Review - “Extraordinary Popular Delusions and The Madness of Crowds” by Charles MacKay

137
Sun, Nov 3, 2013 - 12:06pm

I have a necessary library of trading and market related books, both in printed and electronic form. To do things I believe that you need to allocate resources. For investing, one resource is, obviously, money or capital to invest or trade with.

Other things can be equated with money, for they have difficulty in the getting. Power is one – it can be used to seize money from those who have it. Another is knowledge, for with knowledge money can be made or created. A third primary resource is time. It takes time for all things to happen, time to gain power, even a HFT algorithm requires a small amount of time to carry out it’s instructions, and it takes time to learn knowledge.

I’m talking of knowledge today. This is the first of a series of book reviews which more or less could be called my own Recommended Reading List for Traders and Investors. It’s personal and some famous works will be left out, and I assume some minor works will come as surprises, as the prioritization is my own and based on my personal experiences and thoughts.

I had an inner debate about whether the #1 slot should go to MacKay or Lefevre/Livermore, but MacKay wins out because his work transcends trading, or even markets. It is a study of humanity. I expect everyone would benefit to a certain degree from reading this.

Oh, I should mention – Charles MacKay wrote it in 1841. That’s 172 years ago, 50 years after the French revolution, and 20 years before the American Civil War was to be fought.

I add at this point that I have three volumes of this book in my personal collection: A 1980 facsimile of the original, 724 pages in length, an electronic one, and also a new compact (abridged) hardback edition from Harriman House of 2003, 115 pages, and reprinted several times since. So this is an investment classic and still in very high demand, hence the reprints. The main difference between my two paper editions, apart from weight, is that the recent compact volume contains the financial bubbles whereas the original full text describes these however it also recounts other historical manias not related to finance like Fortune-Telling, Duelling, Haunted House, Poisoning and other manias.

I’ll stay with the compact volume for this review seeing as it will be read by investors and traders in the main. The illustrations are representative of my quirky thought process and not intended to be manipulative or imposing a political view. They are merely chosen to transcend the time of writing of the excerpted texts visually.

So what book written back then could be so pertinent today? I must get out of the way and let Charles MacKay's words speak for themselves. Here are some quotes from the first section about John Law and the Mississippi Bubble. You can judge for yourself.

Early on his wisdom was noticed and discussed in the media:

All the small poets and litterateurs of the day poured floods of adulation upon him. According to them, he was the saviour of the country, the tutelary divinity of France; wit was in all his words, goodness in all his looks, and wisdom in all his actions.”

Real assets were sucked in while paper was issued to acquire these items of value:

... It was remarked at this time that Paris had never before been so full of objects of elegance and luxury. Statues, pictures, and tapestries were imported in great quantities from foreign countries, and found a ready market.

All those pretty trifles in the way of furniture and ornament which the French excel in manufacturing were no longer the exclusive playthings of the aristocracy, but were to be found in abundance in the houses of traders and the middle classes in general. Jewellery of the most costly description was brought to Paris as the most favourable mart;”...

The wealth effect is described so well, as is the link between the Sovereign Ruler and Financier:

“...Thus the system continued to flourish till the commencement of the year 1720. The warnings of the parliament, that too great a creation of paper money would, sooner or later, bring the country to bankruptcy, were disregarded. The regent, who knew nothing whatever of the philosophy of finance, thought that a system which had produced such good effects could never be carried to excess. If five hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage. This was the grand error of the regent, and which Law did not attempt to dispel. The extraordinary avidity of the people kept up the delusion; and the higher the price of Indian and Mississippi stock, the more billets de banque were issued to keep pace with it.

On astute individuals hedging to protect against the inflationary loss this next quote reads like it was written both next year and in the 1930s, some 92 years after Mackay published his book:

“ ... In February 1720 an edict was published,

which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution. By this famous edict it was forbidden to any person whatever to have more than five hundred livres (20l.) of coin in his possession, under pain of a heavy fine, and confiscation of the sums found. It was also forbidden to buy up jewellery, plate, and precious stones, and informers were encouraged to make search for offenders, by the promise of one-half the amount they might discover. The whole country sent up a cry of distress at this unheard-of tyranny. The most odious persecution daily took place. The privacy of families was violated by the intrusion of informers and their agents. The most virtuous and honest were denounced for the crime of having been seen with”

And that is just the section about John Law!

I do not wish to spoil with excessive quotation, only two more, but the sections about the South-Sea Bubble and the Tulipomania are just as archaic distant history, and at the same time they describe exactly what is going on around us today in our Central Bank- Politician-Banking controlled present day world.

So to finish this review, I excerpt two short and memorable pieces – first from Charles Mackay’s 1st 1841 edition and another from his preface to the edition of 1852, written 160 years ago: “... millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple; and neither of them recovering its senses until it has shed rivers of blood and sowed a harvest of groans and tears, to be reaped by its posterity.” .....

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

And that last passage, Dear Reader, is as up to date as they come. If there is a"required reading list" for investors and traders, this text which has endured nearly two hundred years and still remains so appropriate to modern life's financial intrigues surely deserves the number one position on that list.

Resources:

Publishers' Page for this book: https://www.harriman-house.com/book/view/556/investing/charles-mackay/extraordinary-popular-delusions-and-the-madness-of-crowds/

Available in printed, and electronic versions

Argentus Maximus

.

The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author can be found here: RhythmNPrice.

About the Author

  137 Comments

  Refresh
Mr. Fix
Nov 3, 2013 - 11:51pm

@ redwood

I no longer attempt to trade these markets, I know it is possible, but I have neither the time nor the expertise to follow the clues and figure out when the “slam downs” are coming, nor do I have the confidence that the “hints they give” are reliable enough going forward. ( I got out in May 2011. ) (ouch).

Obviously, if you are trading on what you learned on KWN , that would be a good way to get financially destroyed. What they talk about there is fundamentals, which by the way they tell it there, gold and silver should be multiples higher than they are now.

Do you expect these talking heads to be able to make a difference in the price of gold? I don't, I know that the case for buying gold and silver at this point in history has never been better, but at the same time, I consider some other things more important going forward, namely, food, water, guess what? I bought a great big pile of ammunition, a couple hundred pounds for oh I don't know, maybe $1000, and since then, their value has tripled in the last couple years. (Who could have seen that coming)?

So while some people are trying to make the best trade possible, I am preparing for a systemic collapse.

I do not earn my living in these markets, the main reason, as I do not think that is a viable long-term strategy,

(although I would certainly be ahead on dollar terms if I had played the markets the last few years).

What I have built is a life that is sustainable in an economic collapse, where markets and even supply chains no longer function, and Fiat currencies revert to their intrinsic value of zero.

I suppose we all listen to talking heads for different reasons, and as a result, not only do we hear different things, but we tend to draw completely different conclusions as well.

So what is wrong with listening to “the good guys”? They may not be right 100% of the time, but at least they call it as they see it, and even if they are not looking at “the bigger picture” which I contend extends far beyond the economic and political sphere, at least they are experts in their particular “area of expertise”, and I do find their analysis useful. Unfortunately, if you've been trading off them for the last couple years, you have been royally screwed.

The alternative, is to listen to the mainstream media, and when it all comes apart at the seams, not only will you be shocked, and horrified, by never seeing it coming, but you may in fact be in a life-threatening circumstance due to listening to only propaganda that “has a feel-good effect”, and it has even worked out for the trades, since they always seem to come up with a rational reason for “a waterfall drop” in the price of our precious metals.

They have created a narrative to give the fantasy that our markets are an air of legitimacy, and I think it is all just a snow job, the underlying fundamentals do not support their conclusions, at all.

I believe that most of the good guys are predicting a catastrophe in the near future,

while most of the talking heads are predicting clear sailing for as far as the eye can see.

Everyone does their own due diligence, in their own way, for their own reasons.

One of the main reasons why I frequent this particular site, is because of the focus on “the end of the great Keynesian experiment”. That makes Turd one of the good guys, and this a great place to be to watch it unfold.

But, I must admit it does have a bearing on which talking heads I take seriously,

and that is a good thing.

Occasnltrvlr
Nov 3, 2013 - 11:35pm

My Dear Brethren

Can ya just make your point in one, or at most two, sentences? And then elaborate? "Lead with your thesis statement" is the single best piece of writing advice I've ever received.

G-Rod
Nov 3, 2013 - 11:21pm

180 years of production?

451,000 metric tons is approximately 180 years of production from all of our current mines using modern equipment.

Where did it all come from?

Why haven't these hordes been confiscated by anyone?

The mind boggles - these are extraordinary claims, and require extraordinary evidence before I would believe them.

The fact that Karen Hudes and Jim Willie make these claims does not support their credibility - it diminishes it.

Mr. Fixredwood
Nov 3, 2013 - 11:21pm

@ redwood

It is good to hear from you, I'm not entirely sure, but there was a “Redwood” that was a regular on MarketWatch when I used to post there, I'm wondering if you are the same one?

As far as Peter Schiff, he gives good analysis, and if you had taken the time to watch the YouTube video, he takes the time not only to dismantle Janet Yellen, but the vast majority of the financial press corps who have been literally lying about her record, which has been abysmal.

Yes, I regularly read King World News, it has some of my favorite columnists, but as far as their calls for eminent explosion in the price of gold, not only have I disagreed, I have been stating here unequivocally “the price of gold and silver will not be allowed to rise significantly until after there is an economic collapse”. (I've been saying that for well over a year now).

This is not what you would find in a typical metals "talking head" world.

At the beginning of the video, Peter Schiff proclaims that he was able to predict the Janet Yellen nomination for the sole reason that she was "by far the worst possible choice", but knew with certainty that president Obama consistently makes "the worst possible choice".

This is also consistent with the assertion I have been making for years that “Pres. Obama will always carefully consider his options and choose the one that will have the worst possible outcome for the United States”.

So at least in that sense, we are quite like-minded.

This should at least interest you to the extent that when the United States collapses in an economic Armageddon, and Pres. Obama declares martial law and makes the United States a de facto dictatorship,

the economic implications for Canada will be quite dire.

Near the end of the video, Peter Schiff documents his predictions back in the 2005 and 2006 time span, where he appears on various talk shows and is the only person declaring that the economy is about to fall off the cliff, while everybody else is simply laughing at him or calling his assertions ridiculous.

He knows what he is talking about, and there are only a few talking heads that I say that about.

It is impossible to predict the price of gold going forward, the price is set through collusion between the banks and the government's, and there can not be any real price discovery until they collapse, or there is no more physical gold available for delivery. ( Even in that scenario, but Evil Empire will still establish the price, unless they are defeated)

I believe that those two events combined with quite a few more “false flags” will be coordinated for maximum

“ shock and awe”. (SOON!)

The carnage will be global, and will extend far past the borders of the United States, I expect it to take down all of Western civilization.

One large area of disagreement that I have with a lot of the “talking heads”, has to do with their assertion that the powers that be are acting out of sheer stupidity, as if they are making all the wrong choices in order to bring about an economic recovery. I think this is complete BS. I am under the personal belief that the entire American government has been hijacked, they are guilty of treason, and are working against the American populace in every way imaginable. This economic disaster is being orchestrated, the price of gold that has always been the “canary in the Goldmine”, is being squashed to hide their high crimes and misdemeanors, namely the collapse of the dollar, along with all of the other Fiat currencies that it is weighed against.

So as bad as they predict it will be, I think it will be far worse, since I know in my heart that they are not trying to fix anything, quite to the contrary, they are going to create as much carnage as possible.

Knowing this to be a fact, does have quite a bearing on my “economic forecasts”, and it is no secret, that is to everyone here, I am not known as one of the “rose colored glasses wearing crowd”. (To put it mildly).

It's getting late, I've got some sleep to catch up on,

sweet dreams.

redwood
Nov 3, 2013 - 11:14pm

Yes, Canada and the US are

Yes, Canada and the US are joined at the hip. And that wasn't me on Marketwatch. Again I don't dispute any of what you say, but I am looking a broader paradigm here that questions the value/purpose of these challengers. It also troubles me that Schiff is a significant name among the financial elite. One can be as prescient as one wants but if it has little repercussion in the real world it just fills electronic/paper space.

G-RodDayStar
Nov 3, 2013 - 11:13pm

Is there any physical evidence of the existence of this Gold?

Hi DayStar WRT...

Karen Hudes (via Silvertards): there is 170,500 metric tons of gold deposited in a vault in the Bank of Hawaii, 130,500 metric tons in AMEX Hong Kong plus 150,000 metric tons in Development Bank of Singapore, for a total of 451,000 metric tons. Jim Willie concurs.

Is there any physical evidence of the existence of this Gold?

redwood
Nov 3, 2013 - 10:12pm

Mr. Fix

As a Canadian I have been watching American TV all my life. The allegory of American life and now of course North American existence has always been premised on the good, the bad, sometimes the ugly but almost always the beautiful. Point being that any narrative has mostly has had as its central point of friction the tension between the ideal and the very bad. It is the stuff of children's fairy tales, westerns, comic strips, and just about any form the entertainment industry wishes to pursue.

Now I listen to Mr. Schiff. Don't get me wrong I have liked the guy, just like I have liked many of the "good" guys. There are so many of them by now.....Sinclair, all of the KWN regulars, Max Keiser, not tomention the endless string of websites that are regularly quoted to get the goods on the metals trade so that we can get valuable insiders' info to defend the little guy.

But aren't we getting tired of listening to the "good" guys. Ok so Schiff challenges Yellen. So what??? She's the next Fed chair and no matter what Schiff or anybody else has to say about it won't change the outcome or even make a dent in it for that matter. I love Sinclair but really has he altered the course of the metals' trade?? Gold will almost certainly go higher, but it didn't for months when he kept swearing to the public that today was the day or the next, or the next after than.

I realize that what I am saying is verging on almost be sacrilegious (esp. on this site) but its' getting very tedious. Its just another rendition of the western classic. It makes for great entertainment, over and over and over again. Meanwhile some have lost their life savings, others less so and in the end that may have been the point, all the while entertaining the masses.

Nov 3, 2013 - 10:11pm

New from Bill Holtet

China has imported through Hong Kong over 2,200 tons of Gold over the last 2 years. This amount is roughly half of the entire worlds' production (excluding Russian and Chinese production which does not get exported) going into just one country alone. This does not take into account demand from India or the rest of Asia. It does not take into account European, North American, South American, African nor Australian demand. Just one country on one continent has spoken for 1 of every 2 ounces mined over the last 2 years. This 2,200 tons does not even take into account Gold that the Shanghai exchange has delivered which is another 1,750 tons which accounts for nearly the rest of ALL mined Gold over the last 2 years.
So where is all of this Gold coming from? We know that COMEX and GLD have bled out 700 tons or so over the last year and we "don't know" what happened to 1,300 tons that the Bank of England no longer shows as in its possession. As a side note, how is it that all of this Gold (weight) can get shipped all over the world but a measly 300 tons that Germany wants back is "just too heavy" and will take 7 years for the NY Fed to deliver? In any case, massive amounts of Gold have been bought AND delivered over the last few years...while the price has gone "down".
I think that the best way to put this in perspective for you would be to simply call it a "going out of business sale"! Think about it for a moment, whenever you see a company go out of business...what do they do? They SELL ...and they sell at a discount to boot! Isn't this exactly what we are doing now? We are selling Gold (and Silver) at or below the cost of production. I don't know this for a fact but I would personally bet that some sort of deal was made 2, 3, or 4 years back where the Chinese told us that we either sell "x" amount of Gold to them at then or lower prices or they would blow up the game. Laugh or call me a nut case, the Chinese have known full well that we are (and were) mathematically bankrupt, as long as they could still "spend" their Dollars on "stuff" (including Gold) then why wouldn't they string it along as long as they could? I have said and will continue to say that when the very first ounce of Gold that China orders and tries to pay for but does not get delivered will be the very last day that "normal" continues.
The above has spoken to what "has" already happened. The question now is how much longer can it continue to happen? Where will the Gold come from to deliver? The Chinese show zero signs of slowing their purchases, the Indians are now paying over a 10% premium to smuggle Gold into their country and the rest of the global demand shows no signs of slowing. This is a mathematical conundrum with only one answer...the price MUST rise to ration demand, preserve supply and actually "clear" the market. Something has to give. demand cannot exceed supply forever because supply will (is) vanish. The ONLY thing available in Mother Nature's arsenal to balance out true supply with actual demand is "price".
"Price" as you know has been a funny duck over the last couple of years and has been perverted. The Dollar price of Gold has gone down as demand rose. This is an impossibility except for one thing, as I mentioned above, if a deal was struck to "buy time" and prolong the game. It is THE only thing that I can think of. You can tell me that it's impossible, unthinkable or inconceivable but please consider the motives for both sides. We want the game to continue and China wants as much Gold as they can get their hands on without upsetting the markets.
Speaking of "upsetting the markets", China seems to have ALL of the cards in that department. They can destroy the Treasury market at will. They can destroy the Dollar and its use and utility at will. They can obviously blow the metals markets to shreds easier than either the Dollar or Treasury market. They have over $3 trillion of Treasuries and Dollar reserves, a mere 1% of this figure amounts to $30 billion. (While we push $85 billion more per month into the system via QE which is roughly enough to buy every single ounce of Gold that is mine in the world in one year). $30 billion could buy up nearly 40% of annual production. It could nearly clean out ALL of GLD and COMEX dealer inventories...and this is JUST ONE PERCENT of what China is sitting on. CHINA ALONE and no one else!
Do you see? Do you see just how carefully balanced this game is now? Do you see how close to going nuclear this situation is? This is not about Gold going to $1,500 or $1,900 or $5,000 or any other number. This is for ALL the marbles. You will either have it or you won't. "Price" will not ever again be "decided" in the paper markets of N.Y. or London. China will spring up a Gold backed or ratio'd currency and TELL the world just how many Dollars are required to purchase and have one ounce of Gold delivered. While we are completing our "going out of business sale", China is filling their coffers. They (along with Russia, Germany and others) will impose a "reset" on the U.S. where we have no seat at the table and no say so in what is decided. Why? Because "he who has the Gold always has and always will make the rules". They clearly have it and we will clearly not after our "sale". Regards, Bill H.
the_circleFr. Bill
Nov 3, 2013 - 10:05pm

Thanks Father!

Excellent cheapskatery!

Great article, Argentus. You have a flair for writing.

redwood
Nov 3, 2013 - 9:37pm

DPH

I"ll let DPH speak for himself but from what I understand he may be in a pretty good space right now. We'll have to wait and see but his new screen name may be a clue. Looking forward to his next post.

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 8/3

8/3 9:45 ET Markit Manu PMI July
8/3 10:00 ET ISM Manu PMI July
8/3 10:00 ET Construction Spending
8/4 10:00 ET Factory Orders
8/5 8:15 ET ADP employment July
8/5 9:45 ET Markit Service PMI
8/5 10:00 ET ISM Service PMI
8/6 8:30 ET Initial jobless claims
8/7 8:30 ET BLSBS for July
8/7 10:00 ET Wholesale Inventories

Key Economic Events Week of 7/27

7/27 8:30 ET Durable Goods
7/28 9:00 ET Case-Shiller home prices
7/29 8:30 ET Advance trade in goods
7/29 2:00 ET FOMC Fedlines
7/29 2:30 ET CGP presser
7/30 8:30 ET Q2 GDP first guess
7/31 8:30 ET Personal Income and Spending
7/31 8:30 ET Core inflation
7/31 9:45 ET Chicago PMI

Key Economic Events Week of 7/20

7/21 8:30 ET Chicago Fed
7/21 2:00 ET Senate vote on Judy Shelton
7/22 10:00 ET Existing home sales
7/23 8:30 ET Jobless claims
7/23 10:00 ET Leading Economic Indicators
7/24 9:45 ET Markit flash PMIs for July

Key Economic Events Week of 7/13

7/13 11:30 ET Goon Williams speech
7/13 1:00 ET Goon Kaplan speech
7/14 8:30 ET CPI for June
7/14 2:30 ET Goon Bullard speech
7/15 8:30 ET Empire State and Import Price Idx
7/15 9:15 ET Cap Ute and Ind Prod
7/16 8:30 ET Retail Sales and Philly Fed
7/16 11:00 ET Goon Williams again
7/17 8:30 ET Housing Starts and Permits

Key Economic Events Week of 7/6

7/6 9:45 ET Markit Service PMI
7/6 10:00 ET ISM Service PMI
7/7 10:00 ET Job openings
7/9 8:30 ET Initial jobless claims
7/9 10:00 ET Wholesale inventories
7/10 8:30 ET PPI for June

Key Economic Events Week of 6/29

6/30 9:00 ET Case-Shiller home prices
6/30 9:45 ET Chicago PMI
6/30 10:00 ET Consumer Confidence
6/30 12:30 ET CGP and SSHW to Capitol Hill
7/1 8:15 ET ADP Employment
7/1 9:45 ET Markit Manu PMI
7/1 10:00 ET ISM Manu PMI
7/1 2:00 ET June FOMC minutes
7/2 8:30 ET BLSBS
7/2 10:00 ET Factory Orders

Key Economic Events Week of 6/22

6/22 8:30 ET Chicago Fed
6/22 10:00 ET Existing home sales
6/23 9:45 ET Markit flash PMIs for June
6/23 10:00 ET New home sales
6/25 8:30 ET Q1 GDP final guess
6/25 8:30 ET Durable Goods
6/26 8:30 ET Pers Inc and Spending
6/26 8:30 ET Core inflation

Key Economic Events Week of 6/15

6/16 8:30 ET Retail Sales
6/16 8:30 ET Cap Ute and Ind Prod
6/16 10:00 ET Chief Goon Powell US Senate
6/16 4:00 pm ET Goon Chlamydia speech
6/17 8:30 ET Housing Starts
6/17 12:00 ET Chief Goon Powell US House
6/18 8:30 ET Initial Jobless Claims
6/18 8:30 ET Philly Fed
6/19 8:30 ET Current Account Deficit
6/19 1:00 pm ET CGP and Mester conference

Key Economic Events Week of 6/8

6/9 10:00 ET Job openings
6/9 10:00 ET Wholesale inventories
6/10 8:30 ET CPI for May
6/10 2:00 ET FOMC Fedlines
6/10 2:30 ET CGP presser
6/11 8:30 ET Initial jobless claims
6/11 8:30 ET PPI for May
6/12 8:30 ET Import price index
6/12 10:00 ET Consumer sentiment

Key Economic Events Week of 5/25

5/26 8:30 ET Chicago Fed
5/26 10:00 ET Consumer Confidence
5/27 2:00 ET Fed Beige Book
5/28 8:30 ET Q2 GDP 2nd guess
5/28 8:30 ET Durable Goods
5/29 8:30 ET Pers Inc and Cons Spend
5/29 8:30 ET Core Inflation
5/29 9:45 ET Chicago PMI

Recent Comments

by AgstAger, 36 min 46 sec ago
by Turd Ferguson, 2 hours 3 min ago
by Benitho, 2 hours 4 min ago

Forum Discussion

by jack3617, Aug 7, 2020 - 5:51pm
by Titus Andronicus, Aug 7, 2020 - 5:13pm
by jack3617, Aug 7, 2020 - 5:06pm
by Steve S, Aug 7, 2020 - 1:59pm
by Silverbull8888, Aug 7, 2020 - 9:48am