Month: July 2019

According to the financial journalist and historian James Grant, “progress is cumulative in science and engineering but cyclical in finance.”

Charles Kindleberger, in his book Manias, Panics and Crashes, suggests that speculative manias typically commence with a displacement which excites speculative interest. The displacement may come either from an entirely new object of investment or from the increased profitability of established investments. It is followed by positive feedback as rising share prices induce inexperienced investors to enter the stock market, and results in euphoria–a sign that investors’ rationality is weakened.

As Defoe warned on the eve of the South Sea bubble, some two decades later, “when Statesmen turn jobbers, the state may be jobb’d.”

Keynes argued that since the future could not be known with any degree of certainty values in the stock market ultimately depended on a state of confidence, itself the outcome of the “mass psychology of a large number of ignorant individuals.”

The rise of the stock market in the early 1690s was accompanied by a fashion for increasingly extravagant ladies’ headdresses, which climbed in height from the early 1690s until they peaked at over seven feet in 1695 (the year the stock market crashed). This prompted Sir Richard Steele to remark that “Stocks have risen and fallen in Proportion to Head-Dresses”–an observation which anticipates the connection made between women’s rising hemlines and the stock market in the 1920s (what has become known as the “hemline theory of stock prices”).

Rather than causing a commercial crisis, however, the outbreak of war actually stimulated the nascent English stock market–as the French saying goes, Achétez aux canons, vendez aux clairons (buy at cannons’ roar, sell when the trumpets sound).

Credit was the Siamese twin of speculation; they were born at the same time and exhibited the same nature; inextricably linked, they could never be totally separated.

Yet credit, unlike gold, could be created and destroyed. It had no utility and its value depended on an act of belief from which it derived its name (Latin: credere, creditum, to believe).

It is another common feature of bull markets that as a mania progresses, the quality of the stocks that attract speculation declines–a rising tide floats all ships, even the most unseaworthy.