August 27, 2016

An Extreme Instance Of How Crowds Can Go Crazy

Two unrelated items for weekend reading, starting with MarketWatch. “It says a lot about human nature that the scientist responsible for the law of gravity was sucked into an investment that for a time defied gravity. Throughout history, people — especially those at the top rung of society — have been greedy and gullible participants in financial bubbles. And Sir Isaac Newton was only human, after all. But the infamous bubble that ensnared Newton, involving a newly established stock market with a company at its center that was fueled by rumors and information gleaned in coffee shops, holds investment lessons to this day.”

“Coming just a few years after the spectacular Dutch Tulip Bulb mania and crash, the South Sea Bubble of 1720 centered on a company that got its start in slave trading, and which had been promised a monopoly of trade by the British government in what is now known as South America for taking over and consolidating the national debt raised by the war against France.”

“After the South Sea Company got the green light on debt, its shares began soaring, pumped by rumor-spreading and inexperienced executives. Investors at this time had to rely on coffee-shop ‘grapevines’ and the press for share information, and the two were interdependent as Richard Dale, pointed out in his book ‘The First Crash: Lessons from the South Sea Bubble.’ The South Sea bubble eventually took down the French company, though the latter was blamed more on faulty monetary policies.”

“In many ways, Newton and other investors of the South Sea Bubble were not too dissimilar to those taken in by more modern bubbles — convincing themselves they were onto a sure thing only to have it blow up. MarketWatch spoke to him about the South Sea Bubble and what investors nowadays can learn from it: MarketWatch: How did the bubble eventually burst for the South Sea Company?”

“Richard Dale: The South Sea Company did not go bust in the sense of having negative net worth. It suffered a catastrophic liquidity crisis because it was spending so much money on supporting its share price. It had to be bailed out by a combination of debt forgiveness and injections of liquidity by the Bank of England. It survived as a financial holding company.”

“MarketWatch: How did Isaac Newton get lured into such a disastrous investment? Dale: Newton invested around £3,500 in early 1720 and sold out in late April of that year having doubled his money. However, like so many others, he was induced to get back into the market in the summer of 1720 at the height of the bubble and ended up losing £20,000, around £3 million in today’s money.”

“MarketWatch: What modern-day financial bubble is most similar to the South Sea Bubble? Dale: From the standpoint of the South Sea directors, the bubble represented a giant Ponzi scheme (e.g. Bernie Madoff) in that it proposed to pay dividends not from profits but from sales of new shares for cash. From the point of view of investment behavior, the bubble resembles the dot.com boom/bust when the valuations of dot.com companies lost any connection with underlying value or realistic profit projections. (The Bank for International Settlements pointed this out at the time).”

“Although this was far ago, the period of history the market was in was not so terribly different from today, such as options-forward markets and people buying on margin and so on. These were quite sophisticated markets. Ok, you didn’t have the framework of financial regulation and didn’t have long-term investors, it was a very short term market, allowing for those differences….I think you can draw parallels from today’s markets. I don’t think anything’s changed. I think it is a lesson to us all, a particular extreme instance of how crowds can go crazy.”

The Maryville Daily Forum by Eric Sheehan. “When we decided to move to this happy little Ville almost a decade ago we toured a bunch of houses. One in particular caught our eye. It was a turn of the century (1900) beauty with so much character only a fool could pass it up. Sure it needed a lot of cosmetic work and updates but that is part of being a homeowner, right?”

“We moved in and rolled up our sleeves. Layer upon layer of wallpaper was steamed and scraped to expose the beautiful plaster walls beneath. Sure there were cracks but that was just part of the character of a century old house. We had a check list and started to go room by room doing the what we could while the house built equity so we could afford the larger renovations like remodeling the 70’s kitchen and 80’s bath. Then the housing bubble popped. Our home’s value deflated like a helium balloon left out in the cold. Suddenly the biggest investment of our lives was becoming our biggest mistake.”

“I was bemoaning this predicament with a friend when he stopped me and said, ‘What you have there is a Money Pit.’ I paused and stared blankly at him. ‘You know, Money Pit, with Tom Hanks, came out in the 80’s,’ he clarified, ‘and Neighbors, the family that has a frat move in right next door to them….that’s you buddy.’”

“He was right, our home had become a financial vacuum and to compound things all the houses on our block had become rentals and not just family rentals, pack ‘em and stack ‘em college rentals. Our neighborhood has also become money making property for the most part. This caused a noticeable decrease in our resale value but there are also other benefits. A couple years back my son and mother got to see one of the neighbor kids streak around the house. We have had at least one young man pass out in the driveway and yet another try to come in our back door insisting that it was his house, they are so adorable at that age. Lucky for us since the central air is out it is almost impossible to hear the late night revelry over the window unit and three fans that cool our bedroom.”

“It hasn’t all been bad though. So many memories are held within the walls of that grand old house. She really has served us well, we just happened along 30 years late. Our next home will be a townhouse if I get my way and it will be rented. It’s not that home ownership is all bad, I just don’t think we’re cut out for it.”

“While I’m on the subject any one interested in one heck of an investment property? You could probably get eight kids in it, finish the attic and make that 12 and if they can swim you could fit three more in the basement … don’t worry I fixed all that stuff I mentioned.”




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56 Comments »

Comment by Montana
2016-08-27 15:55:09

Last story sounds like an acquaintance who bought a huge old place in the university district. The area is considered very elite. Rich lawyers and very senior professors, and yeah the frat houses and shared housing.

Thing is, he bought this thing like 8 years ago, said it needed a lot of work and is only now beginning to entertaining there.

I hate to ask what went down..he is a highly compensated employee so it’s all good I suppose.

 
Comment by azdude
2016-08-27 16:07:52

I think the central banks are enabling this bizarre investment behavior.

Comment by Professor Bear
2016-08-27 16:21:50

More like aiding and abetting it…

 
 
Comment by Apartment 401
2016-08-27 16:13:42

Denver = Debtver.

Median household income here is less than $60,000. There’s no way all the 30KMillionaire lifestyles could be happening here without more and more debt. It’s all fake, it’s all a lie, a borrowed lie. Rolling coal, while stuck in a traffic jam at 6:30am or 2:30pm, do you even realize how pathetic that looks?

Comment by azdude
2016-08-27 16:20:24

they will get principal reductions and we do it all over again.

Comment by In Colorado
2016-08-27 20:33:02

Exactly how many people got a principal reduction last time? I remember some folks here shouting “Cram downs are coming”, but did they?

Comment by Jesus Navas Is My Lord Savior
2016-08-28 08:49:03

Isn’t NIRP basically principal reduction? You know it’s coming.

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Comment by Professor Bear
2016-08-27 16:20:50

“I think it is a lesson to us all, a particular extreme instance of how crowds can go crazy.”

Insanity is the exception in individuals. In groups, parties, peoples and times it is the rule.

– Friedrich Nietzsche

 
Comment by Professor Bear
2016-08-27 16:25:14

I can calculate the movement of stars, but not the madness of men.

– Sir Isaac Newton, upon losing his personal fortune in the South Sea Bubble

Comment by In Colorado
2016-08-28 07:35:09

Sir Issac, meet Hari Seldon

 
 
Comment by 2banana
2016-08-27 16:25:17

Liar.

——–

“While I’m on the subject any one interested in one heck of an investment property? You could probably get eight kids in it, finish the attic and make that 12 and if they can swim you could fit three more in the basement … don’t worry I fixed all that stuff I mentioned.”

 
Comment by The Selfish Hoarder
2016-08-27 16:36:26

We laugh on the HBB about crowds going crazy after tulips, houses, pet rocks. But the exception is for political saviors. No, every four or eight years a new political savior comes along and a group of worshippers flame anyone who opposes their savior. Yes Obama was treated with kid gloves in 2008 by a lot of people here. I remember I was shouted down. Even before the HBB I remember as a federal employee I had to whisper my dissent against the worshippers of Bill Clinton.

Comment by The Central Scrutinizer
2016-08-27 16:57:29

Again and again, people think daddy is gonna make everything ok.

Comment by Ben Jones
2016-08-27 17:03:58

When I see comments that use savior or daddy, I immediately tune them out. It isn’t adult discourse.

Comment by TheCentralScrutinizer
2016-08-27 18:35:09

King? Fuherer? Czar? Duche?

None of them make that sentence acceptable.

Do you know of a word that does?

There’s just no nice way of saying people want somebody else to come fix their problems.

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Comment by Professor Bear
2016-08-27 18:37:05

Il Duce

Why so many readers and posters here are blind to Trump’s wannabe dictator ambitions is an ongoing source of mystery to me.

 
Comment by TheCentralScrutinizer
2016-08-27 19:13:52

Hillary hides it better, but she wants to be our dictator daddy too.

 
 
Comment by Raymond K Hessel
2016-08-27 20:32:22

Bill, seriously dude, you need to start managing your Aspergers better in here. Mental rigidity and an almost cartoonish categorization of anything that doesn’t fit into your highly structured worldview is a dead giveaway. “Savior” and “daddy” comments, as Ben correctly notes, denote an almost childlike simplicity and superficiality in the people who make them.

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Comment by 2banana
2016-08-27 17:06:25

https://youtu.be/P36×8rTb3jI

Obama is going to.pay for my gas and mortgage…

Comment by TheCentralScrutinizer
2016-08-27 18:36:54

He bought me hair plugs and pectoral implants for posting here.

Thanks Obama!

Comment by Ben Jones
2016-08-27 21:48:56

‘There’s just no nice way of saying people want somebody else to come fix their problems.’

What do you expect to achieve by starting off with savior or daddy? It’s infantile. It’s Saturday night and you have nothing better to do than pick internet arguments, (special Olympic medals here!) with people you’ll never meet? And you want to tell us how smart you are?

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Comment by TheCentralScrutinizer
2016-08-28 06:33:56

Again, do you have a better word to make that sentence politically correct?

Just because an idea makes you angry doesn’t make it false.

 
 
 
 
 
Comment by spmk
2016-08-27 17:06:36

“.. don’t worry I fixed all that stuff I mentioned.”

Not picking on that guy specifically, but this should be a red flag to any buyer of a house. We don’t know if this person was a general contractor or had any actual skills in those areas, or if he just watched a few youtube videos and went for it with dreams in his head. I mention it because — one lesson I learned when I bought my first house, even though I hired an inspector, there were a few DIY-type projects a previous owner had done himself, which I eventually found were not done correctly, and I had to undo and redo them from scratch using professionals. Not a bank-account breaker but a non-trivial cost. If there is a next-time around, before buying a place, I would definitely find out who performed any “renovation” type work and talk to them myself. If it was the owners themselves and it was “DIY”, like — “I once took a shop class in high-school” — I might avoid those places.

Comment by TheCentralScrutinizer
2016-08-27 18:38:10

I think the author was being sarcastic for comedic effect.

 
 
Comment by Ben Jones
2016-08-27 17:24:28

Here’s a curious report:

‘Central bankers in charge of the vast bulk of the world’s economy delved deep into the weeds of money markets and interest rates over a three-day conference here, and emerged with a common plea to their colleagues in the rest of government: please help.’

‘Without that, they said, it would be hard to convince markets and households that things will get better, and encourage the shift in mood many economists feel are needed to improve economic performance worldwide.’

‘ECB executive board member Benoit Coeure said the bank was working hard to prevent public expectations about inflation from becoming entrenched “on either side” - neither too high nor too low. But the slow pace of economic reform among European governments, he said, was damaging the effort.’

‘One of the central worries is that households and businesses have become so cautious and set in their outlooks - expecting little growth and little inflation - that they do not respond in expected ways to the efforts central banks have made. That has included flooding the financial system with cash, and voicing a steady commitment to their inflation targets in an effort to make people believe they will be met.’

‘Kuroda acknowledged that household expectations have not moved, and said the BOJ was prepared to continue its battle to figure out how to shift them. In modern monetary theory, households and business expectations are felt to play a defining role in spending and investment decisions, and thus in shaping inflation and growth.’

“Japanese inflation dynamics remain vulnerable,” Kuroda said. “It could be that long-term inflation expectations are yet to be anchored in Japan” at the bank’s 2 percent target.’

‘In a lunch address by Princeton University economist Christopher Sims, policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future. “Fiscal expansion can replace ineffective monetary policy at the zero lower bound,” Sims said. “It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.”

‘It was not clear whether such ideas will catch on. But there was a broad sense here that the other side of government may need to up its game.’

Other side of the government? I wasn’t aware of this:

‘Central bankers in charge of the vast bulk of the world’s economy’

They must have opened the bar a little early:

‘It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation’

We’ve doubled the debt in 8 years and we don’t have inflation. They are always talking about theory. Has it never occurred to them their theories are incorrect?

Comment by Professor Bear
2016-08-27 18:35:26

‘One of the central worries is that households and businesses have become so cautious and set in their outlooks - expecting little growth and little inflation - that they do not respond in expected ways to the efforts central banks have made. That has included flooding the financial system with cash, and voicing a steady commitment to their inflation targets in an effort to make people believe they will be met.’

In what way can borrowing amounts many households can never reasonably expect to be able to repay in order to pay insanely high prices for homes be construed as anything except for responding in expected ways to the efforts central banks have made to encourage irrationally exuberant behavior?

Comment by rms
2016-08-27 23:15:09

Difficult to stay in business when your customers are tapped-out.

Comment by azdude
2016-08-28 06:07:05

when u create artificial demand it never goes away. You need to keep stimulating the demand or sh@t hits the fan.

houses , autos and retail!

tinkering with interest rates hasnt worked.

There is nothing price wont fix!

Why is it so necessary to keep prices high? The consumer would rather have low prices.

Look at flat screen tvs.

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Comment by spmk
2016-08-27 17:38:36

“policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.”

Wow. I guess they want us to start wheelbarrowing money around to places like the grocery store. heh.

Comment by spmk
2016-08-27 19:47:31

Large enough to ’shock us’ into it.

That is kind of disturbing. That’s real power right there.

 
Comment by aNYCdj
2016-08-28 10:22:26

still wont help poor people with 18+% credit card debt…

oh yeah lets buy a trillion dollars in corporate bonds that should stimulate the economy.

oh one tall skinny luxury building right next to another and a highway and a jampacked 7 train that is way over capacity and will be for the next 20 years if they can ever build a new tunnel under the east river.

http://newyorkyimby.com/2016/08/topping-out-imminent-at-44-26-purves-street-long-island-city.html

 
 
Comment by spmk
Comment by TheCentralScrutinizer
2016-08-27 19:49:17

How are they going to talk people into borrowing huge sums to purchase these gently depreciating assets?

Comment by spmk
2016-08-27 20:04:47

I don’t know. They say they want to deflate it over the next 10 years. It seems like a lot of people will go underwater over that time. They call it a “managed correction”. A long dragged out decline, if it works. I’m the type, I’d rather get all the pain at once, but be done quickly.

Comment by TheCentralScrutinizer
2016-08-27 21:25:03

“managed correction”

These words shall live in infamy.

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Comment by Raymond K Hessel
2016-08-27 20:35:16

A colleague at work and his wife bought an “investment” condo at Aspen last year. I tried to talk him out of it, but have given up on trying to protect people from their own stupidity and myopia. He’s been uncharacteristically glum and stressed out lately, and word has it he and wifey are already rueing the day they signed the contract.

http://www.zerohedge.com/news/2016-08-27/“i’ve-never-seen-anything-housing-markets-hamptons-aspen-and-miami-are-all-crashing

Comment by palmetto
2016-08-28 05:11:55

Thanks for posting, if you hadn’t, I was going to. I’ve lived in two out of three of those place, the Hamptons and Miami. Yes, Virginia, it was possible for a family to live in the Hamptons (during the summer) on an upper middle income, back in the day. Heck, even starving artists lived there. It was a lot of fun, too, until it went over the top.

The interesting thing about those three locations is that two of them are more or less seasonal. Miami does have more of a year round population and an economy of sorts that doesn’t totally depend on the vacation or second home crowd. But most people who live and work there year round aren’t going to be buying million dollar condoze.

 
 
Comment by Raymond K Hessel
2016-08-27 20:37:21

Which Keynesian lunatics are going to be first to be hunted down by the baying mobs with torches and pitchforks who saw their retirements and “investments” go up in smoke? My money is on China or Japan.

http://www.businessinsider.com/the-bank-of-japan-is-worried-about-a-stock-market-crash-2016-8

 
Comment by Raymond K Hessel
2016-08-27 20:47:18

I watched V for Vendetta tonight with my 13-year-old daughter. It seems more prescient now than ever for people who cherish liberty and the God-given worth of each individual. One of the most powerful scenes was when Evie, the character played by Natalie Portman, finds a letter in her cell from Valerie, a political detainee who has since perished. Valarie correctly notes that your integrity is the one thing no one can take from you; you can only give it away. With a majority of Americans seemingly devoid of any integrity whatsoever, Valarie’s words seem more timely than ever.

https://www.youtube.com/watch?v=EcHj9EXR8M4

 
Comment by Raymond K Hessel
2016-08-27 20:54:05

Civil forfeiture - legalized official theft from the citizenry - will soar to new heights once the Comrades of Proven Worth complete their takeover of the judiciary with larcenous Democratic hacks.

http://dailycaller.com/2016/08/12/california-attorney-dallas-judges-shred-constitution-steal-millions/

 
Comment by Raymond K Hessel
2016-08-27 21:00:15

Would WWIII be bullish for stocks? Krugman is probably salivating at the thought of all that destruction and rebuilding.

http://www.independent.co.uk/voices/russia-is-teetering-on-the-brink-of-all-out-war-with-ukraine-a7207411.html

 
Comment by Raymond K Hessel
2016-08-27 21:03:14

The Oligopoly media is forced to acknowledge the rise of alternative media. Funny how the courage to tell the truth and not be a propaganda outlet for your plutocrat masters tends to attract readers fed up with endless lies, dissembling, The Narrative, and the MSM’s journalistic Omerta.

http://www.breitbart.com/big-government/2016/08/27/new-york-times-breitbart-news-arrived/

Comment by azdude
2016-08-28 05:40:12

Why not take the balance sheet to 20 trillion and give the economy a boost of more stimulous?

There doesn’t seem to be any limit so why keep pretending there is?

 
 
Comment by Raymond K Hessel
2016-08-27 21:07:24
Comment by TheCentralScrutinizer
2016-08-27 21:32:49

Thank you, Raymond, for those 7 alt conservative text bites introed with your hand crafted mini tirades. These have given me much to think about. First I have to look up ‘Omerta’… but I suspect the definitions I find will not yield insight. I had the same experience trying to decipher ‘centipede’, and have put that one aside for now.

I may be incapable of comprehending ideas of this magnitude, but I will toil on to that end../

Comment by TheCentralScrutinizer
2016-08-27 21:34:09

… and don’t capitalize ‘oligopoly’. It’s disturbing.

Comment by phony scandals
2016-08-28 06:02:09

“… and don’t capitalize ‘oligopoly’. It’s disturbing.”

Another Saturday night and I ain’t got nobody
I got some money ’cause i just got paid
How I wish I had someone to talk to
I’m in an awful way

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Comment by Raymond K Hessel
2016-08-27 21:12:50

The Comrades of Proven Worth (D) can’t impose their collectivist kleptocracy and redistribution of the wealth as long as those bitter clingers won’t budge on the Second Amendment.

http://www.thedailysheeple.com/pew-poll-majority-of-americans-want-to-protect-second-amendment_082016

Comment by azdude
2016-08-28 05:43:38

“Monetizing debt is thus a two-step process where the government issues debt to finance its spending and the central bank purchases the debt, holding it until it comes due, and leaving the system with an increased supply of money.”

We need more deficit spending to boost the economy!

 
Comment by palmetto
2016-08-28 06:06:36

One of the things that concerns me the most about this are the implications of the recent deaths of Seth Rich and Shawn Lucas, now added to the Clinton body count over the years.

When you see that google is actively suppressing the search terms for the Clinton body count, it gets even more interesting, and not in a good way. Because for sure google knows and could easily produce a list of people who have protested or posted unflattering comments about Hillary on line. That list could also reveal where most of those people live.

Mass purges of dissenters have occurred in other countries. Chile, Argentina, China, USSR, Germany, etc. A former friend of mine lived through the time of the “disappeared” in Argentina. It wasn’t only high profile dissenters but regular, everyday working class people who “disappeared”, in most cases overnight.

Think it can’t happen here? Think again. It most certainly can, and in fact the effort can be targeted better, with the help of tech organizations like google. In fact, the violence from the left at the Trump gatherings is, a bit of a preview of what can happen.

http://www.zerohedge.com/news/2016-08-26/real-threat-violence-left

 
 
Comment by Raymond K Hessel
2016-08-27 21:15:41

People who enable corruption with their votes have no right to complain when they suffer the consequences of that corruption. Pay attention, Hillary voters.

https://www.yahoo.com/news/shoddy-home-renovations-may-contributed-italy-quake-toll-021807176.html

 
Comment by azdude
2016-08-28 05:13:08

MONETIZE THE DEBT!

 
Comment by aNYCdj
2016-08-28 10:42:41

what is it with this we work company…..taking up super expensive office space in nyc…. i guess there is still money to burn also 500,000 sq ft leased to bloomingdales while macys closes 100+ stores…

also tishman gets $56 million in tax breaks so much for affordable housing..

http://www.crainsnewyork.com/article/20160711/REAL_ESTATE/160719988

 
 
Comment by phony scandals
2016-09-03 14:24:41

Arizona Taxpayer and Citizen Protection, Proposition 200 (2004 …
https://ballotpedia.org/Arizona_Taxpayer_and_Citizen_Protection,_Proposition_200_(2004) - 191k - Cached - Similar pages

 
Comment by phony scandals
2016-09-03 16:06:15

xyz

 
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