A History of Financial Markets

Please note that Jon Petersen or Novel Investor https://novelinvestor.com/notes/ wrote a lot of the summaries and a lot of ideas were generously taken from many other books for my nourishment. The author has no intention of violating copyrights or materials. Should you find any material which you want taken off, please contact me.  

Kurt Schuler, editor, “Key Dates in Financial History,” original version 8 May 2011; viewed on Feb 27, 2020 at Historical Financial Statistics Website,

http://www.centerforfinancialstability.org/hfs/Key_dates.pdf

Why should we study a history of the financial markets?

Robert Rodriguez, during graduate school at the time, asked Charlie Munger, “What is the one thing that I could do that would make me a better investment professional?”

Munger responded in his characteristic, succinct, manner: “Read history, read history, read history.”

He also later added in his speeches, “I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting there and trying to dream it up all by yourself. Nobody’s that smart.”

“To be ignorant of what occurred before you were born is to remain always a child. For what is the worth of human life, unless it is woven into the life of our ancestors by the records of history?”― Marcus Tullius Cicero

“Fools, say they learn by experience. I prefer to profit by other people’s experience.” -Bismarck

Polybius: “There are two roads to the reformation for mankind — one through misfortunes of their own, the other through the misfortunes of others; the former is the most unmistakable, the latter the less painful…the knowledge gained from the study of true history is the best of all educations for practical life.”

Stocks returned twice that of bonds from 1926 to 2011.

Real stock returns (after inflation) were 3x that of real bond returns from 1926 to 2011.

After inflation and taxes, stocks returned 4x more than bonds.

20^th Century in the United States- was unbelievable

How has GDP per capita changed in the U.S? 610% in a century (it went up in the decade of the 30’s too, up 13%) Qualitatively, it probably went up higher; you can’t measure improvements in medicine, etc.

Best decade was the 40’s, up 36% in WWII. Worst decade was WWI.

There were 6 big periods for the stock market. 3 were bull markets. 3 were bear markets.

 https://mrtopstep.com/stock-traders-almanac-super-boom-update-maybe-ahead-of-schedule-for-dow-38820/

From 1900-1921, the Dow went from 66 to 71 less than a 10% move in 20 years, less than half a percent a year including dividends. From 1921-1929, it went from 71 to a high of 381 in September 1929, about 500%. Obviously, the well-being of the country did not fluctuate that much.

From September 1929 until the end of 1948 the Dow went from 381 to 180.  It was cut in half. This was 18 long years. Yet the GDP per capita was moving right up.  

From 1948-1965 the Dow went from 180 to close to 1000, 5 for1, which was far out stripping it.

From 1965-1981, the Dow went down. And then from 1981 to 1999 went up significantly.

If you look at the entire century, it went up 180 for 1. Every 1000 dollars invested turned into 180,000.

For 56 1/4 years, were period of stagnation, the Dow was down. The 43 3/4 years, the huge bull markets from 66-11,000.

Investors behave in very human ways. Most people don’t care about the underlying business and want to make money quickly.

Debt to GDP change?

1929 Under Franklin D. Roosevelt and his New Deal, the US posted its biggest-ever peacetime debt increase. The debt jumped by 150% from 1930 to 1939, when it was at around $40.44 billion (about $673 billion in today’s money.)

The debt-to-GDP ratio hit its all-time record of 113% by war’s end. Debt was at $241.86 billion in 1946, about $2.87 trillion in current dollars.

On top of the roughly $11.4 trillion in US government debt, which can be bought and sold and is floating around in financial markets, there’s also nearly $5 trillion in debt that the US government owes to itself. Those are largely obligations to the trust funds that are used to pay for programs such as Social Security. These aren’t counted in debt-to-GDP charts published here, and are often excluded from such calculations. But if you did include this debt—and there’s an argument to be made that we should, since the government is on the hook to pay these claims—the US debt-to-GDP ratio was just under 100% at the end of 2011.

  

https://qz.com/26062/one-chart-that-tells-the-story-of-us-debt-from-1790-to-2011/

Below is a timeline (I will continue to update this):

995: First paper notes issued privately in China, constituting the first “free banking” system (where banks issued notes and deposits competitively, without centralized control of the monetary base).

1214: First tradable government bonds issued in Genoa.

1408: Casa delle compere e dei banchi di San Giorgio, established in 1407, becomes Europe’s first modern bank.

Late 1400s: Silver production in central Europe increases, beginning the “price revolution” of inflation of roughly 2 percent a year that lasts into the early 1600s, spurred by silver discovered in the Americas after European deposits taper off.

1492: Columbus discovers the Americas; European colonization begins soon afterwards, bringing with it the European monetary systems of the time.

1497-1498: Vasco de Gama finds a passage to India around the Cape of Good Hope. European colonization of South Asia begins soon afterwards, bringing with it European monetary systems.

1519-1522: Ferdinand Magellan and his crew sail around the world. The world is now at least potentially a single market.

1526: Discovery of Iwami silver seams in Japan, an event of regional significance.

1545: Discovery of the Potosí silver mountain in present-day Bolivia, an event of global significance for the supply of the metal. Another major discovery of silver occurs in Zacatecas, Mexico in 1546. Both places are Spanish possessions. The Spanish silver pesos (also known as silver dollars) minted from these discoveries become the premier international currency of the 1600s and 1700s.

1555: Marked edges for coins devised the first of a series of innovations to reduce mutilation.

1575: French copper coins become apparently the first true Western token coins minted on a long-term basis, though there had been experiments before. (In China, token coins were many centuries older.)

Dutch East India Company

1602: The Dutch East India Company was established in 1602 by several merchants and divided into shares. During this time, the first organized stock (equity) exchange, in Amsterdam.  All profits were reinvested back into the company until 1612 when the first dividend was distributed.

From founding to 1688 dividends payment amounted to 1,482.5% while stock price increased more than 5-fold.

Demand for Dutch East India stock was so high that whole shares were first split into smaller shares called “ducaton shares” in 1683. Much like unit trusts created to “give smaller investors access” to Berkshire Hathaway’s high priced A Shares in the 1990s (before the B shares were issued), ducaton shares made it easier for more people to own East India stock that would normally be unable to afford it.

This was done for a fee, of course, with monthly settlement dates. Ducaton shares would sometimes trade at a premium (or discount) to the whole shares, creating an arbitrage opportunity for those who could afford whole shares. The practice became so popular that exuberance and panics were common.

1650: First futures contracts, at the Yodoya rice market in Osaka, Japan, about this year.

1656: Stockholm Banco issues the first paper notes in Europe.

1667: The Insurance Office, the first insurance company, is established in London.

1668: Bankrupt Stockholm Banco loses its charter. The Swedish parliament establishes the world’s first central bank, Riksens Ständers Bank (today Sveriges Riksbank [Bank of Sweden]).

1680: Major discovery of gold in Minas Gerais, Brazil.

1694: English government establishes the Bank of England as a quasi-central bank.

1704: Russia becomes the first Western country to adopt decimal coinage. (China had long had a somewhat decimalized coinage.) The United States begins minting decimal coins in 1792. Other countries do not follow until later; the United Kingdom, the last major holdout, decimalizes in 1971.

1717: United Kingdom adopts the gold standard in practice as a result of the mint ratio of gold to silver chosen by mint master Isaac Newton.

The Mississippi Bubble:

John Law helped set up the Banque Royale for France in 1716 to issue notes to pay government expenses and take over past government debts. Notes could be exchanged for coin.

Revenue to support the notes came in the form of monopoly rights to trade in the Louisiana Territory. Law created the Mississippi Company, a joint-stock company, offering shares to the public while promoting the “wealth” of Louisiana. The public took to it, prices rose quickly, and speculation ran wild.

It turned out to be a scheme. Proceeds from the sale of stock went to pay off government debt. The notes that paid the government debt were used to buy more stock, stock prices rose and demand for more shares rose, more shares were issues, paying off debt — it created a vicious circle that fueled speculation. Ultimately, the number of notes created by the Banque Royale far exceeded the coin available to cover the notes. It was pure leverage.

The scheme came crashing down in 1720 with a run on the bank. People demanded coin for their notes instead of stock. Of course, there was none. Shares of the Mississippi Company tanked. Law went from financial genius to being condemned overnight.

South Sea Bubble:

The South Sea Company, a joint-stock company, was created in 1711 with the idea of assuming Britain’s debt in exchange for sole trade rights to the Americas. Shares of the company were offered to the public.

By 1720, the public rushed to share in the quick richest — shares that sold around £128 in January 1720, were £330 by March, £550 by May, £890 in June, and £1,000 by late summer. By December 1720 the price was back to its January high.

But the episode produced many other joint-stock companies based of imaginative ideas — horse insurers, perpetual motion machines, soap maker, attempt to turn mercury into other metals — trying to take advantage of the boom.

“I can measure the motions of bodies but I cannot measure human folly.” — Isaac Newton on losing £20,000 speculating in South Sea shares.

“Nobody seemed to imagine that the nation itself was as culpable as the South Sea Company. Nobody blamed the credulity and avarice of the people — the degrading lust of gain…or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out for them by scheming projectors. These things were never mentioned.” — Charles Mackay

1756-1763: Seven Years’ War, which causes France to lose most of its colonies of the time and results in a corresponding shrinkage of the French currency zone.

1768: Russian government establishes an Assignat Bank to issue paper money. The State Bank of Russia, more of a modern-style central bank, is established in 1860.

1774: First mutual fund, in the Netherlands.

1775: First bank clearing house, in London.

1789-1815: Revolution and hyperinflation in France, rise and fall of Napoleon, frequent wars in Europe and by extension in European colonies.

1780: First inflation-indexed bonds issued, in Massachusetts.

1789-1796: First Western hyperinflation, in France, resulting from excessive issue of government notes (paper money). China had several episodes of high inflation, perhaps including hyperinflation, well before this.

1791: The Bank of the United States, partly owned by the U.S. federal government, is established; its charter is not renewed in 1811, but a second Bank of the United States exists from 1816 to 1836. Both banks have some quasi central banking functions.

1797: United Kingdom suspends the convertibility of the pound sterling into gold.

1800: Bank of France established as France’s central bank. Unlike its counterpart the Bank of England, it does not suspend convertibility into gold during the Napoleonic Wars.

1836-1837: Financial crisis in England and the United States.

1844: Bank of England becomes a monopoly note issuer and full-fledged central bank. Its example influences many other countries in the coming decades. First use of the telegraph for long-distance communication (Baltimore to Washington, D.C.). The telegraph quickly becomes essential to international financial markets.

1847-1848: Financial crisis in England and United States, then revolutions in several continental European countries and resulting financial turmoil. The Bank of France becomes a monopoly note issuer and a full-fledged central bank.

1849: California gold discoveries; gold is also discovered in Australia, in 1851.

1857: Financial crises in United Kingdom, United States, Scandinavia, and Hamburg.

1859: Comstock Lode of silver discovered in Nevada, United States.

1861: United States abandons the gold standard during the U.S. Civil War.

1865: France, Belgium, Switzerland, and Italy form the Latin Monetary Union on the basis of the French monetary standard.

1866: Financial crises in England, India, Italy, Spain, and Germany.

Panic of 1873

1873: Germany switches from a silver standard to a gold standard, beginning a chain of events that ends with most former silver standard or bimetallic countries switching to gold alone over the next 30 years. The United States in effect enacts the gold standard into law, though in practice the exchange rate floats until 1879. Financial crises in Germany, Austria, and United States.

The Panic of 1873, began with the failure of Jay Cook & Co., followed by other bankers, two trust companies, and a few banks. The NYSE closed for 10 days. Currency payments between New York banks were suspended for 40 days. The recovery finally ended in 1879.

The US experienced a number of debt bubbles and collapses — 1751, 1810, 1819, 1837, 1857, 1873, 1907 — in its early years, not unlike emerging markets do today. Two of the biggest bubbles came from shifts in transportation — canals (busted in 1837) and railroads (busted in 1873) — mostly funded by British money.

1875: Deutsche Reichsbank established as Germany’s central bank.

1882: Bank of Japan established as Japan’s central bank.

1885: General Act of the Conference of Berlin divides Africa among Belgium, France, Germany,　Italy, Portugal, Spain, and the United Kingdom; by about 1905 they exert full power over Africa’s interior, bringing with them European monetary systems.

1886: Gold discovered in South Africa. As South African gold reaches the market in large amounts in later years, what had been a deflation for countries on the gold standard became a modest inflation.

1890: Baring Brothers crisis in England, Argentina, and Uruguay; financial panic in the United States.

1893: Financial crises in Australia, Germany, Italy, and the United States.

1895: Japan’s annexation of Taiwan after war with China begins an expansion of the Japanese monetary zone that continues by steps until the middle of World War II. The zone eventually also includes Korea, Manchuria, coastal China, Oceania, and Southeast Asia.

1907: Financial crises in the United States, Chile, Denmark, Egypt, Italy, Japan, Sweden, and, to a lesser extent Canada, France, Germany, and the Netherlands. First modern securitization, a mortgage bond with a senior tranche, by Samuel W. Straus, in New York City.

 “For the purposes of the stock speculator who is seeking some guide to tell him when to buy and when to sell it is somewhat unfortunate that the turn in stocks — accepting the 1906-1909 cycle as typical — precedes the turn in business thus does not forecast the course of stock prices except in the apparently paradoxical fashion that great prosperity affords an advantageous time for selling stocks, extreme business depression an opportunity for purchase.”

The stock market is forward-looking. Changes in the market tend to precede changes in the business cycle. History offers enough examples but Carret referred to the 1907 Panic in the book.

On the business cycle/economy during the Panic of 1907: 1906 started with general prosperity across most businesses but with an underlying hostile public sentiment toward business leaders due to an outcry against poor business practices in the press over the past year. Interest rates had also risen from the lows of the prior year.

Railroad leaders continued to lay more tracks despite the record high cost of steel and rising cost to borrow. The shifting sentiment drove some states and Congress to pass regulations — railroad rates and meat inspection/food laws — to sooth the public. And on April 18, San Francisco was destroyed by a massive earthquake and fire. The extent of the damage wouldn’t impact the markets for months…until January 1907.

The railroads looked to the markets to finance operations, but the money supply was tight. Many banks were left holding unsold bond offerings. The collapse hit in October with the failure of the Knickerbocker Trust Co (a leading NY bank). That kicked off a run on other banks and bank failures, which bled into other industries. It was a full-blown depression that bottomed around November 1908, followed by a mild recovery throughout 1909.

On the stock market during the Panic of 1907: The Dow peaked in January 1906, falling to the year’s low around May.  Despite the damage in San Francisco earthquake, the Dow recovered close to the peak and traded sideways to end the year. The Dow kicked off 1907 with a break lower in March, a brief recovery in April, sideways till October. The collapse, bottom, and recovery all happened in November 1907. By the time the economy bottomed in November 1908, the Dow was hovering close to its 1906 highs (in other words, the stock market is not the economy — the market is forward looking).

Creation of the Federal Reserve

1914: U.S. Federal Reserve System established as the central bank of the United States.

The Federal Reserve was created by J.P. Morgan who forced the government into acting on the central banking plans it had been considering off and on for almost a century. The fact that the government owed its economic survival to a private banker forced the necessary legislation to create a central bank and the Federal Reserve.

It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.

World War I

1914-1918: World War I. All belligerent countries and many others suspend their gold or silver standards, marking the beginning of the end of full-bodied gold and silver coins. The war begins the rise of the U.S. dollar as an international currency of roughly equal importance as the pound sterling.

1917: Russian revolutions. After the October Revolution, the Bolsheviks begin the first attempt to establish a centrally planned economy, where money plays a much different role than it does in a market economy.

1918-1920: Various treaties strip Germany, Austria, Turkey, and Russia of territory they had before World War I, creating many new countries in Central Europe and the Middle East. Most of the new countries establish new currencies.

1919: United Kingdom unpegs pound sterling from the U.S. dollar and gold.

1920: Spurred by wartime use in munitions, the exchange ratio of silver to gold appreciates from about 40 to 1 a few years earlier to 15.5 to 1 before depreciating again. Some countries with silver coins experience problems. Germany, Russia, and successor states to Austria Hungary suffer post-World War I hyperinflations from 1920 to 1924.

Florida Real Estate Boom:

By 1924-25, Florida “beachfront” property (it was mostly swampland and marsh) could be purchased with 10% down. Prices doubled after a few weeks.

It collapsed in 1926. Blame was placed on two hurricanes that fall.

Miami bank clearings over $1 billion in 1925, dropped to $143 million in 1928.

1926: United Kingdom returns to the gold standard, followed soon by many other countries. (The United States had resumed in 1919). France stabilizes the franc in terms of gold.

1928: China establishes a central bank.

1929:

Had all the ingredients for a speculative episode: leverage, over-optimism, and financial innovation.

Stock could be bought on a 10% margin. Margin rates ran from 7-15% in 1929.

Investment trusts were the new innovation. The trusts levered up spectacularly.

Trading corporations, like the Goldman Sachs Trading Corp. (launched by Goldman Sachs), were created solely to speculate in stocks. The Goldman Sachs Trading Corp would launch the Shenandoah Corp. to speculate in stocks, which launched the Blue Ridge Corp. to do the same. All leveraged to the hilt, speculating in stocks. Each one’s “value” reflected in its creator, due to the speculative euphoria in stock prices.

“Stock prices have reached what looks like a permanently high plateau.” — Irving Fisher

The end began on Oct. 21, culminating on Oct. 29 with the single worst day ever (up to that point).

“Prices driven up by the expectation that they would go up, the expectation realized by the resulting purchases. Then the inevitable reversal of these expectations because of some seemingly damaging event or development or perhaps merely because the supply of intellectually vulnerable buyers was exhausted. Whatever the reason (and it is unimportant), the absolute certainty, as earlier observed, is that this world ends not with a whimper but with a bang.”

The collapse was blamed not on excess speculation but on weakening economic indices. A rational response to an irrational episode.

The Great Depression

1929: Worldwide Great Depression begins. Argentina, Australia, and Uruguay abandon the gold standard; by 1936, almost all gold-standard countries abandon their old exchange rates with gold or impose exchange controls that amount to de facto abandonment.

Stocks vs Bonds — Bonds won the 1930s and investors continued to believe the same would happen into the ’40s. Yet, Davis (author of a book) preferred stocks during the bond loving ’40s. The low-interest rates (April ’46 Treasuries rates bottomed at 2.03% – 25 years to double money) was pathetic compounding to Davis (author of a book).

A stock is a piece of a company with unlimited upside. A bonds biggest reward was giving principle back plus interest no matter how well the company did.

History showed that governments and bonds didn’t get along, thanks to inflationary practices during and after major wars i.e. inflation ate a big chunk of bond earnings and principle buying power.

1931: Credit Anstalt crisis in Austria spreads elsewhere in Central Europe. The United Kingdom, British Empire, Japan, and Scandinavia abandon the gold standard. Germany imposes exchange controls that amount to a de facto abandonment of the gold standard. Countries that abandon the gold standard earliest are generally those that begin recovery from the Great Depression soonest.

1933: United States abandons gold standard as the Great Depression reaches its worst point there, culminating in a wave of bank failures. The United States returns to gold at a depreciated level in 1934.

1935: China becomes the last major country to abandon the silver standard, following a deflation driven by the U.S. government’s policy of silver purchases at above-market prices. India establishes the Reserve Bank of India as its central bank.

1936: France becomes the last major country to abandon the exchange rate with gold established in the currency stabilizations of the 1920s.

1938: Fannie Mae is created.

World War II

1939-1945: World War II. Belligerent countries impose exchange controls. The sterling area and the French franc zone come into formal existence with the outbreak of the war. The start of the war definitively reduces the pound sterling to a currency of lesser importance than the U.S. dollar. Germany and Japan bring conquered areas into their monetary zones, and then loses them as they lose the war. The later part of the war brings Eastern Europe into the orbit of Soviet communism and centralized economic planning, where the region remains until 1989.

Keynes called the low-interest rates of the ’40s the “balm and sweet simplicity of no percent.”

The 1940s began the 34-year bear market in bonds.

1944 Bretton Woods

1944: Bretton Woods international monetary agreements.

Investment 101: Avoid bonds when the consumer price index is rising. Avoid bonds after a costly war.

Savings account and bonds that don’t beat inflation deplete wealth. That’s what happened in the late 40s. Yet, savers lost money but didn’t complain because they weren’t “losing” money in the markets.

1946 Federal Reserve Board survey results in 90% saying they wouldn’t own stocks. The masses held “collective grudge against the market.”

Insurance companies weren’t earning due to low-interest rates, low bond yields. Couldn’t make much more than reserves needed to cover claims. The biggest problem was how to invest the proceeds. The typical insurer sold for less than book value. Investor got underlying insurance portfolio (bonds and other assets) plus the insurance business for free, plus dividend.

Compounding Machines — a low cost to run, no factories, and no machines to upgrade/replace every few years means the company takes a small hit when inflation rises.

After WWII, returning soldiers drove insurance demand — a very conservative time.

The public still hated Wall Street in ’48.

Davis (author of a book) only bought on margin when low prices offered a margin of safety, unlike those who bought stocks at sucker prices. (Still something I wouldn’t do myself…)

Davis’s (author of a book) favorite question: “If you had one silver bullet to shoot a competitor, which competitor would you shoot?” Then research the competitor. A company feared by its rivals must be doing something right.

He looked for companies with great leadership. He visited company headquarters to talk to management. Invest strategically, not nostalgically.

Between 1949 and 1965, stocks returned on average better than 10%. People “generally regarded as a sort of guarantee that similarly satisfactory results could be counted on the future. Few people were willing to consider seriously the possibility that the high rate of advance in the past means that stock prices are ‘now too high,’ and hence that ‘the wonderful results since 1949 would imply not very good but bad results for the future.'

1946: The United States grants independence to the Philippines, starting a wave of decolonization over the next 30 years that ends the British, Dutch, French, and Portuguese colonial empires.

1947: International Monetary Fund begins operations and a form of the gold standard effectively resumes.

1948: Germany’s currency reform ends high inflation that occurred after World War II. Most other European belligerent countries also had postwar currency reforms.

1949: United Kingdom devalues the pound sterling; most sterling area countries and many Western European countries follow. Japan’s currency reform ends its high postwar inflation. Communist takeover of China starts that country’s first complete monetary unification and movement toward a centrally planned economy. Alfred Winslow Jones establishes the first hedge fund, in New York City.

1949: October 1, 1949, when Mao Zedong proclaimed the People's Republic of China (PRC) from atop Tiananmen

1950: European Payments Union establishes limited current-account convertibility among its members, which included most Western European countries.

Late 1950s: Eurodollar market begins in London.

1958: European Payments Union ends as most Western European currencies re-establish current account convertibility. France devalues the franc.

1960: France grants independence to most of its African colonies, which unlike the colonies of most other countries remain tied to it monetarily today (2011).

1961: Start of the London gold pool, an attempt by central banks to prevent the market price of gold from surpassing the official price.

1962: Last free banking system ends in South West Africa (now Namibia). Governments deal with each other. France devalues the franc. John Oswin Schroy establishes the first money market mutual fund, in Brazil.

1965 Fed Chair William McChesney Martin said, “Disquieting similarities between our present prosperity and the fabulous Twenties.” It took two generations to forget about the roaring ’20s and crash before exuberance returned. It lasted four more years – didn’t end until ’69.

In 1965 the average taxable high-grade bond yield was 4.5%, and 3.25% for tax-free bonds, while the average dividend yield was 3.2%. Graham viewed the small spread between the bond yield and dividend yield warranted caution.

The last stage of a Bull Market — Mass transfer of assets from pros (smart crowd) to mom and pop investors (the naive crowd) as public flocked into the markets, driving prices higher, and exuberance lasted another 4 years before it ran out of buyers.

1967: United Kingdom devalues the pound sterling.

1968: Two-tier gold market begins, with free market price higher than price at which

1969 — high stock turnover, high mutual fund turnover. The late ’60s kicked off the growth fund craze. A study by Twentieth Century Fund found that blindly owning the entire market from 1960 to 1968 was more rewarding than paying a fund manager to pick stocks.

Momentum driven stocks soared. Investors became performance chasers, moving in and out of the top mutual funds. Buffett closed his partnership in 1969 and bought municipal bonds.

Between 1949 and 1969, the Dow increased 5x while its earnings and dividends only doubled (i.e. P/E expansion): “Hence the greater part of the impressive market record for that period was based on a change in investors’ and speculators’ attitudes rather than in underlying corporate values. To that extent, it might well be called a ‘bootstrap operation.'”

Electronics were hot stocks of the ’60s and Nifty Fifty. In the United States, the term Nifty Fifty was an informal designation for fifty popular large-cap stocks on the New York Stock Exchange in the 1960s and 1970s that were widely regarded as solid buy and hold growth stocks, or "Blue-chip" stocks. These fifty stocks are credited by historians with propelling the bull market of the early 1970s, while their subsequent crash and underperformance through the early 1980s are an example of what may occur following a period during which many investors, influenced by a positive market sentiment, ignore fundamental stock valuation metrics. Most have since recovered and are solid performers, although a few are now defunct or otherwise worthless.

’69 bull market ended and the market continued falling into 1970. Both inflation and recession existed. Economists called it stagflation. Dow down 36%. Hot stocks and electronics got killed, down 77% on average.

Other euphoric periods built on innovation: Go-Go ’60s, REITs in the ’70s, junk bonds (fueling takeovers and LBOs) in the ’80s, commercial real estate in the ’80s (fueled by S&Ls), the Japanese stock market in 1990.

1970 Freddie Mac founded.

1971 Nixon Ends Convertibility of US Dollars to Gold and Announces Wage/Price Controls

With inflation on the rise and a gold run looming, Nixon’s administration coordinated a plan for bold action. From August 13 to 15, 1971, Nixon and fifteen advisers, including Federal Reserve Chairman Arthur Burns, Treasury Secretary John Connally, and Undersecretary for International Monetary Affairs Paul Volcker (later Federal Reserve Chairman) met at the presidential retreat at Camp David and created a new economic plan. On the evening of August 15, 1971, Nixon addressed the nation on a new economic policy that not only was intended to correct the balance of payments but also stave off inflation and lower the unemployment rate.

The first order was for the gold window to be closed. Foreign governments could no longer exchange their dollars for gold; in effect, the international monetary system turned into a fiat one. A few months later the Smithsonian agreement attempted to maintain pegged exchange rates, but the Bretton Woods system ended soon thereafter. The second order was for a 90-day freeze on wages and prices to check inflation. This marked the first time the government enacted wage and price controls outside of wartime. It was an attempt to bring down inflation without increasing the unemployment rate or slowing the economy. In addition, an import surcharge was set at 10 percent to ensure that American products would not be at a disadvantage because of exchange rates.

In order for the U.S to maintain the strength of its currency, it would have to be well circulated around the world; it would have to have a certain percent of the world’s GDP and wars would be threatened with the middle east should oil be bought in other currencies other than the US dollar. 

1971: United States devalues the dollar and gold convertibility for all currencies in effect ends, beginning the breakup of the Bretton Woods monetary system agreed in 1944 and begun in 1947.

1972: United Kingdom floats the pound sterling; the sterling area dissolves. Chicago Mercantile Exchange offers the first futures contracts for currencies, which apparently are also the first futures contracts for anything other than a physical commodity.

Following the bear market of 1973-’74, stocks still looked cheap in ’76. Buffett said he felt like an oversexed teenager at a dance hall.

1973: United States devalues, and then floats the dollar; other major currencies also float, ending the Bretton Wood system in practice. A period of higher inflation follows in most countries.

Western European countries attempt to reduce exchange rate fluctuations among themselves. The Black-Scholes formula, published in 1973, helps start the age of computer driven financial engineering.

1975: Portugal’s colonies are granted or declare independence, ending the era of widespread European colonialism. The high-water mark of socialist economies is about here. Also by about this time, all commonly used coins throughout the world had for the first time become pure tokens, with no gold or silver content.

Three phases to Davis’ s (author of a book)financial life — learn, earn, return. Learn phase lasted into his early 40s, earn phase lasted the next 3 decades, return phase was setting up a plan for the next generation or whoever would get the money when he was gone.

1979 — stocks were priced for terrible news and selling for less than book value, single-digit P/E’s.

1978: China becomes the first communist country to begin moving definitively away from central planning. One component of the program is a first foreign exchange reform in 1980.

1979: Western European countries establish the European Monetary System.

1980s: Start of a shift away from bank financing to bond financing as dominant in rich countries.

The 1980s — the Fed fights inflation. Prime rates rose to 20.5% and 30-yr Treasuries hit 15% (bond deal of the century which few people were buying). The average investor couldn’t see past high inflation to notice the great deal of 15% Treasuries. Always too focused on the short term worry.

Gold and silver prices soared in 1980. High demand, fear buying that tanked after gold bugs predicted higher prices.

1981 – Recession and the Dow fell 24%. The last bear market before a 20-year bull run. Inflation subsided, Fed cut rates, and commodity prices fell.

1982: Latin American debt crisis begins; later it spreads to Africa. Many high inflations result in poor countries. The debt problem is addressed starting 1989 by the Brady plan. In rich countries, this year marks the start of what was dubbed the Great Moderation, a period of generally low inflation, less volatile economic growth, and apparent financial stability that lasted until the world financial crisis of 2008-2009.

1983: Hong Kong re-establishes a currency board system, providing a model that will inspire loose imitations in several other countries in the 1990s.

Late 1980s – Reagan added $1 trillion in new debt. Low rates drove consumer/corporate borrowing and overpaying on assets. Mike Milken led the junk bond frenzy, the famous Predator’s Ball, leveraged buyouts and hostile takeovers.

Best time to buy banks is during a recession because investors become pessimistic.

“There are two kinds of companies – the quick and the dead” – Andy Grove, Intel CEO

The 1980s brought trading back in vogue. Newsletters popped up to profit off the fad.

1987 crash — Dow lost 23% on Black Monday. 36% from the high. Pundits called for further losses — end of the world calls. Experts were wrong.

“Bear markets help you make money.”

Key to insurance stocks (and most businesses) — Own the low-cost operators.

Why Davis (author of a book) wrote a weekly bulletin: “It’s not for the readers. It’s for us. We write it for ourselves. Putting ideas on paper forces you to think things through.”

Long term Buy and hold – Once he bought winning companies, his best decisions were never to sell.

As long as he believed in the strength of leadership and the companies’ ability to compound, he held on.

A few big winners are what count in a lifetime of investing, and these winners need many years to appreciate.

A young, inexperienced investor has a built-in advantage over a mature, sophisticated investor — time.

1988: Basel Accord establishes international standards on minimum capital requirements for banks, a milestone in international financial regulation.

1989: Communism ends in Eastern Europe. Soviet transferable ruble monetary zone breaks up.

Eastern European countries begin transition away from socialist money.

1990: New Zealand has the first central bank to practice explicit inflation targeting.

1991: Soviet Union breaks up; the successor states establish independent currencies, many initially having high inflation, and start the transition away from socialist money. Argentina establishes a currency board-like system, the first of five countries to do so in the 1990s.

1991 – Recession. Banks had trouble due to the high debt of the ’80s. Citicorp was too big to fail in the late ’80s. Japan in the ’90s was like the US in the ’30s.

The similarity between the late ’60s and ’90s: ’69 were computer peripherals, mainframes, and electronics companies. The ’90s were Dotcoms, chip makers, networking, and connectivity. All high P/E stocks which everyone was buying.

1992: Crisis of the Exchange Rate Mechanism of European Monetary System: the last recent big currency crisis in developed countries.

’20s -> ’60s -> ’90s = about 30 years to forget each prior blowout/bust or 1 generation removed from each high P/E crash event.

Ben Graham issued a market excess warning in the 60s. Buffett did it in the 90s. The Fed called market exuberance each time too – William McChesney Martin in ’65 and Alan Greenspan Dec. 5, 1996. Both markets continued higher for 4 more years.

Save to invest more, not invest to save less.

The 1990s again drove high debt use, this time by consumers. People borrowed to pay bills, borrowed against homes to buy stuff, which doesn’t make debt work for you.

The 1990s — like each boom before it, only the short term performance mattered to investors, media, and pundits. Mutual funds were graded based on a performance of 6 months or less.

The problem with performance rankings tends to give the illusion of consistency that doesn’t exist. 1, 3, and 5-year results are a poor measure of success. A fund can lag for 4 years straight then have a blowout 5th year, where it ends up at the top of a 5-year performance ranking (likely nobody owned it that 5th year). A 5 or 10-year rolling return is the truest test of stock picking talent.

Creative accounting pops up in boom times — happened in ’69 and late ’90s, where some “companies were fluffing the books to meet Street expectations and create an illusion of predictable success.” Saw this in ’08 too.

1994: Mexican financial crisis, spreads to Argentina in 1995; first of the big recent developing country financial crises.

1997: Investors deserted emerging Asian shares, including an overheated Hong Kong stock market. Crashes occur in Thailand, Indonesia, South Korea, Philippines, and elsewhere, reaching a climax in the October 27, 1997 mini-crash.

Buffett called the 1999 top. Most people were buying the market at 50x earnings after fees (Fortune 500 companies were selling at $10 trillion, on $300 billion of earnings, minus the 1% fees or $100 billion, gives a payoff of $200 billion). Buffett said the market had to sell off slowly or quickly or stay flat until earnings caught up. It couldn’t rise further without violating the laws of financial gravity. $3 trillion valuation on $200 billion is reasonable, not $10 trillion.

Best bear market protection — buy companies with strong balance sheets, low debt, real earnings, and powerful franchises. These companies can survive bad times and eventually dominate weaker competition who had to cut back or shut down.

1997-1999: East Asian (1997-1998), Russian (1998), and Brazilian (1998-1999) financial crises.

Russian crisis causes failure of U.S. firm Long Term Capital Management and a near-panic in U.S. financial markets.

1998 The NY Fed offered 30 year treasury bonds yielding less than the 29 1/2 year treasury bonds by 30 basis points. Long Term Capital Management put a trade on a 10 basis points and it was a crowded trade. They were certain to make money, but they could not afford any hiccups. This speaks to human nature. The MIT guys were smart but toppled the system with their highly leveraged trading.

1999: Eleven Western European countries (most notably Germany, France, Italy, and Spain) begin issuing a common currency, the euro. The constituent national currencies disappear completely at the start of 2002.

2000 Tech Bubble

2000: Ecuador becomes the first country of even modest significance in many years to dollarize.

2001: Turkish financial crisis.

2001-2002: Argentine financial crisis, leading to abandonment of its currency board-like system.

Collateralized Debt Obligations, Subprime Mortgage Market Crisis, and Global Collapse

2008-2009: World financial crisis originating in U.S. mortgage securities. Residential Housing was 20 trillion as an asset class. CDO’s made it into a currency and borrowed on it. At the top, they were writing mortgages that they knew they never had to hold. So they sell them to some sucker in Norway after it is put in a financial package. At the bottom, you had people refinancing, so it didn’t make any difference if the monthly payments were too high for them. People were lying on loans and the lenders were participating in it which led to huge speculation in housing. 50 million of the 75 million owner occupied homes were mortgaged and only 25 million were insured. The mass population owned on margin and thought their living standard would go up.

When everyone is deleveraging, there's only one person who can leverage up. And if that person doesn't, you're screwed if you were originally over leveraged. 

Commercial paper is backed by a lot of money market funds.

BOA got Merill at $30, they could have acquired them for 30 cents. 

The crisis causes the world economy to shrink for the first time in decades. The crisis hits the United States and Western Europe worse than poorer countries.

Contingency funds, emergency mergers, were all tried by Geithner and Hankson, and fund raising was required from a Japanese bank and by Berkshire. Institutions were showing capital ratios above their regulatory minimum, so they reject some of the help from the FDIC and wouldn’t borrow. Racing to stabilize Fannie and Freddie. Dodd Frank weakens the ability for the Federal Reserve to act promptly and unilaterally. 

TARP was passed. AIG and various banks were bailed out and companies were recapitalized.
Banks were toast after TARP. In hindsight, it was better if greater liquidity was provided. Banks continue to make loans, the market didn't and the government did with their alphabet loans. The Fed was financing America. 

The system now has much more constraints on risk taking- much higher capital ratios required, and less leverage, which cannot be deregulated unless an emergency happens. 
The the leverage is lower, the off balance sheet vehicles are not there, there's containable shadow banking, capital and liquidity is higher, repo is properly done, regulation has more authority, less unsecured credit, etc. 

When everybody (American Households) tries to deleverage 98-100 trillion (think houses, retirement accounts, savings accounts) of wealth it comes down to the Fed to save the day when things are gumed up.  

2010-2011: Debt crisis in the peripheral countries of the euro area.

2020: Corona Virus Outbreak