Buy the Book: Fortune Tellers presents five biographies of prominent forecasters of the 1920s. Each one rode the wave of U.S. economic prosperity and market speculation only to fall from grace as their inability to see the future was realized.
The Notes
- “This book is about early attempts to develop ways to predict the economic future and to sell those predictions to managers, brokers, and individual investors.”
- The economic prediction industry came to the forefront in the early 1900s. It was a time of invention and scientific discovery with an optimistic belief that science could solve everything including the future of the economy and stock market.
- Humans desire certainty in life which requires foretelling the future because knowing avoids the randomness, ambiguity, and doubt of life. People want reassurance more than anything and forecasters provide it.
- Forecasters, with their charts, models, and data, created the illusion that the future is predictable.
- “The desire for any information that would illuminate the future was overwhelming, and subscribers to forecasting newsletters were willing to suspend reasoned judgment to gain comfort. This blend of rationality and anxiety, measurement and intuition, optimism and fear is the broad frame of the story and, not incidentally, why forecasters who were repeatedly proved mistaken, as all ultimately must be given enough time, still commanded attention and fee-paying clients.”
- “Forecasting is at once the effort to discern the future before it happens; but it is also the ability to alter the very thing that one predicts. Embedded within the word is the ambivalent meaning of, in the case of economic forecasting, both predicting the economic future and shaping it.”
- “Business Cycle”
- The fluctuation between economic prosperity and turmoil was originally believed to be due to speculation and schemes of politicians and business men. The numerous economic declines in 1837, 1857, 1873, 1893, 1907, and 1920 shifted the view. People began focusing on the fluctuations in economic activity — production, employment, etc. as the “business cycle.”
- The unpredictability of the business cycle became a problem for business leaders, workers, and politicians.
- Business leaders wanted to know when the next downturn was for capital investment, inventory management, profits, and labor unrest.
- Most workers had enough savings for a few weeks. A downturn meant less work or unemployment and homelessness and hunger.
- Politicians wanted to avoid social upheaval and revolution like that in Russia at the time.
- There was a growing desire to limit uncertainty in the future in the early 1900s.
- About 10 forecasting agencies existed in the U.S. by WWI.
- “We now have nearly fourscore forecasting agencies to help the business man.” — Irving Fisher, 1925
- “Though all forecasters dressed their predictions in the garb of rationality (with graphs, numbers, and equations), their predictive accuracy was no more certain than a crystal ball. Moreover, despite efforts of forecasters to distance themselves from astrologers and popular conjurers, the emergence of scientific forecasting went hand in hand with rising popular interest in all manner of prediction. The general public, anxious for insights into an uncertain future, consumed forecasts indiscriminately.”
- Early economic forecasters were influenced by weather prediction (meteorology), advances in business data gathering and statistics, and development in economic theory.
- The late 1800s saw a rise in data collection on commodity prices, exchange rates, railroad haulings, and other financial data.
- Only 500,000 owned stocks in the U.S. in 1900 or 1% of the population. About 10 million owned stocks in 1929 or 12% of the population.
- “The number of industrial stocks listed on the New York Stock Exchange rose from 20 in 1898 to 173 in 1915.”
- 1919 to 1929 was a golden age for economic forecasting.
- Saw a massive increase of new companies/stocks.
- Saw a massive increase in new investors.
- “In 1900, AT&T had 7,000 shareholders; by 1920, it had 140,000. U.S. Steel had 54,016 in 1901 and 154,243 in 1928; in these same years, the number of shareholders at Procter and Gamble rose from 1,098 to 37,000.”
- Those new investors, businesses, etc. wanted to know what the economy/market would do next.
- More forecasting services emerged to feed demand.
- Evangeline Adams
- An astrologer who moved from Boston to New York in 1899. Her hotel burned down not long after she arrived, and someone (likely her) told the newspaper she predicted it.
- She gave advice on stock market and business trends based on her “insights” for the next 30 years.
- Adams Philosophy: “a compound of truths of all truths, applied in the light of an intelligent optimism to the requirements of Western everyday life.”
- Set up a financial newsletter in 1927 and predicted the 1929 crash.
- Had a radio broadcast on WABC and a regular column in the Washington Post by 1930.
- She died in 1932.
- Was viewed as a fraud and scam artist by some.
- Roger W. Babson
- Diagnosed with tuberculosis in 1902 at age 26.
- Admired Isaac Newton to the point of acquiring the second-largest Newton collection and founded the Gravity Research Foundation (to study gravity in the hopes of overcoming it).
- Promoted alcohol prohibition, eugenics, and dietary reforms.
- John Kenneth Galbraith called his methods “hocus-pocus” and “mysticism.”
- Attended MIT in 1894.
- Worked at E.H. Gay, a bond house, after graduating. Learned two lessons that shaped his view of Wall Street:
- He believed that most companies existed to sell securities not produce products/services and salesmanship drove markets and prices.
- American business was growing more complex and there was a growing demand to organize business information.
- Was a serial entrepreneur who recognized a demand for economic information and supplied it.
- Babson Statistical Organization
- Founded in 1905 at age 29.
- Started with $1,200.
- Focused on bond offerings.
- The first product was the Babson Card System which described bond offerings on individual index cards.
- Added a product for stocks later.
- Charged $12.50/month.
- Began issuing forecasts after the 1907 Panic.
- Babson’s Reports was a weekly newsletter that contained statistics on production, bank clearings, stock market transactions, business failures, immigration rates, import/expert levels, gold prices, and more. He used that data to predict future economic conditions.
- Business Barometers was the same info as the Babson’s Reports but in book form.
- Was a New York Times featured commentator by 1910.
- The Babsonchart was introduced in 1911, that combined different time-series data used to predict the direction of business activity.
- Babson believed that the “business cycle” was inevitable and predictable and that understanding business activity would let people know when to buy and sell. He was influenced by Samuel Turner Benner’s work which attempted to use commodity prices (pig-iron, corn, hogs) to predict the natural swings in general business.
- Babson’s charts added a normalized line between highs and lows. His predictions assumed that past patterns would repeat.
- Chart creation:
- Was made up of 12 data series on manufacturing, construction, crop production, railroad haulings, other industrial production data, business failures, bank clearings, commodity prices, and stock market prices.
- He combined that data into a single number — a Barometer — based on the extent and direction of change in the data.
- Area Theory: “He argued that in order to make an accurate prediction, the time of a fluctuation (either a recession or an expansion) must be multiplied by its severity in order to determine what might come next (Time × Intensity = Area). In a letter of October 7, 1915, Babson explained to a colleague that ‘[w]hen the two factors of time and intensity are multiplied to form an area, the sums of the areas above and below said line of normal growth X-Y must, over sufficiently long periods of time, be equal.’”
- Added a normal line. Being above or below the line meant boom or depression. Babson adjusted the normal line to create equal areas above and below the line (he based it on Newton’s law – for every action, there is an equal and opposite reaction).
- “Babson believed that the relationship of Newton’s theory of action-reaction was related to the business cycle via the psychology of the masses and particularly the tendency of most people to follow the herd and act without rational self-control.”
- “Business conditions depend chiefly on what men do.” — Babson.
- “As the natural reaction of adversity is economy, thrift, industry, and temperance, so the reaction of prosperity is to make men extravagant, wasteful, self-indulgent and careless.” — Babson
- He sold off parts of his news services starting in 1913 to focus on forecasting.
- Worked for the U.S. government during WWI for the Bureau of Information and Education. The department used data and war success stories, public speakers, art commissions, and movies to deliver patriotic messages to promote the war.
- Babson learned about promotion on a massive scale and used it to market his forecasting service after the war.
- “The war taught us the power of propaganda.” — Babson
- Put him in contact with government officials, union leaders, newspapers, and more that he didn’t know before the war.
- Learned about the amount of data the government was already collecting.
- Marketing:
- Built a salesforce across the U.S. and London, Paris, and Berlin to sell his Babson’s Report. 20% of sales were in Europe in 1914.
- Wrote articles for leading newspapers and magazines (earned $20,000 for his writing in 1915).
- Advertised in leading publications.
- Wrote pamphlets that promoted “Make your capital grow from $6,000 to $600,000!”
- Created a newspaper syndicate in 1923 with 420 papers across the country.
- Had 12,000 subscribers with $1.35 million in revenue in 1920.
- Florida Land Boom
- 1924 to 1926.
- “Pandemonium reigned. There were more Rolls-Royces and Lincolns in the state of Florida in 1926 than in any other state in the country.” — Babson
- “A syndicate in which I was interested bought about seven thousand acres of ranch land fifteen miles East of Lake Wales at about fifteen dollars an acre in 1924–25. In 1926 they refused fifty dollars an acre for this same property. In 1928–29, five dollars an acre was the best bid!”
- Babson learned about the mob psychology around greed and fear in markets.
- “When a man makes a profit, he cannot help telling of it.” — Babson
- 1929 Crash
- Babson was seen as a leading market expert by 1929.
- Was the big-name forecaster that predicted the market crash.
- “I shall repeat what I said at this time last year and the year before; namely, that sooner or later a crash is coming which will take in the leading stocks and cause a decline of from 60 to 80 points in the Dow-Jones Barometer. Fair weather cannot always continue. The economic cycle is in progress today, as it was in the past…. Wise are those investors who now get out of debt and reef their sails. This does not mean selling all you have, but it does mean paying up your loans and avoiding margin speculation.” — Babson, September 5, 1929 (Dow at 380)
- A market selloff occurred on September 5, 1929, after Babson’s comments hit the news. It was known as the Babson break. The market rebounded the next day.
- “Babson’s prediction was less impressive than it seemed. Because he tended to call for ‘depression’ in good times and ‘improvement’ in bad times, he had begun predicting an end to prosperity as early as 1926. But the economy only continued its boom.”
- On October 28 and 29, 1929 the market fell 24% over two days.
- By November 13, 1929, the Dow was at 199, a 48% drop from its September high of 381.
- Babson promoted his services heavily after the crash claiming he was the only one to call it.
- December 16, 1929 – claimed the U.S. entered a depression.
- New Yorker profiled Babson in February 1930 as the “prophet of doom.”
- September 1930 – recommended buying stocks with 20% of funds.
- November 1930 – recommended owning stocks with 40% of funds.
- May 1931 – called the depression over, go 100% into stocks — “Today we are again willing to risk our Organization’s thirty year reputation by stating that—irrespective of what the stock market does—general business has seen its worst.”
- “Despite his public triumph in ‘predicting’ the crash, his actual record was not as stellar. For one thing Babson had urged his clients to get out of the market in 1926, far before the boom of 1927 and 1928. This is a key point. Had Babson’s clients followed his advice, they would have missed the real boom in stock market securities in the late 1920s. Babson also called the bottom of the Great Depression incorrectly. Despite confident predictions of improvement in 1931, the economy would not recover for a decade.”
- Saw the greed and fear that drove market extremes and business failures as a moral failing.
- Switched his focus from market forecasting to self-help during the Great Depression.
- He published Cheer Up! Better Times Ahead! in 1932.
- Founded three schools: the Babson Institute, Webber College, and Utopia College.
- He campaigned unsuccessfully for president in 1940.
- Died in 1967 with an estate of $9.2 million.
- Irving Fisher
- Went to Yale in 1884. Graduated valedictorian in 1888. Stayed for graduate school plus 3 more years to earn his Ph.D.
- Marginal Utility Theory
- His dissertation came up with a theory of marginal utility and marginal cost to explain how prices are determined and changed.
- “By arguing that the value of a commodity gradually diminished the more of it an individual already owned, marginal utility theory emphasized the role of consumer demand in determining prices. Thus consumers spent money on a particular item until the point at which they would get a higher amount of satisfaction spending a dollar elsewhere. Products did not have an inherent value, therefore consumers assigned value to a good depending on its relation to a basket of other goods.”
- Relied on calculus, geometry, and algebra to explain his theory — sealing his support for mathematical economics.
- Marriage
- Married Margaret Hazzard, daughter of wealthy businessman, Rowland Hazzard in 1893. Hazzard owned Solvay Process Company (made soap, glass, soda ash, and water softener).
- Took a 14-month honeymoon in Europe.
- Rowland Hazzard built a 5-bedroom mansion with servants’ quarters for the new couple while they honeymooned.
- Diagnosed with tuberculosis in 1898 at age 31.
- Fisher was so popular in 1924 that the Wall Street Journal called John Maynard Keynes “England’s Irving Fisher.”
- “Babson is a nice gentleman. He receives great publicity and has a large following, but he has no academic standing.” – Fisher
- Fisher’s best-selling book How to Live, was a diet and health guide that sold over half a million copies across 21 editions from 1915 to 1945.
- He conducted dietary experiments at Yale and was hired to endorse Grape-Nuts cereal in a 1907 ad.
- He advocated for alcohol prohibition, eugenics, and other pseudoscience. His daughter was victim to that pseudoscience — had her treated for mental illness (believed to be schizophrenic) by Dr. Henry Andrews Cotton, who removed her colon. Cotton believed bacterial infection causes mental illness. She died shortly after the operation.
- Index Visible
- Invented an index card sorter called the Index Visible, a precursor to the Rolodex, in 1912.
- He and his wife invested $145,000 to start a business to produce and sell his device.
- Sold it to Rand Kardex Company in 1925 for $660,000.
- Fisher was named a director of Rand Kardex and held shares in the company.
- Rand Kardex later merged with Remington Typewriter Company.
- Recognized that business and capitalism were forward-looking. He highlighted the present value of a business or investment is based on future cash flows in The Rate of Interest in 1907.
- “The sagacious business man…is constantly forecasting.” — Fisher
- “The truth is that the rate of interest is not a narrow phenomenon applying only to a few business contracts, but permeates all economic relations. It is the link which binds man to the future and by which he makes all his far-reaching decisions.” — Fisher, The Rate of Interest
- Believed that prices, credit, and interest rates were key to forecasting the economy and monetary instability caused boom-bust cycles.
- “Fisher’s forecasts were based on his belief that changes in the price level (rather than the actual price level) signaled upcoming fluctuations in real output and employment.”
- “Any pronounced or prolonged fall in the price level usually foreshadows depression, while any pronounced or prolonged rise in the price level usually foreshadows improved conditions, from the business man’s point of view.” — Fisher
- Fisher took an analytical approach with his economic model based on causation.
- Equation of Exchange
- “The Panic of 1907 had convinced Fisher that extreme economic fluctuations were the result of monetary changes. When too much money existed in the economy, inflation and booms resulted; with too little came deflation and depression.”
- “Fisher used the equation MV = PT to claim that the level of prices varied directly with the quantity of money in circulation, provided that the velocity of money and the volume of trade did not change.71 Written out, the equation stated that the quantity of money in circulation (M) multiplied by the average number of times per year a dollar is exchanged for goods (V, the “velocity”) is equal to the volume of trade (T) multiplied by the price of goods.”
- His equation was a way to measure the dynamic activity within an economy.
- Led to a research project to test his theory against reality. He collected data on money in circulation, price levels, and total output from 1896 to 1911.
- “Fisher concluded that just as a rise in the price level signaled an expansion of trade, a rapid increase in the velocity of bank deposits signaled an impending downturn. He discovered that, historically, a high turnover in bank deposits was reached in 1899, 1901, 1906, and 1909—each a year of prosperity followed by one of downturn.”
- He emphasized interest rates and credit availability as a driving force to expansions and recessions.
- It gave Fisher a theory around forecasting the economy.
- Made his first forecast in 1911 and 1912 in the American Economic Review. He predicted an expansion in 1912 followed by a recession in 1913. Both were correct and he was praised for it.
- His forecasting success led him to think bigger. He created an index out of his Equation of Exchange theory. — “We want to find…an index number constructed from a relatively small number of commodities which shall measure, as accurately as possible, the movement not only of this small number included, but also those excluded.” — Fisher
- Index Number Institute
- Founded in 1922.
- Sold access to his indexes to newspapers.
- Index numbers were updated weekly for commodity prices and purchasing power.
- Promotion was done through speaking engagements and weekly newspaper editorials.
- Irving Fisher’s Business Page
- Weekly editorial using his indexes to explain business matters and make forecasts.
- The first column was on January 25, 1926, in the New York World.
- Built a salesforce to push newspaper editors to buy access to his weekly Business Page. Newspapers wanted them to bring in advertisements on the page too. That put Fisher in contact with more companies.
- The business operated at a loss.
- Fisher sold the business to the Institute of Applied Econometrics after 1936.
- 1929 Crash and After
- Fisher mocked Babson’s crash prediction in 1929.
- September 6, 1929 – “There may be a recession of stock prices but not anything in the nature of a crash.” — Fisher
- October 15, 19129 – Stock prices have reached “what looks like a permanently high plateau.” — Fisher
- October 24, 1929 – “Fisher says prices of stocks are low.” — New York Times
- Fisher blamed the crash on the excessive use of margin, not high prices.
- November 1929 – “It was the psychology of panic. It was mob psychology, and it was not, primarily, that the price level of the market was unsoundly high.” — Fisher
- Fisher was ridiculed for being wrong.
- December 1929 – “The Wall Street upheaval which sank Irving Fisher’s stock to a new low sent Roger Babson’s skyward.” — Outlook and Independent
- “He thinks the world is ruled by figures instead of feelings, or by theories instead of by styles… An economist might figure out that high shoes and long skirts are better for women in the Winter time than low shoes and high skirts, but all the economists in the world could not make women change until the style changed… In the same way styles rule Wall Street.” — Babson
- January 1930 – “would not be surprising if by next month the worst of the recession will have been felt and improvement looked for.” — Fisher
- February 1930 – Fisher published The Stock Market Crash–And After. He said the crash was “largely pschological” and would pass.
- May 1930 – “It seems manifest that thus far the difference between the present comparatively mild business recession and the severe depression of 1920–21 is like that between a thunder-shower and a tornado.” — Fisher
- Early 1931 – “The industrial giant has become conscious again. He is beginning to move around slowly in an effort to regain his feet, as the cobwebs from a knockout blow gradually clear from his brain.”
- Fisher believed the solution to the Great Depression was to expand the money supply (about the only prediction he was right on).
- The 1929 crash bankrupted Fisher. He used debt to buy stock before the crash. Most of his net worth was tied up in Remington Rand shares that fell from $58 in 1929 to $1 in 1933.
- He owed the IRS $61,000 in back taxes on money earned in 1927 and 1928, which he couldn’t pay.
- He borrowed from his sister-in-law to cover his debts. He sold his home to Yale, on the condition that he live there for a low rent. He was forced out in 1939 after not paying the rent.
- He owed $750,000 to his sister-in-law, $3,800/month in interest payments to brokers, plus rent.
- Fisher died broke in 1947.
- “Fisher’s contributions to forecasting, and to economics more broadly, have long outshone those of his competitors. These contributions were threefold: his brilliant formulation of the Equation of Exchange and his subsequent writings on monetary phenomena; his sense that changes in business practice and in technology could have lasting effects on industrial productivity; and his advocacy for the use of mathematics and statistics in economics that changed the shape of the field.”
- John Moody
- His father was prone to stock tips and get-rich-quick schemes. He lost money in the Panic of 1873 and again in the Panic of 1879. His father’s losses influenced Moody’s view of Wall Street as a casino.
- Got a Wall Street job at Spencer Trask & Company in 1890 as an errand boy for $20/month. He rose to securities analyst.
- Corporate financial information was hard to come by before the SEC for anyone but the biggest investors (railroads were the exception due to regulations). Moody argued for financial transparency in the markets and built a business around it.
- He focussed on corporate financial data and expectations.
- Believed the stock market followed changes in businesses and was not forward-looking.
- “He argued that investors tended to purchase securities when business was good, and they had surplus funds, and sold them when they encountered financial difficulties—and that this behavior, en masse, made stock purchases lag changes in the ‘real’ economy.”
- “Business must alternate from good to bad and back again, because it can do nothing else. A cycle is merely this inevitable alternation. Most business changes are due to universal human traits and instincts, or, in other words, to psychology as expressed in mercantile affairs. Successes tend to make even the greatest of men over-confident, while failures make us all humble.” — Moody
- “Business situation is the sum total of a vast number of ever-changing factors.” — Moody
- “It was found that the limit of capitalization was by no means reached when present earning power alone was capitalized, for in a growing country like the United States, with population practically doubling every generation, future earning power was seen to be vastly greater.” — Moody
- “If the margins are fat there will be a great rush to capture them and a big boom. But thin margins mean small inducements, and tend to restrict activity.” — Moody
- Businesses
- Moody’s Manual
- “During the year 1898, an insistent demand arose in Wall Street for some reliable publication which would supply complete information and statistics on industrial corporations, and more particularly on their numerous stock and bond issues,—which were flowing into the financial markets in ever-increasing volume.” — Moody
- He printed a directory of corporations and their securities listed on the New York, Boston, Philadelphia, and Chicago exchanges.
- He borrowed ideas from Henry Varnum Poor’s American Railroad Journal, first published in 1849.
- He raised money to print the directory by selling several hundred preorders.
- 5,00 copies of the first edition were published in 1900 at $5 each. It was over 1,100 pages on 1,800 industrial companies divided into 12 sections by industry. It included balance sheets, date of incorporation, and outstanding securities. In total, the companies accounted for $9.3 billion in securities. It was the first of its kind.
- Set up an office in 1901 and sales offices in Chicago, Pittsburg, London, and Amsterdam.
- Moody did a country-wide sales tour in 1902 to promote the directory and built a reputation by 1903. That brought competition from Poor’s.
- Moody Publishing Company
- Started in 1903 with $125,000.
- Two business lines:
- Bureau of Corporation Statistics – financial library of news and data on companies.
- Book Publishing – works on finance and economics.
- Moody Corporation
- Formed in 1904 with $1 million to manage his numerous ventures.
- Moody’s Magazine – formed in 1905, covered pieces by journalists, businesspeople, and economists.
- Included a random assortment of investments with borrowed money like a printing plant in New Jersey, a brick factory, and a gold mine.
- Panic of 1907
- Moody was 39, married with 2 boys, at the time.
- “The event arrived unexpectedly, Moody recalled, ‘destroying values by the billions, replacing confidence with fear and foreboding, annihilating credit and driving interest rates up to the moon.’ His ‘house of cards collapsed with the rest, and all my business interests fell in ruin at my feet.’… Moody said of the period that he ‘learned that uncontrolled optimism is no asset at all, but a great liability.’”
- Subscribers declined, the gold mine ran dry, the brick factory failed, and the printing plant hemorrhaged money. And Moody was in massive debt.
- He stalled as much as possible to avoid personal bankruptcy despite being over $100,000 in debt.
- “I had been a great donator, a great lender, a great borrower, a great endorser. I had thought all along that I was a great builder; but now, for the first time, I discovered that I was only a great optimist!” — Moody
- He sold Moody’s Magazine and Moody’s Manual by 1908 (Babson bought Moody’s Manual).
- Weekly and Monthly Newsletter Service
- Founded in 1909.
- Built on the basis that financial data and opinion were needed to aid investors. That led to his forecasts.
- Moody’s Weekly Review of Financial Conditions
- Weekly forecasting newsletter designed for investors.
- He sold a preorder to raise funds for the first issue — gained over 100 subscribers in a week at $50 to $60 a year.
- Monthly Analyses of Business Conditions
- Monthly version of his business forecasts.
- It was profitable by 1911.
- He surveyed business executives on their expectations going forward. Used that as one data point in his forecasting model.
- His forecasts advised specific companies/securities to invest in.
- Barometer Index
- Created an index similar to Babson that included lumber prices, coal production, commodity prices, interest rates, and more.
- Believed his index was one tool of many — financial/economic news and data. Moody said charts showed what happened not what will happen.
- “Moody advocated focusing investments on specific firms after carefully examining their balance sheets and management. He made a clear distinction between investment and speculation. Investing required analysis and some measure of safe return over time. Investment was an analytical endeavor unlike speculation based only on heard-on-the-street gossip.”
- Index of Operating Costs
- Used as an industry-level forecast. He compared it to a commodity price index to forecast the industry.
- Included costs of factory labor, fuel and light, rent, and raw materials.
- “He announced in the 1930s that he could no longer interpret the signals of Wall Street, he canceled the Weekly Letter and decided to move Moody’s Investors Service more solidly toward securities ratings.”
- Moody’s Analyses Publishing
- Started in 1909.
- Become the basis for his bond ratings agency.
- He used a rating system similar to John Bradstreet’s.
- The first edition of Analyses of Railroad Investments rated 1,200 bond issues and hundreds of stocks, detailing each company — location, mileage, equipment, income, expenses, and balance sheet.
- Ratings were based on earning capacity.
- He got complaints from companies who believed their securities were unfairly rated. The ratings back then were independent — companies did not pay for ratings like they do today.
- “Investors, Moody argued, needed to value securities on what they expected to earn from them rather than studies of past price trends. Estimated future earnings derived from knowledge of the issuer’s resources for growth, patents, managerial expertise, and market position vis-à-vis its competitors. Also by 1929, Moody was calculating price-earnings ratios as a better indicator of stock value than simply looking at share price.”
- Moody’s Investors Services
- Formed in 1914 as a holding company for his newsletter and ratings business.
- WWI closed U.S. exchanges from August to December 1914.
- Moody’s business experienced cancellations immediately.
- He cut his workforce, and reduced payroll, but kept sending the weekly newsletter to current and former subscribers.
- In December 1914, Moody made a bullish forecast for stocks and bonds for 1915 based on historical reports from prior wars and U.S. manufacturing benefiting from the war. He was right. The Dow rose 67% in 1915.
- By 1920 he had 10,000 clients from investors, banks, and brokerages.
- Bought the naming rights to Moody’s Manual from Babson for $100,000 in 1924.
- IPO’d the company in 1928. He later said it was a mistake.
- He bought out several investors, giving him 32,000 of 60,000 shares in 1929.
- Revenue hit $3.6 million in 1929. Dropped to $500,000 in 1931. Wouldn’t exceed its 1929 high for 25 years.
- Business increased in the 1930s as bond defaults increased.
- Business was helped further by a 1936 law that required banks to only hold investment-grade bonds. Every security required a rating at that point.
- 1921 – Wrote an optimistic forecast for Saturday Evening Post on the future of Europe and the U.S. role in its prosperity.
- 1922 – Forecast 20 to 30 years of prosperity in American Magazine.
- Moody’s Manual
- 1929 Crash
- “Wherever I went during 1928 or in the spring of 1929, whether to business or social gatherings, to dinners, lectures, concerts, theaters or churches, I was invariably buttonholed for my opinion of this or that stock-market movement or tip.” — Moody
- “I nowadays viewed with horror certain rich old men I sometimes saw in Wall Street; men whose whole lives had been money-making, and who had amassed great wealth, but in the feebleness of old age continued to toddle about adding just a little more to their already swollen fortunes.” — Moody
- October 7, 1929 – advised clients that the economy was fine, the market was in a speculative boom but it wouldn’t end until the spring of 1930.
- October 28, 1929 – “We are convinced that it represents nothing more or less than a speculators’ frenzy of fear for the time being—in other words, a technical condition of the market rather than a reflection of radically changing underlying conditions, which, in point of fact, remain relatively stable.” — Moody
- November 1929 – “The recession will probably be accentuated and prolonged by the feeling of pessimism which spread from the stock market into business… The extent of net paper losses and their effect can hardly be measured for the country as a whole.” — Moody
- April 1930 – “The inescapable conclusion is that we are not facing a business depression.” — Moody
- July 1930 – “The recent conservatism in buying caused by lower purchasing power and accentuated by psychological uncertainties.” — Moody
- Harvard Economic Service
- Started by Charles Bullock, with the help of Warren Persons, in the Harvard Economics Department with funding from the Rockefeller Foundation.
- Bullock believed that a profit motive made forecasts biased and that only an academic setting could allow unbiased forecasts.
- “Statistics may be effectively utilized not merely to describe the past, but as a basis for estimating present and future tendencies.” — Persons
- “Persons rejected the role of probability theory in making predictions about the future because, he said, probability implied randomness to unfolding events.”
- “Persons believed that each data series was composed of a secular trend (a regular increase or decrease over the whole period under consideration), seasonal variation (the movement of items within the year), and the underlying cyclical fluctuations (the value secured by the removal of secular trends and seasonal variation). Using his own pioneering statistical methods, he adjusted these data series to eliminate seasonal variances and secular growth. At the core of Persons’s idea was the thought that by getting rid of “disturbances,” he would reveal the true nature of the business cycle.”
- The Harvard ABC Chart
- Warren Persons created the forecasting model.
- Persons published his forecasting method in the Review of Economic Statistics. Being public, their methodology was easier to criticize by other academics and forecasters.
- Began publishing forecasts in the quarterly Review of Economic Statistics in 1917.
- The chart focused on three things in the economy — speculation (A), business (B), and money (C). Each was then used on a three-curve graph.
- It was the originator of the leading/lagging indicators used by the NBER.
- The group also studied historical data of speculation, business, and money to look for past similarities to the current environment.
- They claimed their research “proved” that changes in speculation (A) preceded business (B) by 4 to 10 months, and changes in business (B) preceded money (C) by 2 to 8 months.
- “At the heart of the Harvard group’s method was the idea that analogous patterns of economic change found in past periods of depression and expansion would reemerge in the future.”
- “The past is not exactly like the present and future; it is only more or less similar.” — Persons
- Weekly Letter
- Forecast newsletter service started in 1922.
- Added an international barometer in the mid-1920s.
- In early 1920, they warned of an economic downturn later that year. The U.S. suffered a depression from 1920 to 1921. The correct prediction brought recognition. Bullock aggressively marketed the services to Alumni after the call.
- Charged $100/year to subscribers.
- Used direct mail to market their services to business leaders. They eventually settled on a subscriber list of about 1,200.
- “Paul Samuelson recalled that for some, the Service promised ‘a philosopher’s stone that would tell customers when to get into the wild and woolly stock market of the 1920s and when to get out.’ During the Roaring Twenties, Samuelson recalled, the investment firm of Jackson and Curtis had offices located just outside the walls of Harvard Yard and was popular with students and the occasional assistant professor who wished to try their hand in the markets.”
- The most important contribution of the service was to collaborate with economists in Britain, France, Italy, Germany, Austria, and Canada to better understand international business and economies.
- John Maynard Keynes was an early collaborator but later disagreed with the Services methodology. He did not believe that the business cycle was inevitable or unalterable.
- “I feel it would be a great pity if the Service were to get into the state of mind of having, so to speak a vested interest in the due recurrence of the boom and slump according to program.” — Keynes
- Separated from Harvard University in 1928, renamed Harvard Economic Society, and reorganized as a corporation.
- 1929 Crash
- Was optimistic going into the October 1929 crash.
- November 16, 1929 – “The unprecedented declines in stock prices…make it difficult to estimate at present the amount of injury which will be done to business.”
- November 1929 – “While the extent of the damage to business can not yet be appraised, it is clear that serious and prolonged business depression, like that of 1920–21, is out of the question.”
- December 21, 1929 – predicted a depression “improbable.” and “Recovery of business next spring, with further improvement in the fall, so that 1930, as a whole, should prove at least a fairly good year.”
- Fall 1930 – “Our view that the decline in business would not go beyond a recession has not been borne out by this year’s developments, since first the duration and now the magnitude of the decline indicate a depression… But our statement that, with money easy, commodity speculation absent, and commercial credits in good condition, this country did not face a depression of such extreme severity as that of 1921 seems to be in process of justification.”
- Late Fall 1930 – “Business is now much reduced, but neither the statistical evidence nor the present economic situation gives assurance that it has yet reached bottom.”
- November 1931 the Weekly Letter was canceled. The focus of the quarterly Review of Economic Statistics would be less on forecasting.
- Harvard Economic Society closed in 1935.
- Criticisms
- It focused only on short-term quarterly trends.
- “By what occult powers the speculating world in mass could accomplish a thing which no speculator seems able to do individually, and that is correctly to divine and discount the future of business, for between six months and a year in advance.” — Karl Karsten
- “One of the problems that naturally sprang to my attention was that of the influence of predictions on the predicted events.” — Oskar Morgenstern
- “[A]ny widely accepted forecast itself sets up reactions which doom it to failure.” — Oskar Morgenstern
- Morgenstern’s main concern was that the existence of a forecast, by its very nature, influences market participants and introduces the possibility of changing the outcome of events.
- “Cycles are not, like tonsils, separable things that might be treated by themselves but are, like the beat of the heart, of the essence of the organism that displays them.” — Joseph Schumpeter
- “The constructors of the Harvard Barometer emphasized for the benefit of their readers and also believed themselves that they were not using any of that discredited and discrediting monster, economic theory. Professor Persons was quite prone to reply to theoretical objections by pointing to the hundreds of correlation coefficients that had been figured out under his direction. As a matter of fact, however, they did use a theory that was all the more dangerous because it was subconscious: they used what may be termed the Marshallian theory of evolution. That is to say…they assumed that the structure of the economy evolves in a steady or smooth fashion that may be represented (except for occasional changes in gradient, ‘breaks’) by linear trends and that cycles are upward or downward deviations from such trends and constitute a separate and separable phenomenon.” — Joseph Schumpeter
- “All predictive efforts, even those claiming to simply reveal past patterns or to be based solely on observation, contain deeply embedded assumptions.”
- Herbert Hoover
- Born in West Branch, Iowa. He was the first president born west of the Mississippi River.
- Studied geology at Stanford. Became a mining engineer after graduation.
- Created a consulting firm on mine valuation in London in 1908. He made $4 million from 1908 to the start of WWI.
- Ran the Commission for Relief in Belgium in 1914.
- Was the U.S. Food Administrator during WWI.
- Ran the American Relief Administration after WWI. It distributed food across Europe after the war.
- President Harding gave Hoover the choice of the Department of Interior or the Department of Commerce on his cabinet.
- Department of Commerce
- Hoover ran the department from 1921 to 1928 before running for president.
- Hoover believed forecasting could “solve” the business cycle.
- Hoover believed that the boom/bust cycle of the economy brought unemployment and labor conflict. He was concerned about the potential for revolution, similar to what he saw in Russia at the time and wanted to eliminate extreme economic swings that might threaten the country.
- Hoover hired Wesley Mitchell, a leading economist of the time and expert on the business cycle.
- Wesley Mitchell
- Grew up in Decatur, Illinois.
- Was in the first class at the University of Chicago.
- Saw economics as the science of human behavior.
- Published Business Cycles in 1913, a historical study on all the major business cycle theories at the time.
- Wanted to better understand the forces behind the business cycle.
- “The social sciences give no such guidance to a social engineer as the physical sciences give to a mechanical engineer. Human beings are the most intractable of materials. Nor can an inventor experiment with them at will as he can with alloys and plastics; he has to persuade his fellows to experiment on themselves, which they are generally reluctant to do.” — Mitchell
- “If we could foresee the business cycle, there would be none.” — Mitchell
- Founded NBER in 1920, the New School for Social Research in 1919, and the Social Science Research Council in 1922.
- “‘Business Cycles’ is merely a vivid term for this recurrent ebb and flow of business activity which past experience has taught the wary to expect. Depressions pave the way for business revivals, revivals develop into ‘booms,’ booms breed crises, and crises run out into depressions. A tolerably regular repetition of such cycles can be traced in American experience for at least a century. Similar cycles run their round in all countries of highly developed business organization.” — Mitchell
- Mitchell believed that historical data and business cycle theories only offered a rough guide. — “The key was not to look to history as a model but to look at history as a way to understand complex signals of when things were changing.”
- The USDA was the first government agency to use forecasts — on crop production. It was done to: 1) help stabilize commodity markets, and 2) provide farmers with similar (or better) information as commodity merchants (to protect farmers from getting fleeced).
- Hoover wanted to replicate what the USDA was doing but for the business cycle.
- He set up a Committee on Business Cycles to forecast the economy and help businesses be more efficient.
- “If the work of applying statistics to the guiding of business affairs were easy and obvious, it would long ago have been undertaken as universally as bookkeeping.” — Oswald Knauth, committee member
- “Many a businessman is developing the precipitate zeal of a new convert and talking about cycles as if they came around with the regularity of presidential elections… Not a few forecasting agencies are publishing prophecies as if they had the certainty of history.” — Mitchell
- Hoover and Mitchell worried those forecasting for profit were pleasing clients with optimistic, rather than objective, forecasts, created the illusion that cycles were predictable, and offered a false sense of security to business leaders and investors.
- “They also hoped to popularize the idea that cycles could be modified through the voluntary association of government officials, philanthropic institutions, and enlightened managers. This was a somewhat utopian scheme.”
- Survey of Current Business
- Free publications to help business leaders better run their companies. It covered foreign demand for goods, consumption data, and business statistics.
- “We hoped the business world might better detect the approach of booms and slumps.” — Hoover
- Hoover took credit for the economic prosperity of the U.S. in the 1920s.
- “The past five years have been remarkable for generally sustained prosperity, without the violent fluctuations which have characterized most of the previous periods of great activity. In large measure this has been due to greater knowledge of the current facts of business and a growing experience in utilizing this knowledge.” — Hoover 1928
- Hoover ran for president in 1928 on that message of economic “success.” He won overwhelmingly.
- His goal as president was to preserve the capitalist system in the country and eliminate extreme swings in the business cycle.
- Hoover was president from 1929 to 1933. The worst economic period in U.S. history.
- 1929 Crash
- Hoover believed that US prosperity would continue long into the future.
- He saw the October market crash as the fault of speculators.
- He pushed business leaders not to cut production.
- He held conferences to “restore business confidence.”
- November 1929 – Began a series of optimistic rhetoric under the belief that economic performance and presidential statements were linked.
- March 1930 – Predicted a recovery in 60 days.
- May 1930 – Claimed the worst was over.
- Hoover’s optimism had the opposite effect. People had less reason to believe him as the economy worsened.
- “It seems quite possible that Hoover’s prosperity propaganda program contributed to the uncertainty of consumers in 1930 by generating forecasts that were so at odds with actual economic conditions.” — Christina Romer
- Hoover lost the 1933 election to Roosevelt handily.
- “Hoover blamed the relatively steady increase of prosperity from World War I onward for inculcating a sense of economic invulnerability. It ‘gave birth to a foolish idea called ‘the New Economic Era.’ That notion spread over the whole country. We were assured that we were in a new period where the old laws of economics no longer applied.’”
- “I am well aware that uninformed persons recollect my term as President solely as the period of the Great Depression. That was indeed the nightmare of my years in the White House.” — Hoover, in his memoirs.
- Forecasting Charts
- “In and since the War the use and development of charts has been almost phenomenal—so large, indeed, that at least one able economist who is interested in such things thinks that we as a country have gone chart-mad.” — Carl Snyder, NY Federal Reserve statistician, 1923
- “A world turning to saner and richer civilization will be a world turning to charts.” — Karl Karsten
- Early forecasters used charts as a visual tool to show a trend in everything.
- “The many charts and graphs encouraged the idea that capitalism was both logical and understandable, in the way that one could make sense of the weather by looking at a meteorological chart, or a system of aqueducts by consulting a blueprint, or geographic distance by studying a map. They encouraged a sense of comfort, familiarity, and confidence in the marketplace—and, importantly, its predictability. Forecasting charts depicted the economy as a separate phenomenon, divorced from labor strife, cultural difference, and even events like war and natural disaster. In this way, the graphs were as important for what they left out, as for what they included.”
- The rise of these early forecasters was fostered by multiple worldviews:
- “A view of the future as discernible through the study of past patterns, including numeric sequences.” (Babson)
- “A view of the future as perceivable through mathematical insight and reason.” (Fisher)
- “A view that the future is graspable with detailed knowledge of the motivations and resources of the leading economic actors, as well as the financial health of the firms they headed.” (Moody)
- “A view of upcoming trends as discernible through the study of analogous past episodes with similar characteristics.” (Harvard Economic Services)
- “A view that forecasting requires a multidisciplinary approach, making use of leading indicators, mathematical models, and knowledge of leading firms, and entails a high degree of judgment and even intuition.” (Mitchell)
- Studying the Forecasters
- Garfield Cox Study
- Wanted to see if forecasters were any good at forecasting.
- Studied Babson’s, Harvard Economic Service, and Moody’s Investment Service from 1919 to 1928.
- Lacked rigor. He did not test how a random forecast performed against each service. He also never questioned why the services failed to get better over time.
- “He found that testing for accuracy was an unexpectedly difficult task. Forecasts of the business cycle—that is, of the “real” economy rather than the stock market—tended to be imprecise. Forecasters often wrote only generally about whether “business activity” would continue in the direction it was headed or whether some turning point was imminent.5 Few services ever committed to a specific time when the events they forecast would take place.”
- Yet, he concluded that the services “will be right considerably oftener than they will be wrong.”
- “Cox barely mentioned his most interesting finding: that forecasters had far less success predicting downturns than upturns. He believed that this did not have to do with a lack of insight or an inherently sunny disposition. Rather, it stemmed from a fear of antagonizing clients or, as he put it, a fear of ‘the resentment which many business men, in a time of active business, feel against anyone who gives publicity to doubts concerning the foundations of the current prosperity.’ Customers wanted forecasters to provide reassurance about the future.”
- Alfred Cowles Study – “Can Stock Market Forecasters Forecast?”
- More sophisticated study than Cox’s.
- Studied 24 financial publications from January 1, 1928 to June 1, 1932.
- Tested against a random forecast printed on the back of a card. Asked a group of readers to examine a forecast and make an “investment” accordingly.
- “Cowles’s research revealed no evidence that forecasters were accurate. Simply shuffling cards and randomly drawing one, he found, brought about a better record of stock market prediction than following the professionals’ advice. Random guesses, he concluded, were as accurate as carefully calculated predictions.”
- Garfield Cox Study
- “In 1931, the New York Times reported that a wide variety of ‘investment counselors’ were selling predictions of all different types throughout the city. Numerology had the most adherents among street-corner investment advisors: ‘There are hundreds of amateur numerologists, more than 1,000 professionals.’”
- A new group of forecasters popped up at the end of the Go-Go 60s, repeating the 1920s episode. They created models, sold predictions and data, and came to a similar end in the harsh downturn to start the 1970s.
- Lessons from the 2008 Financial Crisis
- “The unsettling nature of future uncertainty, and the desire of people to avoid ambiguity, helps illuminate much about modern economies. It helps us understand, for instance, the range of institutions that have been developed to combat uncertainty, such as the evolving insurance industry and the growing economic-data gathering centers that collect unprecedented volumes of information. It provides insight into the behavior of firms, whose leaders try to protect themselves from unexpected events, and of consumers, who quickly curb purchases during turbulent times. It also, of course, helps explain the centrality of forecasting practices and the endless variety of predictions that are so much a part of our economy and life.”
- “The seductive belief, held by many, that today we live in a smarter and less risky era than our ancestors and that calamity will not happen to us. This is another way of saying what economists Carmen Rein-hart and Kenneth Rogoff noted when they wrote that investors continually fool themselves into thinking that ‘this time is different.’… Emphasize the important role that skepticism should play in evaluating rosy economic scenarios and the promises of market gurus.”
- “In periods of unexpected calamity old worldviews shatter and new ones arise.”