Financial topics

Investments, gold, currencies, surviving after a financial meltdown
John
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Re: Financial topics

Post by John »

** 29-Feb-2020 World View: Evaluating historical data

Higgenbotham wrote: > Somebody asked me today to help him get some historical data on
> the 1929 crash because the initial leg down was about the same as
> the one that the stock market just had (16% or so).

> I mentioned two things.

> One is the initial leg down of 16% or so in 1929 took 23 sessions
> and this recent one took only 7.

> The second was the initial leg down in the South Sea Bubble, which
> I had thought to be as fast as the current unraveling, was not
> nearly as fast.

> So the conclusion in my response to him was that I have no data
> that can help with characterizing the current situation.
Higgenbotham wrote: > If this is the biggest bubble in history, which I believe it is by
> far, it will not pop like 1857, 1929, or any other. And it's not
> like the Tulip Mania or the South Sea Bubble either; those are
> more like Bitcoin because they didn't consume the entire
> economy.
If you're comparing what's happening today to historical events, the
speed with which something happens would not be relevant, since that
simply means that the technology has changed.

What's important is to compare the behavior of entire generations or
the entire population. So I don't see why the flashcrash is relevant
at all, since it was purely technology.

By contrast, Tulipomania did indeed consumer the entire economy.
Here's what I wrote in my book:
"*** Tulipomania

By way of example, let's start with one of the most famous bubbles
in history. However, it occurred in Europe, not in America. It's
the first reasonably well-documented bubble in history, and it was
called "Tulip Mania" or "Tulipomania" -- because it had to do with
the pricing of Dutch tulips in the early 1600s. This bubble grew
for decades, but it only burst completely in 1637, just as France
was entering a major "world war" of that time, the Thirty Years'
War.

It's almost hilarious to compare the Internet products of the
1990s with tulips of the 1630s, but in fact, tulips were the
high-tech product in the Netherlands at that time.

Image
  • Tulips


Those were heady days in the Dutch Republic. Amsterdam was the
major gateway between London and Paris, and the city had benefited
hugely from having established Europe's first central bank in
1609, giving Dutch merchants a big competitive advantage around
the world. It was still the biggest bank in Europe in the 1630s,
and the whole of the Netherlands was prosperous, not having yet
been affected by the Thirty Years War.

Tulips did not originate with the Dutch. The first bulbs had
arrived from Turkey only a few years earlier, in the late
1500s. By means of breeding experiments, Dutch botanists were able
to produce tulips with spectacular colors. These tulips were
sought by wealthy people, and by 1624, one particularly
spectacular bulb sold for the cost of a small house.

Prices remained elevated for over another decade, and soon
investors from all over Europe began purchasing a kind of "Tulip
future," a certificate purchased in the fall which can be traded
for a specific actual tulip to be grown the following spring. In
some ways, these certificates were similar to "stock options" in
the 1990s.

In 1636, speculation in tulip futures went through the roof, and
on February 3, 1637, the tulip market suddenly crashed, causing
the loss of enormous sums of money, even by ordinary people,
including many ordinary people in France and other countries.

A mood of retribution began immediately, and even the tulips
themselves suffered. Evrard Forstius, a professor of botany,
became so reviled by the mere sight of tulips that he attacked
them with sticks whenever he saw them! At this point, the Thirty
Years War enveloped all of Europe, as we'll discuss in a later
chapter."
The key to comparing financial behavior in different historical
eras is the use of securitization of debt. People think of "printing
money" as a physical printing press spewing out green pieces of
paper. But in fact anyone can "print money" by issuing IOU certificates.
The extent to which a serious bubble is created depends on how
much these certificates are abused.

Each of the five major financial catastrophes since the 1600s has
been based on abuse of securitization of debt. One place where I
wrote about this extensively was in

** The bubble that broke the world
** http://www.generationaldynamics.com/pg/ ... 071009.htm



Here's a summary:
  • The 1637 Tulipomania bubble was based on a market in tulip
    futures, securitized with personal credit notes.
  • The 1721 South Sea Bubble was securitized by shares of the South
    Sea company, a company operating in South America.
  • The 1789-1795 bankruptcy of the French monarchy was securitized by
    "assignats," bills of credit based on lands confiscated from the
    clergy.
  • The Panic of 1857 was securitized by railway shares.
  • The 1929 Wall Street crash was securitized by stock shares, and
    also securitized by bonds from well over 100 foreign
    countries.
Here's a description of how securitization of debt worked in the
Tulipomania crisis, as described in Edward Chancellor's 1999 book,
Devil Take the Hindmost, a history of financial speculation:
"No actual delivery of tulips took place during the
height of the boom in late 1636 and early 1637 as the bulbs
remained snug in the ground. A market in tulip futures appeared,
known as the windhandel (the wind trade): sellers promised
to deliver a bulb of a certain type and weight the following
spring, buyers took the right to delivery -- in the meantime, cash
settlement could be made for any difference in market price. Most
transactions were expedited with personal credit notes which also
fell due in the spring when the bulbs would be dug up and
delivered. Gaergoedt boasts of having made 60,000 guilders from
his tulip speculations but admits that he has only received "other
people's writing." By the later stages of the mania, the fusion
of the windhandel with paper credit created a perfect
symmetry of insubstantiality: most transactions were for tulip
bulbs that could never be delivered because they didn't exist and
were paid for with credit notes that could never be honoured
because the money wasn't there."
So these are the kinds of things to be looking for when comparing
historical eras. There is nothing new under the sun.

Higgenbotham
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Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

John wrote:** 29-Feb-2020 World View: Evaluating historical data

If you're comparing what's happening today to historical events, the
speed with which something happens would not be relevant, since that
simply means that the technology has changed.
I've been thinking about this today because the question might be asked, when comparing to 1929, whether it's more relevant to look at the initial 16% decline in 1929 or whether it's more relevant to look at the fact that the initial decline was about a month with the bulk of the crash following over the next 2-3 weeks.

It might be said that people get their information more quickly today, so the market can fall the requisite 16% a bit faster and then there will be the bounce as happened historically.

But there are other factors to weigh. One is, forced liquidation occurs at about the same rate in some respects. People get margin calls and they have so much time to meet them or get liquidated, the market ratchets down to the next level lower as the liquidation occurs, and that process repeats until some temporary bottom is reached. Another is, people probably don't become concerned and panic about something any quicker than they have in the past. To bolster that argument, there were computers in 1987 and information traveled faster in 1987 than in 1929, but the crashes lasted an identical number of days. Going back further, the crash of 1857 (triggered on August 25 and ended on October 14) lasted an nearly identical number of days as the 1929 and 1987 crashes (and was actually a bit shorter).

Therefore, it's my opinion that the crash of 2020 if it materializes at this time might be just as likely to last 6-7 weeks regardless of the level it takes stocks to and that this initial decline is simply forecasting a much larger decline than happened in 1857, 1929, or 1987. Surely I don't know if that's more probable, but it seems possible to me.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
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Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

John wrote:** 29-Feb-2020 World View: Evaluating historical data
Higgenbotham wrote: > If this is the biggest bubble in history, which I believe it is by
> far, it will not pop like 1857, 1929, or any other. And it's not
> like the Tulip Mania or the South Sea Bubble either; those are
> more like Bitcoin because they didn't consume the entire
> economy.
By contrast, Tulipomania did indeed consume the entire economy.
https://www.smithsonianmag.com/history/ ... 180964915/
There Never Was a Real Tulip Fever

In fact, “There weren’t that many people involved and the economic repercussions were pretty minor,” Goldgar says.
This is one of my sources for making the above claim. I still look at Tulip Mania as more like bitcoin. People did not have their retirements dependent on the bubble.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

John
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Location: Cambridge, MA USA
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Re: Financial topics

Post by John »

** 29-Feb-2020 World View: Was Tulipomania for real?
Higgenbotham wrote: > https://www.smithsonianmag.com/history/ ... 180964915/
>> There Never Was a Real Tulip Fever

>> In fact, “There weren’t that many people involved and the economic
>> repercussions were pretty minor,” Goldgar says.
> This is one of my sources for making the above claim. I still
> look at Tulip Mania as more like bitcoin. People did not have
> their retirements dependent on the bubble.
OK, then what were their retirements dependent on? Did they have
the money in banks? What happened to their money if the bankers
had invested in tulips?

Or were they invested in any of the various businesses of the time?
What happened to the employees if the business owner had invested in
tulips?

I don't know the financial structure of the Netherlands in 1637, but
I do know that the tulipomania collapse led directly into the 30 Years
War, and I do know that if tulipomania were just a few garden club
members losing their shirts then we wouldn't be talking about it today.

The article that you've referenced is highly political, as illustrated
by its reference to "Christian moralists," as if that were in any way
even remotely relevant to the issue. The article draws heavily from a
2007 book by Anne Goldgar. If you think back to 2007, you'll recall
that all the "experts" were saying that there was no real estate
bubble, and Ben Bernanke believed that any financial crisis could be
solved with a little bit of helicopter money. Goldgar's book fits
right into those delusions.

Goldgar undoubtedly proves that a lot of people didn't invest in
tulips. What percentage, do you suppose? How does it compare to the
10% of people who owned stocks in 1929?

In many ways, the 90% who didn't own stocks were just as affected by
Tulipomania. A lot of those people lost their jobs or homes because
of the 10% going bankrupt. Or they had friends living under bridges,
or dependent on soup kitchens to stay alive. I think that one could
do a Goldgar-type analysis and prove that the Great Depression wasn't
that big a deal either.

Higgenbotham
Posts: 7465
Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

John wrote:** 29-Feb-2020 World View: Was Tulipomania for real?
Higgenbotham wrote: > https://www.smithsonianmag.com/history/ ... 180964915/
>> There Never Was a Real Tulip Fever

>> In fact, “There weren’t that many people involved and the economic
>> repercussions were pretty minor,” Goldgar says.
> This is one of my sources for making the above claim. I still
> look at Tulip Mania as more like bitcoin. People did not have
> their retirements dependent on the bubble.
OK, then what were their retirements dependent on? Did they have
the money in banks? What happened to their money if the bankers
had invested in tulips?

Or were they invested in any of the various businesses of the time?
What happened to the employees if the business owner had invested in
tulips?

I don't know the financial structure of the Netherlands in 1637, but
I do know that the tulipomania collapse led directly into the 30 Years
War, and I do know that if tulipomania were just a few garden club
members losing their shirts then we wouldn't be talking about it today.

The article that you've referenced is highly political, as illustrated
by its reference to "Christian moralists," as if that were in any way
even remotely relevant to the issue. The article draws heavily from a
2007 book by Anne Goldgar. If you think back to 2007, you'll recall
that all the "experts" were saying that there was no real estate
bubble, and Ben Bernanke believed that any financial crisis could be
solved with a little bit of helicopter money. Goldgar's book fits
right into those delusions.

Goldgar undoubtedly proves that a lot of people didn't invest in
tulips. What percentage, do you suppose? How does it compare to the
10% of people who owned stocks in 1929?

In many ways, the 90% who didn't own stocks were just as affected by
Tulipomania. A lot of those people lost their jobs or homes because
of the 10% going bankrupt. Or they had friends living under bridges,
or dependent on soup kitchens to stay alive. I think that one could
do a Goldgar-type analysis and prove that the Great Depression wasn't
that big a deal either.
I think it's important to take a step back and talk about what the stock market is. The stock market is putting a value on every publicly held company in the United States (many of them multi-national) and aggregating that value. It's not just the value of 1-800-FLOWERS. As the stock market has evolved with business in America, many private businesses have been gobbled up and become public and thus part of the stock market. A greater percentage of Americans are employed in publicly held companies than ever before. Even with parts of the economy that remain relatively private like health care or farming, publicly traded health insurance and agribusiness (Cargill being an exception as it is still huge and privately held) companies have got their tentacles in. Hell, you can't even hardly order a pizza nowadays without using a publicly traded company. It's harder and harder to buy a house from an entity that is not a publicly traded company (Lennar, Pulte, etc.) or to get the hardware to repair that house (Home Depot or Lowes). The Main Street businesses that existed in 1929 are for the most part gone. The value of the stock market relative to all the goods and services produced in the US is massive because the stock market represents a huge fraction of the goods and services produced in the US.

Now let's think about tulips in Holland in 1637. It's literally impossible that tulips (similar to bitcoin, gold, sugar, or South Sea shares, etc.) represented the economy. It may be that some people speculated on tulip futures and when the economy unraveled, like bitcoin, the price of tulips unraveled with everything else. It may be that some people used tulip futures, like bitcoin, as a form of money. But to say that this bubble that exists in the stock market today is on the same scale as the tulip bubble I don't think is accurate.

So to answer the question, in 1637 Holland, retirements (if they existed) were dependent on the economy. Retirements today are dependent to a great extent on the stock market which to a great extent directly represents the economy, albeit in a hugely distorted fashion.

So here's my bottom line. Looking at how the tulip, South Sea, or bitcoin bubble unraveled will not be helpful in determining how the current stock market bubble will unravel. If someone were to ask me if there are any models to use to try to chart the course of the stock market going forward, a price chart of tulips in 1637 won't be helpful. Like I said previously, I haven't got anything to help someone with that.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
Posts: 7465
Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

As a footnote to all that, I'm not trying to score debate points. Somebody asked me today if the stock market decline will stop at 16% like it did in 1929 and then retrace most of the decline before crashing. My answer to him was that I can't help him with that because this bubble isn't like anything that has happened historically (in the sense that you have any reasonable chance of using a previous bubble as a model to chart a course going forward). It could retrace a huge percentage of the decline or it could collapse straight down from here. I have no idea. It seemed like there was a reasonable probability based on short term action that the stock market would make a snap back on Friday but that may be all there will be.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
Posts: 7465
Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

Here's something I got this morning where I've underlined some points that support an opinion that the extent of this bubble is unprecedented and likewise the path going forward may be unprecedented also.
With the forced liquidation process now operating in high gear, global equity markets are in the early stages of an unstoppable crash. Because system-wide leverage now exceeds anything mankind has experienced in recorded history, the eventual collapse should be record-breaking. As a specific example, two weeks ago the S&P 500 Index hit a record of approximately 3400 (top of page 2). If the S&P Index crashes like the 1929 scenario, then expect a 50% drop to 1700. However, the degree of leveraging and valuations far exceed those in 1929. Thus, the coming crash could easily lop 70% from peak values – which would drive the S&P 500 Index down to 1100. Even though the decline last week might seem immense, it likely represents just a small initial move within a much large collapse that will transpire in coming weeks. In other words, the market debacle from last week is likely just the tip of the iceberg.

Numerous technical indicators suggest that the current decline has much further to go – possibly another 3 to 10 weeks of intense selling before reaching an intermediate-term bottom. The recent move into record territory was primarily isolated to domestic blue-chip and high-tech stocks, with most secondary indices lagging far behind. Such non-confirmations are generally bearish for the overall market. The evidence is overwhelming that a major selloff is in its infancy, and the decline will continue unabated until the time when unusually heavy selling occurs in declining issues. Thus, prepare for a major stock market crash in the weeks ahead. Expect occasional, sharp 1-day rallies to interrupt the crash and use them as selling opportunities when they develop.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

John
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Joined: Sat Sep 20, 2008 12:10 pm
Location: Cambridge, MA USA
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Re: Financial topics

Post by John »

Higgenbotham wrote:Here's something I got this morning where I've underlined some points that support an opinion that the extent of this bubble is unprecedented and likewise the path going forward may be unprecedented also.
With the forced liquidation process now operating in high gear, global equity markets are in the early stages of an unstoppable crash. Because system-wide leverage now exceeds anything mankind has experienced in recorded history, the eventual collapse should be record-breaking. As a specific example, two weeks ago the S&P 500 Index hit a record of approximately 3400 (top of page 2). If the S&P Index crashes like the 1929 scenario, then expect a 50% drop to 1700. However, the degree of leveraging and valuations far exceed those in 1929. Thus, the coming crash could easily lop 70% from peak values – which would drive the S&P 500 Index down to 1100. Even though the decline last week might seem immense, it likely represents just a small initial move within a much large collapse that will transpire in coming weeks. In other words, the market debacle from last week is likely just the tip of the iceberg.

Numerous technical indicators suggest that the current decline has much further to go – possibly another 3 to 10 weeks of intense selling before reaching an intermediate-term bottom. The recent move into record territory was primarily isolated to domestic blue-chip and high-tech stocks, with most secondary indices lagging far behind. Such non-confirmations are generally bearish for the overall market. The evidence is overwhelming that a major selloff is in its infancy, and the decline will continue unabated until the time when unusually heavy selling occurs in declining issues. Thus, prepare for a major stock market crash in the weeks ahead. Expect occasional, sharp 1-day rallies to interrupt the crash and use them as selling opportunities when they develop.
The only comment I would make is that 70% is no big deal. The 1929
crash lopped 90% from peak values.

Higgenbotham
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Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

John wrote: The only comment I would make is that 70% is no big deal. The 1929
crash lopped 90% from peak values.
He's talking about losing 70% in the next few weeks. In 1929 alone, the loss from the high of the year to the low of the year was about 50%. And I agree given the current situation, a loss of 70% over the next few weeks would not be a surprise at all.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

richard5za
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Joined: Sun Sep 21, 2008 10:29 am
Location: South Africa

Re: Financial topics

Post by richard5za »

Higgenbotham wrote:
John wrote: The only comment I would make is that 70% is no big deal. The 1929
crash lopped 90% from peak values.
He's talking about losing 70% in the next few weeks. In 1929 alone, the loss from the high of the year to the low of the year was about 50%. And I agree given the current situation, a loss of 70% over the next few weeks would not be a surprise at all.
Thank you Higg, John and Aeden for sharing so extensively
If this is really the long awaited crash, and the evidence suggests that to be the case, then the next 'wild card' is the human reaction to the loss in so many ways. Here are Elizabeth Kubler_Ross' seven stages of human reaction to loss:
shock, denial, anger, bargaining, depression, testing, and acceptance.
Who will be blamed (probably many people) ?? Probably an essential political tool for the November elections.
Next week will be fascinating

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