Continued from...1907 Bear Market after the San Francisco Earthquake
We have been considering in some necessary detail
the record of the stock market barometer, and we shall have some further
historical study to make in that interesting and little understood period
between the bear market which culminated in 1910 and the outbreak of the
World War. We have hitherto paid small attention to the tempting "cycle
theory" of human affairs, and especially of business affairs. In an early
discussion I set forth the panic dates for the eighteenth and nineteenth
centuries as recorded by Jevons, together with Dow's brief account of our
panics of last century. But it was essential to establish something of
an irregular stock market cycle of our own, not necessarily, and hardly
more than accidentally, involving a panic - for, indeed, the panic has
more than once proved to be merely an interruption in the main movement
of the barometer.
Our Own Modest CycleWe can see that we have established some sort ot irregular rotation through Dow's theory of the stock market price movement - its major swing up or down; its secondary reaction or rally, as the case may be; and the daily fluctuation in prices on the Stock Exchange as reflected in the records of the averages. But the theory of the longer rhythmical cycle will not down. It seems to be almost an obsession with many of my readers and critics. None of them seems to have analyzed his belief in it in any searching way. The general impression is that there is "something in" the idea; that if it is not proved true it should be true; that the world's panic dates themselves indicate a striking degree of periodicity; that, given such periodicity in the past, we may anticipate something like it in the future; that men will always be as stupid in the conduct of their own business as they seem to have been when judged by the records of history.
Basis of the Cycle TheoryProbably this unwillingness to analyze the panic theory arises from the fact that in the eighteenth century, according to Jevons, there were exactly ten noteworthy crises at an average of ten years apart. I am content to waive the one Jevons omitted - that of 1715, when the Scots invaded England - because there were not enough spots on the sun in that year to establish his daring theory of the relation between the two phenomena. We may note that Jevons gave 1793 and 1804-5 as crisis years, while it is of record that our own first panic of the nineteenth century was consequent upon the British capture of the city of Washington in 1814 - an event which no cycle could have predicted, unless we are to assume that the cycle theory could have predicted the late war. But, counting 1814, and what Dow calls the "near approach to a crisis" in 1819, there were ten American crises in the nineteenth century.
Let us see how the cyclist - if that is the correct
word - approaches the subject. The ten-year interval between the British
crisis of 1804-5 and our own of 1814 might stimulate him at first. And
the really ardous and nation wide crises of 1837 and 1857 would give him
a great deal of confidence. He would recall the ten-year intervals of Jevons,
and that we had up to 1837 recorded four crises of sorts, in four decades
of the new century. We did not greatly share the panic in Europe in 1847,
although it was sufficiently serious there to impress itself upon American
memory. But when the cycle enthusiast found a real panic in 1857, he cried
"Aha! We have now discovered the secret. There is a twenty-year cycle,
with a big crisis at each end, and a little crisis in the middle. We may
now confidently set about humoring the facts to fit this beautiful theory."
Misfitting DatesOn that showing there should have been another first-class panic, with nation wide consequences, in 1877. But apparently the machinery slipped a cog, for the panic came in 1873. From the devastating folly of overtrading on a greenback basis it would have come in 1872 but for the accident that we had in that year in an enormous wheat crop, which brought splendid prices in the world market because of the almost- total crop failure in Russia. Here, then, was a contraction of the interval between great crises. The twenty-year theory was deflated to sixteen, and it is hard to derive much consolation from the fact that the Overend-Gurney failure in London in 1866 had marked a date conveniently between the two great crises. The London panic of 1866 was accompanied by a heavy fall in prices in our Stock Exchange. In April of that year there was a corner in Michigan Southern and rampant speculation. The truthful but cautious Dow says that the relapse from this "was rather more than normal."
But the three panic years 1873, 1884 and 1893 did
something to revive the confidence of the ten and twenty-year theorists.
The first and the last were crises of almost world wide magnitude and.
equally far-reaching consequences. Our cyclists said: "That slip-up in
the reduction to sixteen years for the interval between crises occurring
in 1857 and 1873 was merely fortuitous, or at least we shall be able to
explain it satisfactorily when we have deduced only a little more about
the laws which govern these things." And the twenty-year cyclists prophesied,
saying: "There are twenty years between 1873 and 1893. Our barometer is
getting into shape. There will be a minor crisis roundabout 1903 and a
major panic in 1913, or not later than 1914."
Lost in TransitWhat is the use of the theory, indeed, unless it can be made the basis for at least as much prophecy as that? But between 1893 and 1907 we have an interval of fourteen years. Has the twenty-year period contracted, or the ten-year period expanded, to fourteen years? Is there any dependable periodicity about the thing? We see that there was not the slightest reason for any crisis in the years presumably anticipated by the cycle theorist - 1903 or 1913, Indeed, the volume of the world's speculative business was not large enough to make a crisis in those years. It is reasonably certain that a smash cannot be brought about unless an edifice of speculation has been constructed sufficiently high to make a noise when it topples over. What is the value of all this as a forecast for business? I cannot see that it has. any. The theory has to make so many concessions - takes so much humoring, in fact - that it ceases to have more than a value for record. We see that the sweeping conclusions based upon the cycle assumption had to be changed again and again. Does much that is really useful remain? I am anything but a sceptic; but this whole method of playing the cycles looks to me absurdly like cheating yourself at solitaire. I can understand stringent rules, arbitrary rules, unreasonable rules, in any game. But my mind fails to grasp a game where you change the rules as you go along.
From The Stock Market Barometer by William P. Hamilton, published in 1922
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