As economic and political crises in Canada, Holland, Italy, Sri Lanka, and elsewhere continue to gain momentum, the history of economic crises and analysis of their causes and consequences should elicit keen interest from investors, especially those wondering if they should become divestors.
In addition to doing due diligence on specific investment options, investors can turn to Fearless: Wilma Soss and America’s Forgotten Investor Movement, by myself and Bucknell professor Jan Traflet, for insight and perspective. Our book describes the life and ideas of corporate activist and financial journalist Wilma Soss (1900-1986) and provides an interesting entry point into financial history, a too-often-overlooked perspective on present woes from the vantage point of the past.
A 1925 graduate of Columbia’s then new School of Journalism, Soss studied economics and history from some of the best minds in the country. Throughout her long stint as the writer and host of the nationally syndicated NBC Radio weekly show “Pocketbook News” (1957-1980), she often invoked lessons from financial history.
Too busy with her show and her professional shareholder activities to finish her autobiography, Soss never enjoyed the opportunity to articulate a full-blown vision of financial history. But from her show’s transcripts, the texts of her many speeches, and other writings (contemporaries called her, among other things, The Woman of a Million Words), we can revive the gist of her views, filling in the gaps ourselves when necessary.
In short, Soss believed that catastrophe, fraud, plague, policy shock, revolution, and war may foment economic crisis, but the direst financial crises around the world, and throughout history, stem from the rapid reversal of the market price and/or trading volume of one or more assets – bonds, corporate equities (stocks), intellectual property, land, livestock, various natural resources, or other assets. Financial crises produce profound political and socioeconomic effects, including sustained decreases in employment and output, massive wealth redistribution, and, at times, social unrest or fundamental policy and governance reforms.
Each financial crisis initiated by the bursting of an asset bubble, or the sudden end of a sustained period of significant asset overvaluation, exhibits idiosyncratic characteristics. Like improvisational jazz, however, such episodes stem from variations in identifiable causes, the Six Horsemen of Financial Apocalypse. Understanding the root causes of bubbles, Soss stressed, would not enable individual investors to “beat the market,” but it could help them to avoid being beaten into submission when the next bubble inevitably crashes a sector, or a regional, national, or global economy.
Unlike many market prognosticators, however, Soss did not perennially predict doom and gloom. She also sought to help investors to avoid fleeing false positives, price increases merited by the underlying fundamentals of supply and demand. Like her friend the investor guru Benjamin Graham, Soss believed that stocks and other assets could be valued rationally by understanding their fundamentals. One should not miss the bull for fear of the bear, or the bubble.
Even value investors, though, had to beware bubble troubles. When the prices and/or trading volumes of overvalued assets crash, businesses and individuals that purchased the asset, especially those that borrowed for the purpose, feel exposed. Unable to service their debts or post sufficient collateral for new loans, many sell the troubled asset, and other assets if need be, at distressed prices. Inevitably, many enterprises fail, dragging their creditors, typically banks and other financial intermediaries, down with them.
That often leads to outright panic as the creditors of banks and businesses, fearful they will not be able to recover their deposits or borrow to finance operations or consumption, scramble for the safety of liquidity, more commonly known as cash. Like the victims of a fire in a crowded theater, many innocents find themselves trampled or suffocated in the mad dash for the exit.
To avoid being trampled, Soss explained, investors needed to know that asset bubbles form under specific circumstances, including:
1) easy money, i.e., low inflation-adjusted interest rates and high lending volumes;
2) the inability or high cost of shorting the asset, or in other words of benefitting from a fall in its price;
3) narratives, rather than numbers, designed to justify high asset valuations;
4) the entrance of new market participants, a.k.a. dumb money;
5) the existence of pushers who profit from transaction volume but who will not be financially injured when prices sink, or of government regulations that entice investors into certain assets or asset classes;
6) systemic moral hazard, or the expectation of a government bailout.
These six circumstances, like Six Horsemen of Financial Apocalypse, can blind investors to rational asset valuation models, tricking them, temporarily, into paying too much for corporate bonds or equities, land or livestock, intellectual property rights or financial derivatives, sovereign debt or money, or even pretty pieces of paper and other worthless trinkets or baubles.
Our book, like Soss herself, does not give specific stock tips. Instead, we try to inoculate readers against the Six Horsemen and other potential calamities through the vicarious and nearly costless experience that accrues to readers of financial history.
