Visualizing History

The oldest companies still in business within most countries. Larger version of this visual here.

From the Archives

NYC Population & Mortality

The document is recent, but this visual is not. Fascinating stuff.

Sunday Reads

It was another action-packed week in financial markets, with the S&P 500 posting its best weekly return since 1974! The index rose 7% on Monday, finished marginally lower on Tuesday, and then finished up a further 3.4% and 1.5% on Thursday and Friday, respectively. Who remembered that markets could go up multiple days in a week.. ??

One of the major headlines for the week in US markets, however, was an announcement from the Federal Reserve:

“The Fed said Thursday it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.”

While the announcement is an important piece of news in itself, students of history are always taught to analyze events with an eye to the bigger picture. So while this edition of Sunday Reads will cover multiple topics relevant for investors today, we will dive deep on the potential knock-on effects of the Fed’s involvement in high-yield and municipal bonds.

Down the Rabbit Hole: An Easter (ish) Story

Have you ever wondered how Easter and rabbits are linked? Well I was curious, so now you’re going to find out why regardless. Turns out the answer isn’t readily apparent, but our best answer comes from

‘The Easter bunny has become a prominent symbol of Christianity’s most important holiday. The exact origins of this mythical mammal are unclear, but rabbits, known to be prolific procreators, are an ancient symbol of fertility and new life. According to some sources, the Easter bunny first arrived in America in the 1700s with German immigrants who settled in Pennsylvania and transported their tradition of an egg-laying hare called “Osterhase” or “Oschter Haws.” Their children made nests in which this creature could lay its colored eggs. Eventually, the custom spread across the U.S. and the fabled rabbit’s Easter morning deliveries expanded to include chocolate and other types of candy and gifts, while decorated baskets replaced nests. Additionally, children often left out carrots for the bunny in case he got hungry from all his hopping.’

Now that we’re clear on that, let’s talk about an absolutely bizarre bubble in 19th century Japan…. Rabbit Mania.

Rabbit Mania

After the Meiji Revolution of 1868 in Japan, the newly established government in Tokyo made widespread economic and political reforms. One of the most profound reforms was destroying the Japanese class system (samurais, merchants, farmers, etc.). For Samurais specifically, the government continuing providing them with their compensation, but were instructed to establish new businesses or locate investment opportunities in order to put their compensation to a productive venture.

Shortly after this societal shakeup unfolded, ‘some foreign merchants started to import rare foreign rabbits for pets to Japan.’ Before long the rabbits became wildly popular in Japanese celebrity circles, and the price of these en vogue rabbits started rising. As you probably guessed, the newly idle samurai class armed with capital they needed to deploy began buying/selling rabbits, as well as raising them for profit. In Tokyo, the number of bunny auctions started… well… multiplying like rabbits (sorry). Like with any speculative bubble involving collectibles (Tulips, beanie babies, etc.), rabbits with rarer features fetched higher prices. For example, some rabbits might have yellow ears. In fact, ‘even the champion rabbit ranking list (below) was created, which is resembled to the champion ranking list of Japanese sumo wrestlers.’ However, there were many ‘rare’ rabbits that turned out to be anything but, as this September 1872 newspaper from Japan explains:

“Rabbit selling, popular for the first time since the Bakufu days, has recently reached a level beyond all reason, and industry is being lost. Dishonest merchants ask outrageous prices and ensnare the ignorant in their schemes. The common technique is to use Western paints to disguise the color of a rabbit’s fur, pass it off as a unique species, and sell it to someone from a remote area.”

Predictably, there is no shortage of examples describing the ‘mania’ surrounding rabbit speculation. To name a few:

  • ‘A Japanese news paper even reported that some wanted to sell their daughters in order to purchase rabbits.’
  • The Times of London ‘reported a story that a man killed his farther because the father refused $150 for a rabbit which they possessed, but which unfortunately died before morning.’

In terms of prices, there were records of a rabbit being traded for 600 Yen. For context, average monthly rent in 1872 was a mere 0.58 Yen. Fearing the societal impact of rampant speculation and the prospect of a bankrupt samurai class, the government levied a ‘rabbit tax’ that effectively ended the rabbit market overnight. Rabbits that had been selling for hundreds of Yen were no suddenly worth as little as 0.2 Yen.

And that, my friends, is your Easter-themed bubble of the week! (Read this for more info)

Liberty Bonds and Republican Electoral Success in the 1920s

Second Liberty Loan in Washington, DC

The Federal Reserve’s recent announcement places itself in a controversial role politically, as it could involve ‘picking winners and losers’ in terms of the bonds it purchases. As this article (which I’ve shared before) demonstrates, this could have implications on future elections depending on how things work out. As one economist recently put it: ‘Munis are a whole different ballgame… Now all of the sudden you run into problems about favoritism, regionalism and picking winners and losers.”

The NYT reported:

‘Fed relief for states and cities had also been highly anticipated because Congress provided only limited aid to those governments in its recent legislation. The markets that local governments use to issue bonds and finance themselves have been in turmoil, which threatened to make it difficult for officials to fund operations just as revenues dried up and the need for cash skyrocketed.’

It does not require much imagination to envision a scenario where certain towns or cities endure financial hardship while others in similar positions succeeded after perhaps receiving more favorable conditions from the Fed. With the outcomes of presidential elections strongly correlated with the strength of the economy, the so-called ‘winners & losers’ that the Fed ‘picks’ could potentially influence the ballots of voters in key swing states. Just look at how similar the two examples below are despite occurring in elections 100 years apart:

Trump and Harding

If this seems like a stretch, this article might change your mind.

In this fascinating piece, the authors argue that the performance of Liberty Bonds partially influenced the outcome of the 1920 election, as those holding depreciated bonds blamed the Democratic party for their poor performance. As the Harding advertisement demonstrates above, the Republicans took full advantage of this situation.

We find that counties with higher liberty bond ownership rates turned against the Democratic Party in the presidential elections of 1920 and 1924. This was a reaction to the depreciation of the bonds prior to the 1920 election (when the Democrats held the presidency), and the appreciation of the bonds in the early 1920s (under a Republican president), as the Fed raised and then subsequently lowered interest rates.”

In fact, the ramifications of these seemingly innocuous Liberty Bonds shaped the modern Federal Reserve. As it turns out, President Harry Truman was one of the Liberty Bond holders negatively affected by their declining prices:

After returning from World War I, Truman had to sell his family’s liberty bonds at severely depreciated prices to raise money, an experience that apparently infuriated him and made him suspicious of the motives behind Fed policy.”

When Truman became president in 1945, the Federal Reserve supported the ‘prices of government securities by purchasing large quantities of them’ (sound familiar?) under a wartime policy. However, after World War II the Fed wanted to end this operation, but President Truman and his Treasury department were ‘vigorously opposed’. As the United States became increasingly involved in the Korean War, and there was ‘very high inflation’ in the economy, the ‘the conflict between the Fed and Truman intensified.’ So much so, in fact, that

‘In 1951… Truman took the extraordinary step of asking the entire Federal Open Market Committee to meet with him in the Oval Office. In that meeting, Truman stated that he did not want “the people who hold our bonds now to have done to them what was done to him.”

Eventually, the conflict intensified to the point that it was ‘resolved through the negotiation of the Treasury-Fed Accord, which established the foundations of the Fed’s modern independence.’ As the authors of this article put it, ‘in more ways than one, liberty bonds shaped the evolution of American monetary and fiscal institutions.’ As the Federal Reserve is now being forced into a more ‘political dimension’ by participating in the municipal market, it will be interesting what the future second-order effects of this action will be. For example,  studious Sunday Reads subscribers will remember the importance of this 1951 Treasury-Fed Accord from last week’s article on the relationship between presidential elections and the U.S. economy. In that article, the authors described the shift in this dynamic due to the 1951 accord:

‘The concomitant transformation of the position of the federal government in the national economy and the increase in the independence of the Federal Reserve suggests the following hypotheses related to the role of economic circumstances in presidential elections:

    1. Prior to 1952, price stability was positively associated with the share of the vote received by the incumbent president (or his fellow partisan).
    2. From 1952 to the present, income growth was positively associated with the share of the vote received by the incumbent president (or his fellow partisan).’

Equity Styles and the Spanish Flu

Nurses leaving Blackfriars Depot, Chippnedale NSW, during flu epidemic, in April of 1919. (NSW State Archives)

‘We study the performance of equity styles during the period around the Spanish Flu pandemic of 1918-1919 and other deep historical market corrections to gain a deeper understanding on the performance of different groups of stocks during crises. We extend the widely used CRSP database with hand-collected data on U.S stocks and examine the major pre-1926 market corrections. We find that low-volatility and momentum tend to reduce losses during sharp market selloffs. By contrast, smaller stocks with high yields (value) offer less protection, but perform well during the recovery phase. Over major market selloffs and subsequent recoveries combined equity styles added value.

This paper takes a look at the performance of different ‘factors’ around the time of the Spanish Influenza, as well as other market crises:

The paper finds:

‘As the Spanish flu occurred around World War I stocks markets were especially occupied with worries about the war. The peak of the stock market was reached in November 1916, but then sold off to bottom a year later. With the relief about the end of the war a recovery started in which the Spanish flu occurred. The figure below shows the performance of the stock market and the equity styles for the period from the stock market peak during World War I and the Spanish flu period (November 1916), to bottom (November 1917) and subsequent recovery (February 1919)…

Over this period, the market dropped by about -20%, mainly driven by negative developments around World War I. High-dividend stocks and low volatility stocks offered protection, although not as much as in other market corrections. All stock moved in tandem and correlations went up. There was nowhere to hide, a bit like the recent March 2020 sell-off. After that markets recovered, with a dip around the outbreak of the Spanish Flu. The markets fully recovered by the end of February 1919. During the correction, small caps underperformed, and winner stocks performed in line with the market. In the following recovery period small caps showed the strongest performance.’

A History of the Junk Bond Market (1910-1955)

In addition to the Fed becoming involved in the municipal bond market, the monetary body also announced it would be purchasing riskier high-yield corporate bonds to support companies impacted by the financial fallout of COVID-19. In response, ETFs like ‘the iShares iBoxx High Yield Corporate Bond ETF… surged about 7.5% — the most since January 2009. That said, this is a good opportunity to review the longer history of junk bonds in the United States. The article looks at high-yield bonds, Federal Reserve policy, inflation, money growth, and much more.

‘We present a new monthly index of the yield on junk (high yield) bonds from 1910-1955. We then use the index to reexamine some of the main debates about the financial history of the interwar years. A close look at junk bond yields:

    1. Strengthens the view that the decline in lending standards in the late 1920s was modest at best:
    2. Casts doubt on the view that the banking crisis that began in 1930 disrupted financial markets because banks liquidated their holdings of risky bonds;
    3. Strengthens the view that the cost of capital rose substantially in the early 1930s and remained high for the rest of the decade;
    4. Casts doubt on the view that financial markets entered a liquidity trap in the second half of the 1930s; and
    5. Strengthens the case for believing that junk bond yields contain some information useful for making economic forecasts.’

Successful Investing in A Low Growth Economy

As concerns over the impact of COVID-19 on long-term economic growth increase, this timely paper looks at the history of investing in a low-growth economy, and what has worked previously.

‘The U.S. economy has grown about 3.5% annually from the 17th century until the late 20th century. Most of American industry and wealth can be attributed to significant technological advancements starting in the Industrial Revolution. Over recent decades, productivity has significantly dropped off with some estimates of the economy growing at 1.8% annually. Returns from innovation appear to be entering a period of stagnation. Although the causes and implications of such events remain in question, it has become increasingly vital for investors to analyze performance across similar environments in history to successfully navigate uncertain markets.’

In a particularly interesting section of the piece, the author includes data on the best performing stocks of the Great Depression: