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Most Unique Financial Events That We See Today Most Likely Has Happened Before


The most significant value-add that a less experienced investor can get from speaking to someone more sophisticated is to teach them how to tackle aspects of investing that they struggled with.

A common area that we often struggle with as less experienced investors is every event feels like this is the first time it is happening in the world. But how often are these events never-happen-before-events or are the events that happened before, but we never know?

More and more, I realize that a vital attribute of an investor may be to be a lifelong historian and what has happened today most often had happened before.

In last week’s Value After Hours podcast, Farnam Street Investment’s Chief Executive Officer Jake Taylor, one of the podcast hosts, provides an excellent “Veggie Segment”. Regular podcast listeners will know that Jake always spends effort finding these gems from all aspects of life, from microbiology to construction, which has a lesson to help us become better investors.

Jake’s education starts at the 30 min mark:

Jake introduced us to the new book by British historian Edward Chancellor, The Price of Time. Edward Chancellor also wrote Devil Take the Hindmost – A History of Financial Speculation and Capital Returns.

I have not read both books, but both books were independently mentioned as must-reads by two separate good local investors.

Edward’s new book focus on interest rates and what happened in the last ten years. Jake’s major takeaway from the book was how often humans only look at the policy’s immediate effects and not at all the effects that will everyone.

Another big takeaway was that what we think that is happening today, has never happened before and more often, it happened in the past in some form.

Here are some notes that Jake brought up in the episode:

  • Money is derived from the word flock.
  • The Latin word for interest is related to fertility.
  • The word capital comes from the word herd of cattle.
  • Finance was born from the shades of sanctity. Early on, religious temples were the largest providers of loans, probably because many people trusted that system wouldn’t screw them over.
  • Debt crises regularly occurred throughout history.
  • The first experiment in quantitative easing was in 1833 when a banking crisis erupted, and Roman Emperor Tiberius lent out the imperial treasure free of interest to all the patrician families.
  • Very low-interest rate often appears to be the calm before the storm. In neo-Babylonian, the rates of silver dropped, and the Babylonians fell to the Persians. In eighteen century Holland, the rates dropped not long before the revolutionary French overran the Dutch republic.
  • Emperor Augustus, who preceded Emperor Tiberius, flooded Rome with treasures, the interest rate dropped, and the house prices rose.
  • Irving Fisher, an economist in the 1930s, quoted that interest is human impatience crystalized into a market rate.
  • The decline in interest rate leads to the adoption of roundabout or time-consuming production methods. The lower the interest rates, the more we put greater emphasis on future goods as opposed to now. This may give a reason why during low-interest rates, more people focus on this of self-actualization rather than on necessities. (Bezos and Musk’s space programs for example)
  • Richard Cantillion, an economist in 1700, said when a national bank turns on the printing press and buys up government debt, the newly created money is initially trapped within the financial system, inflates financial assets rather than consumer prices and only slowly seeps out into the broader economy. Jake feels that statement perfectly describes the past ten years.
  • Walter Bagehot was born into a banking family and worked as a banker before becoming the editor of the Economist in the 1860s: The good times of high prices always encourage much fraud. He has some interesting quotes:
    • Bad business takes time to grow, especially bad lending business, which is most dangerous because when discovered, it saps credit and destroys the spring of industry.
  • In 1899, the president of an Insurance-like company Equitable Life asked the respected financiers of that period what the future course of long-term rates was. At that time, yields have been falling for decades. All 69 responses say the rates were going to be lower for longer. They were all wrong as the bond bull market ended, and US rates went up decades after that. Bond turns are infrequent, but when they happen, they last for decades.

A new unique event that has never happened before is challenging for investors because you need to quickly find out whether the event has an impact on different investments, the duration of the impact (long-term or short-term) and the best course of investment action to take.

If an event is not unique and has happened before, we may be able to derive a better course of action because we can understand the actions taken and the effect.

The more that I read, watch and listen, I feel that what will happen in the future has happened in the past in some broad variations. As investors, we have a clue about the after-effects. That can be both assuring and scary simultaneously (if you look at the effects of some of this stuff on the financial markets).

I managed to find this chart from Edward Chancellor showing five millennia of interest rates:

Look at the current rates’ low, but it is not new. Rates typically average around 4%!


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Revhappy

Thursday 22nd of September 2022

Few days back you wrote this article, you started off saying that it may be the top of the bear market rally and yet you went on to show past charts which dont show negativity.

https://investmentmoats.com/money/only-positive-market-charts/

So you were right, it turned out to be bear market rally top. But what use was the rest of the article? Sometimes we should ignore too much past data analysis. There is good chance there are flaws in our analysis, maybe we are missing something and hence what didnt happen in the past will happen now.

It is time to be very tactical right now and play very safe. The equity markets players of today are mostly under 40 something. They havent seen what 4-5% interest rate feels like. This stock markets is extremely overvalued. Like I mentioned in the comments in that article, it was to sell and not buy. Even now, if someone is over allocated to equities, the time to get out was yesterday, but nothing wrong with getting out today.

We still have mostly orderly selling in the markets and not panic selling yet. I am pretty much assure you, we are going to have an accident sooner or later. Some leveraged institution is going be caught pants down and cause a wave of panic selling. When everyone is feeling horrible and want to puke, that is the time to buy.

rubb

Thursday 22nd of September 2022

Roman empire still exists in 1833?

Kyith

Saturday 24th of September 2022

hi rubb, this shows how much I know about history. I was translating what Jake said and that is what I heard. But from what I can find in history, I might have communicated wrongly.

Sinkie

Wednesday 21st of September 2022

Devil takes the hindmost is like a more modern version of Extraordinary delusions & the madness of crowds. Very good read on financial history excesses & causes. Includes the crazy Jap property & stock bubble of the late 1980s which the 19th century Extraordinary delusions book obviously doesn't.

The last time interest rates were so low in the developed western world was during and just after WW2.

The current normalisation of interest towards 5% may actually be good eventually for the 60/40 again.

Recently read an article by Mark Hulbert on the 60/40 over the past 200+ years, and it has generally worked over the long run even though it had many tough years like now.

PS: People generally have short memories even if they've lived through the period. Like supposed experienced investors saying Singapore property constantly went up in the last 20 years lol.

Kyith

Saturday 24th of September 2022

The 60/40 is the biggest disconnect i feel. its like... there are so many people say the 60/40 is going to shit... but we cannot forget that we had 150 years of 60/40 data (at least for the US)

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