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Insights From Devil Take The Hindmost (#50)

The Erection Index -> How To Call The Top Of A Bull Market

  • The Chrysler Building provides the classic example of what economists half-jokingly call the “erection index”. This predicts that the top of a bull market can be called when the height of a new building exceeds all previous records.
    • The Petronas Towers in Malaysia, was completed a few months before the onset of the Asian crisis of 1997. 

Why El Salvador and Central African Republic Are Probably Even More Fucked (

  • When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. 

What Is Speculation?

  • Speculation is conventionally defined as an attempt to profit from changes in market price.

Funny Monet: The Bubble In The Art Market

  • Art prices are determined by the meeting of the real or induced scarcity with pure, irrational desire, and nothing is more manipulable than desire.

Difference Between Speculators and Investors

  • Unlike the speculator, the investor is primarily interested in the current state of affairs, who hopes that the future will be a seamless continuation of the present. 

Psychologies of Speculation and Gambling

  • The psychologies of speculation and gambling are almost indistinguishable: 
  • both are dangerously addictive habits 
  • involve an appeal to fortune
  • often accompanied by delusional behavior and are dependent for success on the control of emotions. 
    • Inventions and novelties have always excited speculators
      • The fire engine, burglar alarm companies, and the machine guns all did in their time.
    • There is not a single speculator who does not steadfastly believe:
      • First, that a crash sooner or later is inevitable
      • Secondly, that he himself will escape it

    Benefits Of Speculation

    • Some economists argue that speculation is fundamentally a benign force, essential to the proper functioning of the capitalist system. 

    Drawbacks of Financial Manias -> People Stop Working

    • Financial manias were seen as upsetting the social order (servants buying expensive vehicles), and bringing ruin to the people. 
    • Speculators start preferring to speculate on their holdings rather than work at their normal job.

    Countries That Undertake Speculation 

    • Nations that exhibit an appetite for enterprise and risk-taking have a strong propensity to speculation.

    The Speculative Character Of The American People

    • The American dream is posited on the vision of a beneficient, ever-improving future. 
    • Nothing makes a man feel poorer than being a passive bystander in a bull market.

    Phases Of Tulip Mania And Other Booms 

    • Several other features of Tulip Mania are common to later stock market booms:
      • Rumours fueling the boom
      • The rapid growth of leverage through the use of paper credit and future, conspicuous consumption among speculators 
      • Sharply rising prices followed by sudden panic without cause
      • Initial government passivity followed by belated intervention.

    Bucket Shops And The Stock Ticker

    • The stock ticker gave birth to the bucket shop which was a cross between a betting shop and a brokerage where people could gamble on share price movements without actually buying the stocks (i.e. the same effect as buying futures). 
      • Bucket shops were shady places whose owners were often engaged in manipulating stocks and had a reputation for disappearing into the night when faced with a large payout. 

    When Do Manias Occur?

    • They occur at the inception of a new industry or technology when people overestimate the potential gains and too much capital is attracted to new ventures. 
    • When the economic balance of power is shifting from one nation to another
      • The Tulip Mania appeared in Holland shortly after the “Dutch economic miracle”
      • A stock market boom occurred in New York at the beginning of the 20th century, when the United States overtook Britain as the world’s leading industrial power. 
    • There are a large number of parallels between the Japanese bubble economy of the 1980s and the U.S. boom at the turn of the century.
      • In both periods, domestic speculative exuberance found an outlet in extravagant overseas purchases. 
        • Afterwards most properties bought by the Japanese acquisitions in America, and by Americans in Britain were bought for significantly lower prices.

    “Panic Birds”

    • Some speculators, known as “panic birds” came to the market only once prices had crashed and money was scarce
      • They bought carefully, locked up their investments, and kept away from Wall Street until the next calamity struck. 

    Why The SEC Was Formed

    • The Securities and Exchange Commission was established to police the capital market and prevent “unnecessary, unwise and destructive speculation.”

    When Financial Crises Hit Emerging Markets 

    • When a financial crisis afflicts an emerging-market nation, foreign exchange dealers rapidly reexamine the economic situation of its neighbours. 
      • They realize that if one of these countries were to suffer from a loss of confidence, interest rates would have to rise to protect the exchange rate. 
      • Higher interest rates, by increasing its cost of borrowing, and also cause local asset prices to fall, damaging local banks and businesses as well as the government if they’ve borrowed excessively in foreign currencies. 
      • The net result of these events might lead to a currency devaluation

    Emerging Markets Are Only For Bold Western Investors?

    • An article in the Financial Times claims that emerging markets are not suitable for Western investors, as, in many cases, they lack the necessary institutions:
      • The rule of law
      • Proper bankruptcy procedures 
      • Reliable accountancy 
      • Non-corrupt administrations 
      • Predictable taxation
      • Monetary stability
      • Deposit insurance
      • Adequate financial regulation
      • Independent central banks capable of acting as lenders of the last resort
    • Emerging market speculation tends to appear when declining yields on domestic bonds combined with an excess of capital make foreign investments particularly attractive. 

    Behavior Of Bull Run

    • During the bull or manic phase, activity is frenetic and expectations become unrealistic. 
    • Mr. Market’s instability: “At times he feels euphoric and can see only the favorable factors affecting the business….At times he is depressed and can see nothing but trouble ahead for both the business and the world.”

    Fun Facts About Wall Street And Stocks 

    • The original purpose of the wall on Wall Street was to keep out bears and maruading Indians and keep in the bulls and other livestock.
      • bear market ⇒ bad market
      • bull market ⇒  good market
      • In its subsequent history, Wall Street has penned in its bulls and bears together. 
    • Blue chip stocks ⇒ “reliable” companies 
    • The term blue chip ⇒ derives from the color of the most expensive gambling chip at the Monte Carlo casinos.

    How Hedge Funds Got Their Name

    • Hedge funds acquired their name because the original fund, set up by W.A. Jones in the 1950s, “hedged” its stock market exposure by balancing its long positions (i.e. shares it bought) with an equal number of shorts (shares it sold). “market neutral”
      • Nowadays few huge funds operate in this manner. 

    Market Conditions That Generally Are The Seeds Of Speculation

    • In a time of peace, when interest rates are low
    • The seeds of each boom are sown during the preceding crisis, when the liquidation of credit causes assets prices to decline so severely that they become genuine bargains. 
      • After each crisis, the financial markets invariably shrug off past losses with bright optimism

    The Patent Companies Of The 1690s Were Scams

    • The patent companies of the 1690s were not genuine attempts to apply scientific advances for commercial purposes: 
      • They were used by promoters as a convenient device to launch companies in the stock market while avoiding the time and expense of incorporation. 
      • Were mainly scams intended to solely to profit the promoters and stock operators.
    Another Example of Company Promoters Taking Advantage Of Investor “Euphoria” 
    • The 1840s Railway Schemes -> Many of the promoters of the new railways were found on the committees of numerous new railways, in some case representing rival schemes 
      • which served to serve them in their own personal profit.
    Confusing People - John Blunt in the 1720s
    • The more confusion the better: People must not know what they do, which will make them more eager to come to our measures.
    • “It is observed that many of these projects are so ridiculous and mythical , that it is hard to tell which is most to be wondered at
    How Stocks Performed During The Depression
    • The speculator’s fancy for new technologies was well served by the bull market. 
      • The motorcar replaced the railroads as both the engine of economic prosperity and was the favored object of speculation.
        • It transformed the culture and geography of the nation, passenger cars went from 7 to 23 million during the 1920s.
        • General Motors price increased 10X between 1925 and 1928
      • After Lindbergh crossed the Atlantic in 1927, the aircraft industry became favorites in the stock market. 
    • Contrary to public perception, movie stocks performed badly during the Depression.

    When Experienced Market Operators Exit

    • The departure of the more experienced market operators at, or near, the peak of a bubble is a common feature of speculative booms. 

    “Greater Fool” Strategy 

    • “Greater fool” investment strategy, whereby the speculator knowingly buys shares above their intrinsic value hoping that a “greater fool” will pay more for them later.

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