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

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Mr. Fix
Nov 3, 2013 - 9:31pm

@ ag1969: You will love this:

Janet Yellen exposed:

https://www.youtube.com/watch?v=rfLlF1vtit8#t=228

Peter Schiff takes her apart!

DeaconBenjaminFr. Bill
Nov 3, 2013 - 9:22pm

Don't forget

What Kindle giveth (or selleth), Kindle can also taketh away.

ag1969
Nov 3, 2013 - 9:22pm

Oh Come on Fix

You've looked like that! I've looked like that. You can't cast judgement based on....blah...blah...blah! I can just see it now!

Mr. Fix
Nov 3, 2013 - 9:20pm

This is one seriously scary bitch:

Keynesian central planner Janet Yellen: believes the free market doesn't work and needs utterly clueless people like her to function 'better'.

Mr. Fix
Nov 3, 2013 - 9:10pm

Buckle up, there is far more insanity to come.

Guest Post: Yellenomics – Or The Coming Tragedy of Errors

Submitted by Tyler Durden on 11/03/2013 - 20:35

The philosophical roots of Janet Yellen's economics voodoo, it seems, are in many ways even more appalling than the Bernanke paradigm (which in turn is based on Bernanke's erroneous interpretation of what caused the Great Depression, which he obtained in essence from Milton Friedman). The following excerpt perfectly encapsulates her philosophy (which is thoroughly Keynesian and downright scary): Fed Vice Chairman Yellen laid out what she called the 'Yale macroeconomics paradigm' in a speech to a reunion of the economics department in April 1999. "Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not," said Yellen, then chairman of President Bill Clinton's Council of Economic Advisers. "Do policy makers have the knowledge and ability to improve macroeconomic outcomes rather than make matters worse? Yes," although there is "uncertainty with which to contend." She couldn't be more wrong if she tried. We cannot even call someone like that an 'economist', because the above is in our opinion an example of utter economic illiteracy.

ag1969
Nov 3, 2013 - 9:08pm

Argentus, very nice post!

But my favorite line came in the comments section:

The new world order is just the old world order saying to the bankers & politicians "Playtime's over! We're taking our ball back!"

Thanks for the perspective.

Bag of Gold this is for you, since you understand how I feel about shopping as a mind numbing diversionary tactic against the sheeple.

I have noticed that "Christmas" has come early this year. And I don't mean the actual day, I mean the shopping hoopla season that precedes Christmas. It is 11/3. When I retrieved my Sunday Newspaper this morning, I noticed that the full blown Toys r us catalog was in the paper. I then went on a daytrip with my family to Portsmouth, NH. On the way out there, I passed three trucks overloaded with "Holiday" Trees.

And all the talk on the dealnews.com site is about Black Friday. I checkout dealnews.com every few days because I have obtained lots of good prepper items from that site very cheaply. As a for instance, I have 25 quarts of oil in my garage all that I got for free. So anyway, as I was marveling at how all of these stores are publishing their Black Friday ads weeks in advance, I come across this little link that is symbolic of how Christmas has become a three month long shopping celebration.

So you want to shop BOG? Let's celebrate Black Friday and all that it stands for, surely this page will give you inspiration!

With the biggest shopping day of the year approaching fast, let's take a moment to review some factoids that you probably didn't already know about Black Friday. For example: Did you know that one of the most tweeted words during Black Friday last year was "coffee?" Or that there's a board game in Germany called Black Friday? It's true!

Black Friday Money Games

Schwarzer Freitag (German for Black Friday) is a board game from 2010 in which players trade stocks until the market crashes. Whoever has the most money at the end wins. For ages 12 and up!

No Free Parking!

In New York City, shoppers rack up approximately $900,000 in parking ticket fines on Black Friday. (It's only about $270,000 on an average day.)

I'll Wait for the Movie to Come Out

The 1940 movie called "Black Friday" stars Bela Bela Lugosi and Boris Karloff and isn't about shopping at all — it's about a brain transplant gone very wrong.

And the biggest offense? This article actually comes out and says "Black Friday" by Steely Dan wasn't very good! WTF?

My final question BOG: Why are you wasting perfectly good shopping time reading my post?

Edit: oops! https://dealnews.com/features/Black-Friday-Is-a-Board-Game-in-Germany-Es...

DayStar
Nov 3, 2013 - 8:56pm

Harvey's Up! (TFMR)

  • Harvey: Gold is in backwardation from 1 month out to 3 months out. GLD: Gold, November 1: after a 4 day hiatus, gold lost a monstrous 5.7 tonnes and this gold left western shores onto Shanghai. GLD stand at 866.32 tonnes.
  • Mark O'Byrne: “If you look across the world, riots always begin typically the same way: when people cannot afford to eat food,” Margarette Purvis, the president and CEO of the Food Bank for New York said. Her comments came in response to Congress $5 billion cut in the food stamp program.
  • GoldCore: The head of the eurozone finance ministers Jeroen Dijsselbloem said yesterday that governments need to prepare legislation for bail-ins.
  • Reuters: Barrick Gold Corp said it would stop development of its Pascua-Lama mine in South America indefinitely, a surprise reversal on a project that has already cost the world's largest gold producer more than $5 billion.
  • Reuters: The volume of gold transferred between accounts held by bullion clearers fell 16.3 percent in September to an average 18.5 million ounces a day, its lowest since August 2012, the London Bullion Market Association said.
  • Reuters: South Africa's AMCU union declared a wage dispute on Thursday with platinum producer Lonmin. The union also said its members in the gold sector were voting on whether or not to strike over wages and could do so from next week.
  • World Gold Council Says Private Gold Stock Worth $1.8 Trillion. That compares with $90 trillion for debt markets, and $51 trillion for equity markets, World Gold Council says in report on website today.
  • 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.
  • Robert Fitzwilson: Rather than reliving the wheelbarrows of cash that post-WWI Germans experienced, the most likely endgame is the so-called “fat finger” by millions of investors -- seeking to rush out of investments into cash.
  • Andrew Maguire (via King World News): “People will ask me, ‘With such strong physical demand, how can the price (of gold) be going down?’ The answer is simple. Physical gold is completely unleveraged. Synthetic Comex supply is not gold at all, it’s just fake supply, and it temporarily overwhelms the underlying (true physical) demand. It’s pretty easy to do if you are the Fed. The Fed has a complete visibility into the (trading) ‘book,’ and knows exactly how much synthetic gold to dump into the market at any time to overcome the ‘bid stack,’ and ignite the algorithm-driven momentum follow through selling. It’s their (the Fed’s) game.

All this and more on...

The Harvey Report!

https://www.tfmetalsreport.com/comment/608933#comment-608933

DayStar

Fr. Bill
Nov 3, 2013 - 8:26pm

Charles MacKay's Book is currently free as a Kindle book

I just checked the Kindle Store and the book Argentus has reviewed above is available at the present time as a free Kindle download.

I just now got it! Wheeeee!

Bollocks
Nov 3, 2013 - 8:24pm

Spartacus Rex



nice one

I missed that post.

silver66
Nov 3, 2013 - 8:17pm

A.M. excellent

It has been a few years since I read this book, you have inspired me to pull it off the shelf and read it again. Thank you.

Here is is link to the latest Thunderroad report, a very good read as usual

https://www.zerohedge.com/news/2013-11-03/buying-time-brought-forward-world-and-why-there-no-plan-b

On a unrelated note, I went to Mises Canada seminars on Saturday, the speakers were good, but I have been spoiled here at TF. The links to videos of great thinkers and articles posted by Turd and his guests make a very high standard that anyone I listen now has to live up to.

Keep up the great work

Silver66

Stack till it hurts

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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
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Key Economic Events Week of 7/27

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7/10 8:30 ET PPI for June

Key Economic Events Week of 6/29

6/30 9:00 ET Case-Shiller home prices
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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
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Key Economic Events Week of 5/25

5/26 8:30 ET Chicago Fed
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