John Mills: “Credit Cycles And The Origin Of Commercial Panics” From 1867 by Todd Sullivan
The more things change they more they stay the same….
We have tried to fathom misunderstood markets for a long time. John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on “ Credit Cycles and the Origin of Commercial Panics ”.Macro Hedge Funds Earn Huge Profits In Volatile Macro Environment
With the S&P 500 falling a double-digit percentage in the first half, most equity hedge fund managers struggled to keep their heads above water. The performance of the equity hedge fund sector stands in stark contrast to macro hedge funds, which are enjoying one of the best runs of good performance since the financial crisis. Read More
“… each crisis appearing to be the result of its own separate accident,—usually some event lying on the surface of commercial history. The highest attempt at generalization does not ascend
beyond the fact—unquestionable in itself—that over-trading, in some form or other, is the common forerunner of Panic. Overtrading, however, is not an ultimate fact, and its regular recurrence claim explanations quite as importantly as the tragic events which follow it.” pg 11
“…commercial Credit runs through the mutations of a life, having its infancy, growth to maturity, diseased over-growth, and death by collapse; and that each cycle is composed of well-marked normal stages, corresponding to these ideas in nature and succession. And as Credit is a thing of moral essence, the external character of each stage of its developement is traced to a parallel change of mental mood, and we find the whole subject embraced under the wider generalisation of a normal tendency of the human mind. To this tendency—that is, the tendency of the faculty of credit to grow—may be attributed the evolution of stages in a uniform order, each having a distinct phenomenal character ; and, operating as it does, under the existing conditions of an island nation, with vast accumulated wealth, of energetic temperament and a low average of economical training, the same tendency is determined to the completion of its, cycle of developement within ordinary periods of ten years.”…“In the course of our investigation, then, we shall probably find that the malady of commercial crisis is not, in essence, a matter of the parse but of the mind.” pg 17
“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”pg 18
The highlighting is mine. Mills noted:
1) We tend to blame paying too much(over-trading) for market corrections without understanding what is the ‘measure of value’. We only know we over-paid because the market fell, not because we had a proper scheme to value markets
2) Use of Credit carries a moral responsibility(moral essence) and is fraught with emotionally charged judgement(mental mood) for profits.
3) Mills observed ‘The Recency Effect’ in his time, the growing belief in a multi-year trend the longer it is in place(tendency of the faculty of credit to grow)
4) There is a strong tendency to believe that wealth knows what it is doing, but often it does not(with vast accumulated wealth, of energetic temperament and a low average of economical training)
5) Like Buffett’s quote, “Only when the tide goes out do you discover who’s been swimming naked.” (Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works)
Further, he said of post crisis periods:
1st. — As a secondary consequence of the new mental mood of the lending classes, the owners of loanable Capital. The first consequence of that mood was, as we have seen, excessive scarcity ; because, in the supreme moment of the crisis, the grasp of each capitalist closed tight upon his own means, and the Banks rushed to strengthen their reserves against possible emergencies. But when that moment has passed, and its first terror has subsided, the private capitalist no longer feels the instinct of self-preservation, demanding absolute personal possession of his means, and the Banks are relieved from the necessity of enormous resources in their own tills. The Capital thus released from durance, does not at once flow back into the channels of loan and discount, from which it had so suddenly been withdrawn. Like the uneasy swell of the sea after the turbulence of recent tempest, there is a remainder of distrust, quieter but more enduring, and this dictates a much more rigid selection of securities, and concentrates the deposit of loanable Capital upon a few important centres
2nd. — The prevailing mental mood, as affecting the borrowing classes, is equally efficient in inducing plethora. In such times it is as dangerous to borrow as to lend, and the inducement to borrow is greatly diminished.
John Mills: “Credit Cycles And The Origin Of Commercial Panics” From 1867 by Todd Sullivan, ValuePlays
These two processes may be considered the chief internal causes of the plethora of unused Capital which marks the Post-Panic period.