold at Keeneland on Monday and Tuesday will plummet. But this probably won't happen, because the commodities being sold are emphatically not tulips. America's breeding industry is producing a product with limited supply and enormous demand, a product whose quality is unequaled in the world.