“Illustration showing two men, ‘Prof. Scarem’ presenting his latest findings on microbes to a crowd of frightened onlookers, and ‘Dr. Fakem’ selling the latest protection against microbes to a crowd of eager consumers. “Scarem” and “Fakem” are a pair of quacks working together to take advantage of a gullible public.”

Visualizing History

(Source: Global Financial Data)

From the Archives

The Bond (1918)

Charlie Chaplin’s propaganda film created at his own expense for the Liberty Loan Committee to try and help sell Liberty Bonds.

Investor Amnesia Course

Towards the end of last year I launched a brand new online financial history course covering Bubbles, Manias & Fraud. The course boasts more than six hours of content split into 37 videos across seven riveting topics like Railway Mania, the South Sea Bubble, Brewery Mania, and more. Students are taught this fascinating material by the world’s foremost investors and financial history experts.

Make sure to check it out!

Sunday Reads

In the fall of last year my boss Jim O’Shaughnessy and I did a podcast with Oscar winning director Ron Howard. Towards the end of our fascinating conversation, Ron offered a thought-provoking insight on human nature and the state of modern society:

I think the trap that we all fall into as the endorphins fire is that we have been taught to learn or naturally do learn based on our wiring, through narratives. And what holds our attention the most is conflict within a narrative.

Again, this is one of my fears about society, is we’re “jonesing” for the conflict, whether we know it or not. It has this subversive effect. And so people who want to get things done, for noble reasons or selfish reasons, if they need to move society’s attention one way or another, they know that the only way to really do it is to stir up conflict.

And suddenly the whole world becomes like the way you promote wrestling, or cable news with its panel of guests who have to argue with one another. I get it. That kind of conversation is important on the one hand. In the realm of having to hold people’s attention to generate earnings or to gain power and hold a position, it’s a little frightening that we’ve lost this […] division between what’s entertainment and how do we really make decisions in society about the way we want to live and what’s important.

Pretty spot on, right? Most of us could easily conjure up a fairly long list of ways in which this concept of “conflict within a narrative” has permeated different aspects of our personal lives and society as a whole. As Ron pointed out, this tactic is not always necessarily utilized for nefarious reasons, but can also be a powerful tool for promoting positive change. For every extremist group that relies upon stoking conflict and an “us against them” narrative to rile up their base, there are activist groups pushing a narrative to engender movements calling out bad behavior and practices across corporate America, politics, etc.

Over the last few years there have been particular groups of what I’ll call “Spheres of Influence” that have either benefited or suffered from the ‘conflict within a narrative’ tool. This is an imperfect list, but they all relate to what we’ll talk about next: The Capitol Attack.

Here are my quick thoughts on how each sphere of influence is impacted by this increased emphasis on narrative and conflict:

How ‘Spheres of Influence’ Use / Are Impacted by Narratives

Again, at times we have seen a couple of these spheres interact with each other at different points, such as Regulators & Lawmakers scrutinizing the role of Social Media & ‘Big Tech’ in controlling and influencing political discourse in America. As another example, ESG activists have pushed for changes in Corporate America across a variety of specific issues like board diversity and environmental impact, which in turn has pressured Asset Managers to react by committing to the adoption of certain ESG principles. Last year, for example, Goldman Sachs announced that it would only underwrite IPOs for private companies with at least one diverse board member. More recently, NASDAQ made a similar announcement:

“If approved by the SEC, the new listing rules would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”

Commodification, Investing & Narrative

In speaking about this subject we must contemplate why narrative and conflict has become increasingly important over recent years. I’d argue that the modern abundance of information, products and our dwindling attention spans have all spurred this dynamic in which narratives and conflict drive society. For instance, in an age of smart phones and the internet it is easier than ever to get the general news (from a purely informational standpoint) from thousands of different sources. So, how do leading media companies differentiate themselves from their peers and competing news sources? Conflict and fear, which is best summarized by the old adage “if it bleeds, it leads”. This is how we end up with channels like MSNBC and Fox which each push their own narratives of conflict that satiate their Left and Right based audiences, respectively. When information and data becomes commodified, conflict and narrative become the easiest way to differentiate yourself from competitors.

Since this is a financial newsletter, let us consider an example from the world of investing: ESG. Investing strategies that incorporate some element of focus on issues pertaining to Environmental, Social & Governance (ESG) have soared in popularity as of late. While there are many that still hold their doubts about the legitimacy of ESG’s value-add to one’s ROI, the influence of ESG is getting harder to ignore. While rooted in specific issues and injustices, ESG investing is heavily reliant upon the power of “conflict within a narrative” in it’s quest to make an impact. Again, it is important to remember that utilizing conflict and narrative is not always a bad thing. The push from ESG proponents for greater diversity in Corporate America has directly led to the developments at places like NASDAQ and Goldman Sachs mentioned earlier.

However, we must acknowledge that some entities will utilize the strength and influence of a narrative to their own advantage in a way that is disingenuous. For instance, one of the main complaints about investment manager’s adoption of ESG is that they are merely adopting the philosophy as a marketing tool in the objective of raising assets. In an OSAM paper my colleague Travis Fairchild wrote last year he pointed out that many of the leading ESG ETFs do not adhere to the ESG approach they are preaching. As the table below shows, the “SPDR S&P 500 Fossil Fuel Reserves Free” ETF still had a meaningful exposure to Fossil Fuels.

Like in the Media example outlined earlier, I think that the rush into ESG by both Active and Passive asset managers has resulted from the commodification of market / Beta access. It is quite literally easier than ever to invest in the market in an age of commission free trading and smartphone devices. Pair that with the precipitous drop in fees on passive index funds to the point that they are essentially free, it is increasingly harder for many asset managers to distinguish themselves from competitors. There should be no surprise, therefore, that they have seized the opportunity to ride this ESG trend and narrative focused on improving society through markets.

The Capitol Insurrection: A Confluence of Influence

What happened Wednesday at the U.S. Capitol - Washington Post

So what does all of this mean, and how does it relate to the Capitol Insurrection on January 6th? As I mentioned, these Spheres of Influence have all interacted with each other at times, but the Capitol Insurrection is notable because it appears to be one of the first times that all of these spheres converged.

I think it is a sign of the times that within hours of the events that transpired on Capitol Hill, CEOs across America were issuing statements to condemn the attacks and announce new corporate initiatives to address various problems related to the insurrection. Those CEOs were right to try and get ahead of the narrative, for it was not long until ESG activists and other groups were identifying and publicly shaming the corporations that were heavily tied to the Trump administration or had made political contributions to any of the Republican Senators voting to block the electoral college certification. As the Financial Times reported:

Many of the biggest corporate donors on Wall Street and across the US are reviewing their political spending after last week’s assault on the Capitol building, threatening to pull millions of dollars from lawmakers whose opposition to the presidential election result contributed to the unrest.  Banks such as JPMorgan Chase and Citigroup and the technology groups Facebook and Microsoft were among those suspending all donations from their political action committees, or PACs. 

Others cut off funding only to the Republicans who voted against certifying Joe Biden’s election victory. Companies taking that step included AT&T, the largest public company donor to those lawmakers; Amazon, the ecommerce group; Dow, the chemical company; and American Express…

In a memo to Amex employees, chief executive Stephen Squeri said the attempts by some members of Congress “to subvert the presidential election process” did not align with the credit card company’s values, so its PAC would no longer support them.”

We are also starting to see ESG and activist groups target asset managers that are tied to the current administration. For example, the Financial Times also reported that the CEO of private equity giant Blackstone, Stephen Schwarzman, is under intense scrutiny.

Public pension funds that invest billions of dollars with Blackstone are resisting activists’ calls to distance themselves from a firm led by one of President Donald Trump’s most important backers.

Stephen Schwarzman, the billionaire financier who founded Blackstone in 1985, has lent rhetorical support to the president at key moments and donated $30m to Republican political causes last year, including $3m to a super-political action committee aligned with Mr Trump.

Activists argue that Mr Schwarzman’s Trump ties could become a liability, if not for Blackstone itself, then for the public pension funds that contribute a large chunk of Blackstone’s $584bn asset pile.

Investors should question the judgment of a man who gave millions of dollars to support Donald Trump despite his growing hate speech, calls for violence and authoritarianism,” said Jim Baker, who leads the Private Equity Stakeholder Project activist group. Pension funds’ reluctance to allow politics to influence investment decisions contrasts with the stance of dozens of high-profile American businesses that severed ties to Mr Trump and cut off funding from his Republican supporters in the days after the president incited a violent insurrection in Washington.

One non-profit group, the Chicago-based Action Center on Race and the Economy (Acre), on Thursday wrote to 30 pension schemes to demand they stop investing with Blackstone.

Social Media and ‘Big Tech’ also took decisive and significant action following the insurrection by “de-platforming” the President of the United States and some of his associated personnel. In addition, the conservative-leaning social media app Parler was pulled from app stores on Apple and Google, and Amazon ceased hosting the company’s web services, which essentially shut the site down for the foreseeable future. In making these decisions, however, the activist tech companies have given ample ammunition for lawmakers on both sides of the aisle to finally crack down on their supremacy and role in society. Conservatives were already probing these companies due to their complaints that conservative opinions are stifled on their platforms, and these companies’ decision to de-platform major conservative figures / groups may be the final straw. On the Left, there are outcries over how little these companies do to address misinformation and hate speech from spiraling out of control until finally culminating in an event like those of January 6th.

So What?

The point of this lengthy intro is to demonstrate that like Ron Howard stated in the opening quote, the tool of ‘conflict within a narrative’ is only growing more powerful. As we can all probably agree, this is not a uniformly good outcome. If we are increasingly moving towards a society that primarily relies upon narratives for our decision-making and views, we are heading down the wrong path. While narrative has its place and can be utilized for good outcomes, there must always be meaningful room reserved for facts and evidence.

For investors, I think that it’s important to recognize just how significant a factor ‘narrative’ will be in the coming years as Corporate America (and subsequently public stocks) adapts and responds to the powerful narratives that are forming in other Spheres of Influence like ESG (and Asset Manager’s adoption of ESG), regulators and lawmakers, and more. Almost all of these narratives covered in today’s post have had a counter-narrative that ultimately impacts companies and their stock. Big Tech companies reaction to the Capitol attack may ignite an even stronger counter-narrative against their influence in politics / society and lead to the repeal of Section 230.

We obviously can’t predict the future, but there are almost certainly going to be instances where narrative leads to action. When this occurs, investors should be prepared to deal with these actions by recognizing and tracking the prevailing narratives shaping our national discourse.

Having said all of this, today we are going to focus on some of the historical context behind some of these key Spheres of Influence.

When Uncle Sam Introduced Main Street to Wall Street: Liberty Bonds and the Transformation of American Finance 

An excellent example of narrative leading to positive outcomes is the success of Liberty Bonds during World War I. By linking the purchase of government bonds to citizen’s patriotic duties, the government encouraged mass investment that had lasting effects on society.

Even national figures who wielded narratives for living like Charlie Chaplin were major proponents of the Liberty Bond movement. Chaplin is pictured below at a Liberty Loan Drive:

The findings in this article show that Liberty Bonds directly led to the democratization of financial markets and broader participation.

“In 1910, fewer than a million individuals owned corporate stock in the United States; by the 1930s that number had increased more than tenfold. What induced so many to move their savings, which were previously held largely in banks, to the security markets?

In When Uncle Sam Introduced Main Street to Wall Street: Liberty Bonds and the Transformation of American FinanceEric HiltMatthew S. Jaremski, and Wendy Rahnfind that the US government’s campaign to finance its World War I effort mobilized new battalions of investors.

During the war, political leaders enlisted financial institutions, fraternal organizations, and religious and community groups to persuade Americans that buying the government’s bonds was their civic duty. As a result, financial firms learned how to mass market securities, and middle-class Americans became accustomed to putting their savings to work outside the corner bank.

Liberty loans raised $22 billion to finance World War I, the equivalent of more than $5 trillion today. At least a third of Americans 18 or older bought bonds. Banks advanced customers money to purchase bonds, paving the way for the margin loans that played a significant part in the stock market run-up of the 1920s.

The researchers analyze data on bond sales in 869 counties in 17 states during the war and control for other factors that could affect security purchases and commercial bank assets. They find that, after the war, counties that had higher subscription rates to Liberty Bonds had lower levels of commercial bank assets. A 10 percentage point increase in a county’s rate of wartime bond subscription was associated with lower commercial bank assets of 7.3 percent in 1920 and 9.7 percent in 1929.

The researchers also analyze data from a survey George Gallup conducted in 1937–38 asking individuals if they owned any stocks and bonds. A single percentage point increase in a state’s Liberty Bond subscription rate was associated with a 0.3 percent increase in the likelihood that its residents owned securities two decades later. Without the Liberty Bond campaign, the researchers estimate that there would have been 22 percent fewer investment banks in 1929 and the collective assets of commercial banks would have been nearly a fifth greater than they were.

The researchers note that the shift of assets from commercial banks to the securities market may have curtailed bank lending, and slowed the growth of manufacturing and farming in some of the sampled counties. For the nation as a whole, however, they conclude that by raising financial literacy, the Liberty Bond campaign unleashed a new source of investment funding ‘that likely helped fuel the large-scale expansion in American industry of the mid-20th century’.”


Political Discretion and Antitrust Policy: Evidence from the Assassination of President McKinley

With the Biden administration taking office this week, it is important to consider the potential changes in policy as it relates to antitrust, corporate taxes, etc.

This paper is a fascinating look at how the market reacted to a transition in power and policy over 100 years ago following the very hands-off and pro-business approach of William McKinley with the trustbusting / anti-monopoly policies of Teddy Roosevelt. Just look at the number of cases in each administration:

Contrast the illustration above of McKinley welcoming monopolies into the White House with the illustration of Roosevelt below:

“We study the assassination of President William McKinley in September 1901 to estimate the potential scope of political discretion in the aggressiveness of antitrust enforcement. The news of McKinley’s shooting provoked a significant fall in stock prices. This decline was reversed when doctors subsequently announced that they expected McKinley to recover, and this reversal was itself reversed when McKinley’s condition suddenly became grave. The latter fall in stock prices in response to the expectation that McKinley would die was purely a response to the transition from McKinley to Roosevelt, and not a reaction to the fact that an anarchist shot the president, which had occurred 7 days earlier. These swings in market values were borne differentially by firms that were particularly sensitive to changes in antitrust enforcement, as were the declines in the market associated with the surprise announcement of Roosevelt’s first antitrust suit.

At the time Roosevelt took office, antitrust enforcement was at a historic low point, and the Supreme Court’s E.C. Knight decision seemed to foreclose any possibility of pursuing a more aggressive approach. Yet when he unexpectedly became president, asset price changes indicated that there was considerable discretion available to him in antitrust enforcement, and that he would utilize that discretion. As one of the authors of the Sherman Act, Senator George Edmunds, stated, “What is needed is not, so much, more legislation as competent and earnest administration of the laws that exist” (quoted in Letwin, 1965: 141). Perhaps something similar is true today, in the sense that recent administrations may have not been as aggressive and innovative as they could have been in enforcing existing rules.

The longer-run consequences of the assassination, relative to the counterfactual of McKinley serving out his second term, are not easy to infer. At the end of his term as vice president in 1904, Roosevelt may have run for president and won, in which case his accession to the presidency in 1901 simply accelerated changes that would have occurred anyway. Yet it is possible that a different Republican, one more sympathetic toward the trusts, may have prevailed in 1904. Growing economic concentration may have been accompanied by growing political influence of big business, potentially threatening both economic growth and democracy. Roosevelt was no radical, and indeed the Tillman Act of 1907 prohibiting direct contributions from corporations to political campaigns was enacted partly in response to the funding that his own 1904 campaign had received from plutocratic interests. But Roosevelt’s independent, reform minded presidency may have prevented some developments that could have been quite harmful for American democracy.”

A separate paper shows just how swiftly the market reacted to Roosevelt assuming office, as they recognized the implications for business regulation:

Market Solutions for Social Problems: Working-Class Housing in Nineteenth-Century London

ESG investing has been one of the most powerful narratives shaping the investment industry in recent years, and the current trajectory does not seem to suggest that changing any time soon.

This article provides a fascinating look at a 19th century example of socially responsible / impact investing that I have not seen discussed anywhere else. With lower-income housing becoming a real issue in Victorian England, a solution was developed that combined the same concepts driving impact investing today: Positive Social Impact & Investment returns.

In fact, investors at this time had another term for what we call this type of investing: “Philanthropy & 5%”. The idea being that investors could commit to a philanthropic cause, while earning a 5% dividend or return on their investment. Sounds familiar…

The market solution to Victorian London’s housing problem was ‘Model Dwelling Companies’, or MDCs:

‘From the 1840s a new group of institutions was formed which attempted to find a way to combine the public and private interest in improving working-class housing. The Metropolitan Association for Improving the Dwellings of the Industrious Classes (MAIDIC) was the first organization to be founded in response to the London housing problem.’

The reason this specific article is interesting, is that there is evidence that these impact investments in MDCs did not result in any material sacrifice in returns.

‘The article demonstrates that MDCs were far more important than all local government agencies in providing low-cost working-class housing in London before 1914, and that patrons were offered rates of return broadly comparable with those they could obtain from alternative domestic investment opportunitiesWe must now return to the question of whether investors were sacrificing personal profit for collective good by investing in MDCs.’

The dividends were comparable as well:

‘Dividends were comparable with those paid by other property companies and for most of the period the annual average realized returns offered were not markedly different from those paid to holders of other domestic assets.’

The Role of the Media in a Bubble

Financial media outlets get a lot of stick these days for negatively influencing investor’s behavior, and perhaps exacerbating market panics with overly ominous headlines. Robert Shiller has even argued that the media are:

“Fundamental propagators of speculative price movements through their efforts to make news interesting to their audience.”

This paper studies this phenomenon in the British Railway mania of the 19th century.

“We examine the role of the news media during the British Railway Mania, arguably one of  the largest financial bubbles in history. Our analysis suggests that the press responded to changes in the stock market, and its reporting of recent events may have influenced asset prices. However, we find no evidence that the sentiment of the media, or the attention which it gave to particular stocks, had any influence on exacerbating or ending the Mania. The main contribution of the media was to provide factual information which investors could use to inform their decisions.”

Using sentiment analysis, this study pores through hundreds of news articles and newspapers to gauge the potential impact of media on stock returns during the Railway Mania.

“Our results suggest that the media may have been affected by stock returns, and that media reporting of recent events may have had an influence on stock prices. However, of most interest is the finding that the sentiment of the media had no impact in hyping railway stock prices, and cannot be blamed for exacerbating the Mania for investing in railway shares.”

Interestingly, however:

“Perhaps of more interest with regards the relationship between the media and a bubble, the results also imply that individual stocks were not successfully hyped by the media. Although those firms which received the most coverage tended to earn higher returns, this was due to standard risk factors, and not due to a psychological bias on the part of investors which could have led to certain stocks being more sought after simply because they received more attention.

In conclusion, the authors reiterate that the media was not to blame for this speculative mania.

“Our evidence suggests that the media did not play a major role in propagating (or bringing to an end) one of the ‘greatest bubbles in history’. The editorial content of the railway specific media did not boost stock returns during the boom, and the opinion pieces of The Times and the Economist did not cause the market crash. Although those companies which received greater coverage also experienced a greater price reversal, this was primarily due to other risk factors. The media may have played some role in the Mania by disseminating information, but it had little influence on investors via its editorial opinion pieces.”

Investing in Charities in The 19th Century: The Financialization of Philanthropy

‘This study deals with the impact of financialisation on the development of charity during the 19th century. We argue that this has two key aspects, firstly the growth of charitable provision via limited companies and secondly the financial audit by charities of the claimants who approached them, Limited companies operated mainly in the field of subsidised housing. These offered investors a satisfactory return, but at the cost of requirements re the level of rent and the behaviour expected from tenants which restricted the number of potential beneficiaries. The evaluation of claimants by charities was pioneered by, but not limited to, the new Charities Organisation Society. This constituted a form of audit, with enquiry into claimants’ behaviour, financial status and prospects, and refusal to support those seen as unreliable or unpredictable. We argue that these developments have significant implications for the social enterprise movement of the 20th and 21st centuries.’

The Century of War: Bear Markets in the 1700s

Total War Center Forums

Finally a reminder that things could be worse…

I think most of us would agree that it would be difficult to invest during a century colloquially known as “The Century of War”. This article from Global Financial Data looks at the bear markets that transpired amid the countless military conflicts in the 18th century.

There were five bear markets in the 1700s, in 1700-1701 (a decline of 36%), in 1704-1712 (a decline of 40%), 1719-1762 (a decline of 89%), 1768-1784 (a decline of 37%, and between 1792 and 1797 (a decline of 41%). There was also a bear market between 1688 and 1696 during which the market declined 46%. What caused each of these bear markets?”