Silver Linings — Investor Amnesia

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“Airships are getting so dreadfully commonplace.”


Visualizing History 

Source: Global Financial Data


From the Archives

The Causes Influencing Investment & Speculation & the Fluctuations in Values (1885)

While you should peruse the entire book and find a section that sounds interesting to you, I would highly encourage you to read this section on The Speculator vs. The Investor .


Sunday Reads

As has been the case with most weeks in this crazy year, a lot has happened in the seven short days since I last published my Sunday Reads. The most important update is obviously the announcement from Pfizer that they had developed a vaccine offering ‘90% protection’ against COVID-19. The stock market reacted accordingly, with the Dow Jones Industrial Average opening up 1,500 points on Monday morning, and the Russell 2000 Small Cap Value Index rocketing 7% higher for the day. Now, the ironic part of all this is that the positive vaccine news is coming at a time when we are seeing exponential growth in cases around the country. On Friday the United States hit another daily record for COVID cases at 184,514 reported cases.

However, knowing that there is now a light at the end of the tunnel I want to use today’s post to focus on some of the silver linings and unintended positive consequences of past crises, crashes, and darkest hours in history. While there is much to be negative about in a time of pandemics and politics, there will be certainly be knock-on effects that have a positive effect on society, markets, and business.

For instance, a recent example that was pointed out to me was the return on investment for London’s considerable investment in the city’s infamous 19th century sewage system, as described below:

London was a rapidly growing city with a population that had reached two million by 1840, having doubled since the beginning of the century and it had a big sewage problem. Before the construction of proper sewers, most of London’s sewage was recycled as fertilizer. Individual houses had cesspools (though often these were just the cellars). The solid waste or ‘night-soil’ was collected from these by well-paid ‘nightmen’ (they were only allowed to work at night) who transported it to the market gardens surrounding the city. The wastewater either seeped into the ground or flowed through the streets into the old natural rivers, which had become public sewers. These all eventually flowed out into the River Thames.

London’s Water Supply Problem

Supplying clean drinking water was another serious problem. Some of London’s water came from shallow wells within the city and was delivered by the bucketful. More prosperous areas had piped water provided by private water companies from springs in the hills around London or, most dangerously, from the Thames itself.

The invention of the flush toilet or water closet at the end of the eighteenth century made things worse. Well-off households that could afford a proper water supply could now dispense with a smelly cesspool and simply flush all their waste away – and out into the Thames.

Cholera Arrives

Death rows on the polluted River Thames in a cartoon from Punch Magazine (1858)

Cholera is a deadly disease. The primary symptom is acute diarrhea, which drains the body of nutrients and fluids. In 1831, there was a global outbreak. It had originated in India but had spread across Europe and arrived in Britain. This outbreak killed over 6,000 people in London. At the time, the cause of the disease was a mystery. The link between the disease and the contamination of drinking water by human sewage was suspected by some. It was obvious that Thames water, when seen through a microscope, was far from clean and it was a subject of wonderful campaigning cartoons in the London newspapers and the satirical magazine Punch.

Also Read on FinMedium:  Times of Uncertainty — Investor Amnesia

However, at this time the dominant opinion was the ‘miasmatic theory’, that the disease was spread by ‘fould air’. It wasn’t the polluted water that was deadly, but the very smell of it…

In 1848 the government had established a Metropolitan Commission of Sewers. After issuing a general invitation to engineers to submit proposals for dealing with London’s sewage, an engineer with a background in land drainage methods, Joseph Bazalgette, was hired. In 1855, the Metropolitan Local Management Bill was put through Parliament. This attempted to centralise some aspects of the administration of London. It created the Metropolitan Board of Works, one of whose duties was to ‘make such sewers and works as they may think necessary for preventing all and any part of the sewage of the Metropolis from flowing into the River Thames in or near the Metropolis’.

Joseph Bazalgette was appointed chief engineer for the Board of Works. He took his duties very seriously, reviewing 137 different proposals and producing a detailed plan for a scheme of intercepting sewers collecting London’s sewage and discharging it into the Thames 10 miles further downstream (which could be interpreted as being ‘near the Metropolis’)…

Bazalgette’s scheme was an extraordinary feat of engineering. It involved the construction of major new ‘intercepting sewers’ that would collect sewage from the existing piecemeal array of sewers and move it down river. On the north bank, sewage would be carried eastwards as far as Beckton, eight miles east of St Paul’s Cathedral, to be stored and then discharged on the outgoing tide. On the south bank, the sewage would flow as far as Crossness, two miles further downstream, where the same would happen.

Bazalgette’s system of intercepting sewers

A map of Bazalgette’s 1858 scheme

Most of the scheme was very carefully designed to flow by gravity, but at critical points, all of the sewage would have to be pumped to a higher level using huge steam pumps. Those installed at Deptford in 1864 were at the time the largest ever built. One of these pumping stations was at Abbey Mills, where much of the sewage from London’s East End had to be pumped up into the enormous Northern Outfall Sewer which flowed across the marshland towards the discharge point at Beckton. This was a prestige project and the buildings above ground, such as the pumping stations, were lavishly decorated.

The restored interior of the pumping station at Crossness

Bazalgette replaced 165 miles of old sewers as well as constructing 1100 miles of new ones. It required the excavation of 3.5 million cubic yards of earth by hand – there were no mechanical diggers at the time. The construction consumed 318 million bricks and demand was such that it forced up the price of them in London by about 50%. The need for more bricklayers meant that wages had to be increased from 5 shillings (25 pence) per day to 6 shillings (30 pence) or more. It consumed nearly a million cubic yards of concrete. A special mill was built at Crossness to produce this, together with a railway to distribute it

The project made pioneering use of Portland cement, which was water resistant, rather than conventional lime mortar. Because its manufacturing process was so new, Bazalgette insisted on a draconian regime of quality control, with every batch being tested before it was used. The southern drainage scheme was completed in 1865 and the northern one in 1868. Most of the pumping stations were opened by Royalty, and some of the enormous sewage pumps were even named after members of the royal family.

Metropolitan Board of Works Consolidated Stock (Source: Global Financial Data)

While the project was an incredibly costly one, we can only imagine the impact that this improved sewage system had on the city in terms of preventing widespread and frequent cholera outbreaks going forward. Like the theme of today’s post, this positive outcome stemmed from a dark period in London that was filled with disease and death. This impressive engineering feat offered a real silver lining.

Also Read on FinMedium:  A History — Investor Amnesia

Now let’s dive in!

An Unlikely Hero for 1906, 1929…and Today

If you want top-notch journalism, you only have to look to Jason Zweig at the Wall Street Journal. Some of you may remember the story of A.P. Giannini that I included a few months back , but it was Jason who told me about this story, and he’s written a piece on Giannini that is just incredible. Even better, it’s part of a new series that Jason’s writing for the WSJ: Back in Business is a new, occasional column that will put the present day in perspective by looking at business history and those who shaped it.

I’ll just give you a little teaser as you should really read the article, but did you know Bank of America was actually founded as the Bank of Italy? Read how the founder took it upon himself to help the people of San Francisco with an early example of microfinancing after the San Francisco earthquake ravaged the city in 1906.

Government Finance and Imposition of Serfdom after the Black Death

Black Death | Definition, Cause, Symptoms, Effects, Death Toll, & Facts | Britannica

For those that survived, the Black Death was a godsend for serfs in Europe as the decimated labor supply suddenly gave them some leverage at the bargaining table with Lords of vast manors that suddenly had little to no laborers to till their land. Despite the atrocity that was the bubonic plague, the dissolution of serfdom across large swathes of Europe offers a silver lining.

‘After the Black Death, serfdom disappeared in Western Europe while making a resurgence in Eastern Europe. What explains this difference? I argue that serfdom was against the interests of the sovereign and was only imposed when the nobility, most of whom needed serfdom to maintain their economic and social standing, had leverage to impose their will. One way the nobility gained this power was through financing the military. Using data from the fourteenth to through the eighteenth centuries, I show that serfdom was imposed in areas where sovereigns had few other resources to pay for war or defense. This paper addresses the causes of a historical institution that scholars from Moore (1966) to Acemoglu and Robinson (2006) have argued played an important role in the development, or lack thereof, of democracy and long-term economic growth.’

Times of Crisis and Female Labor Force Participation Lessons from The Spanish Flu

Like with World War Two, the Spanish Flu had positive repercussions as it relates to female workforce participation. In fact, some have argued that the Spanish Flu helped suffragettes in the United States finally achieve their goal of obtaining the right to vote.

‘It is well known that macroeconomic shocks can have asymmetric impacts on the labor market participation of male and female workers. In the absence of universal social protection, a household may decide to  temporarily increase female employment in order to compensate for a loss of income by the male counterpart. This phenomenon, usually analyzed during times of recession, is called the added worker effect. We go beyond this typical setting and attempt to identify and evaluate the added worker effect during times of a health shock.

For this purpose, we develop and estimate a non-linear DSGE model using Bayesian methods and data from Sweden, covering the period 1915 – 1956. During this time, Sweden experienced the severe 1918 influenza pandemic outbreak, two massive economic recessions, and a period of pre-war preparedness, or Beredskapstiden. We find that females’ participation in Swedish industry increased during the years related to the Spanish flu. In addition, the female labor supply responded to male labor supply fluctuations over the whole sample period.’

Housing Markets in a Pandemic: Evidence from Historical Outbreaks

Cholera Prevention Man

“How do pandemics affect urban housing markets? This paper studies historical outbreaks of the plague in 17th-century Amsterdam and cholera in 19th-century Paris to answer this question. Based on micro-level transaction data, we show outbreaks resulted in large declines in house prices, and smaller declines in rent prices. We find particularly large reductions in house prices during the first six months of an epidemic, and in heavily-affected areas. However, these price shocks were only transitory, and both cities quickly reverted to their initial price paths. Our findings suggest these two cities were very resilient to major shocks originating from epidemics.”

Like the London sewage system example, the cholera outbreaks in Paris during the 19th century led to heavy government investment in clearing out the slum housing that often produced thesecholera outbreaks, which vastly improved the city as a whole.

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Paris

The first outbreak of cholera in Paris occurred in March 1832, and killed more than 11,500 people in the first month alone. Eventually, the outbreak killed roughly 2.5% of the city’s population. In 1849, cholera returned and claimed the lives of another 1.5% of Paris’ population. In some areas of the city with higher population density, cholera killed up to 6% of the neighborhood’s community. The exhibit below shows the death rate per 1000 inhabitants by sections of Paris:

If there was a silver lining, however, it was that the worst hit areas of Paris (which were essentially slums) were cleared away and rebuilt to higher sanitary standards following the first cholera outbreak in 1832.

‘When Count de Rambuteau came to power in Paris in 1833, he proclaimed that his mission was to provide “air, water and shadow” to all citizens in Paris, and started clearing unhealthy housing in the worst-affected central areas of the city, as well as introducing public urinals to improve sanitation…

The epidemic in 1849 confirmed the validity of Rambuteau’s approach: mortality levels were still much higher in the working-class areas in the cities on the left bank but had gone down in the historical city center, where much of the slum housing had been cleared . This confirmation paved the way for massive renovations: the Hausmann renovations that took place in the late 1850s and 1860s destroyed a large part of the unhealthy medieval Paris and gave Paris the image it still has today.’

As far as the outbreaks’ impact on housing prices, for the 1832 outbreak:

‘Between 1832 and 1836, high-mortality areas fall significantly in prices relative to low-mortality areas, with a relative price drop of 7.3%. Reassuringly, this drop is more significant in areas profoundly affected by cholera in 1832 compared to 1849. Until the mid-1840s, house prices between high and low mortality areas remain at relatively stable levels, except for a slight but insignificant jump in 1840.’

The Origins of Mutual Funds

The Factor Archives: Shareholder Yield | O'Shaughnessy Asset Management

Pivoting to more traditional financial crises, the crisis of 1772-1773 in Holland, which saw shares of the Dutch East India Company plummet (and many banks with it), prompted a Dutch broker to create the world’s first mutual fund in 1774. This broker’s goal was to offer retail investors diversified exposure to a range of investments so that they could obtain the benefits of diversification and not be susceptible to the wild swings of just one investment in the Dutch East India Company. Like the Bank of America example, this is further evidence of silver linings emerging from financial and economic hardships.

“In 1774 the Dutch merchant and broker Abraham van Ketwich invited subscriptions from investors to form a trust named Eendragt Maakt Magt—the maxim of the Dutch Republic, “Unity Creates Strength.” The founding of the trust followed the financial crisis of 1772–1773, and Van Ketwich’s aim was to provide small investors with limited means an opportunity to diversify. Risk spreading was achieved by investing in Austria, Denmark, Germany, Spain, Sweden, Russia, and a variety of colonial plantations in Central and South America.”

 

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Jamie Catherwood
My name is Jamie Catherwood, and I’m a Client Portfolio Associate at O’Shaughnessy Asset Management. Get your financial history fix through reading my articles, or those that I link to in my weekly “Financial History: Sunday Reads”.
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