Buy the Book: The authors tell the story of the Panic of 1907 and how fragile complex systems can be. The authors recount the events that led up to the panic, the actors that pushed it to the brink, the efforts taken to halt it, and the aftermath that led to the creation of the Federal Reserve.
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Weekend Reads – 3/24/23
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Quote for the Week
The necessity to distinguish between the short run and the long run is one of the most difficult tasks the businessman faces — and yet perhaps it is the most essential of his tasks. At the same time, however, how does one determine whether the events of the past few weeks or months are just random blips or early harbingers of a more fundamental shift in the long-run environment? If short-run decisions made without regard to the long run are the sure road to disaster, we must also never forget that the long run is nothing more than an extended series of shorter-run variations. — Peter Bernstein (source)
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Full of Surprises
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For centuries, humans have tried to predict what was going to happen next. They sought out oracles and mystics, fortune tellers and psychics, and forecasters and models.
People crave certainty. We want to know what we’re going to get — what happens next. We don’t like surprises.
Yet, the market is inherently uncertain. It’s unpredictable. Nothing is guaranteed. It’s full of surprises.
The constant lesson of history is the dominant role played by surprise. Just when we are most comfortable with an environment and come to believe we finally understand it, the ground shifts under our feet. Surprise is the rule, not the exception. That’s a fancy way of say we don’t know what the future holds. Even the most serious efforts to make predictions can end up so far from the mark as to be more dangerous than useless. — Peter Bernstein
In fact, the market is so unpredictable that we only know what will happen long after the fact. Continue Reading…
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Weekend Reads – 3/17/23
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Quote for the Week
After the violence of a crisis has subsided, it becomes clear that it is not upon Capital, nor even upon legitimate commerce that the blow has fallen heaviest. As a rule. Panics do not destroy Capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works…
Broadly defined, then, Panic is the destruction, in the mind, of a bundle of beliefs. As a first result of that destruction, a mass of paper documents, the outward expressions of those beliefs from which they derived their circulating force, becomes a mere dead residuum, leaving a void which can only be filled by other agents possessing that vital grasp on belief which they have lost. And the void must be filled. The volume of transactions and engagements cannot immediately be reduced. But Panic, the most rigorous of realists, rejects the dead symbols of Credit, and exacts Capital in the mobile form of currency. Suum cuique is now the universal rule, and everybody reclaims his own. The usual magazines of Capital in that form are rapidly drained, and the rate of its hire is proportionately raised. The Panic period is therefore marked by great scarcity of mobile Capital; because, though not less in quantity than before, it is drafted off into a thousand unusual channels to perform the functions commonly exercised by Credit. — John Stuart Mill (source)
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The Squeal that Set Off the Panic of 1907
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And one cloudy day somebody asked for a dollar, and not getting it promptly enough, very promptly squealed. That squeal was the signal to the chorus of the entire world, which also wanted Money! Money! Money! It is sad to want money and not get it. But to ask for your own money and not get it is the civilized man’s hell.
Thus the 1907 bank run began.
The Panic of 1907 is a story of the stupidity of a few greedy rich men attempting to corner United Copper, the failure of the Knickerbocker Trust Company, and J.P. Morgan.
Augustus Heinze, his brother Otto, and Charles Morse cooked up a scheme to corner the market in United Copper stock. To finance the scheme, they borrowed some money.
The corner began on October 14, 1907. Their plan was a short squeeze. They bought United Copper heavily, driving the price from $39 to $60, with the hope that short sellers would rush to close out positions and drive the price up further.
But their scheme failed spectacularly. Short sellers easily found shares and the price tanked. Within two days, the price of United Copper dropped to $10 and took Otto’s brokerage house down with it. Continue Reading…
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Weekend Reads – 3/10/2023
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Quote for the Week
Earning power must always be the chief criterion of stock values — exceeding in importance asset backing, financial condition, and even dividend return. For it is the average rate of earnings which determines the real value of the physical assets, which weakens or strengthens the cash position, and which finally must control the dividend policy. — Benjamin Graham, 1922 (source)