For those new readers in 1998 we started an intense study of market bubbles, in preparation for what we thought was coming. We came to some general conclusions about the elements that contribute to a market correction, break, failure, or crash, each of which has a particular character and depth that is similar but still unique enough to be classified.
We expressed this in a series of price charting patterns, and a set of mathematical relationships of price over time in a large Excel spreadsheet labeled CrashTrak©. The verbal description of the analysis was never polished or published, since this has been for private use only. It has been expressed piecemeal in occasional writings, charts and postings in the past seven years around the web. Its still evolving as more is learned and new things occur as you would expect.
We are reading what looks to be a very promising analysis of a particular period of history which includes a financial market panic in 1907 that helped to set up the creation of the Federal Reserve Bank in 1913. Since we have not yet completed the book we won't comment yet on it except to say that it appears to be a substantial, serious and highly readable history of the time from a financial and social perspective. The Panic of 1907: Lessons Learned from the Market's Perfect Storm: Bruner & Carr
Our own view tends to see 1907 as a market event more like 1987 in its character and aftermath, as opposed to 1929 which is a crash and depression. But we have an open mind and hope this book will help to refine our knowledge.
In the introduction the authors provide an excellent description of the characteristics that together create a crash environment. Its remarkably close to what we think, although expressed much more capably. We'll have to see how they expand on this in the rest of the book, and are keenly interested to see if they have captured the element of a trigger event and if so how they have done it. We recommend this template not only as a general recipe for crash environments, but as a benchmark against which to understand not only what set up 1907, 1929, 1973-4, 1987, 2000-3 but also the situation in which we are in today.
"The following detailed account of the events of 1907 draws upon this rich literature to suggest that financial crises result from a convergence of forces, a perfect storm at work in the financial markets. Throughout the dramatic story of the panic of 1907, we explore this metaphor as we highlight seven elements of the market's perfect storm.
- System-like architecture: Complexity makes it difficult to know what is going on and establishes linkages that enable contagion of the crisis to spread.
- Buoyant growth: Economic expansion creates rising demands for capital and liquidity and the excessive mistakes that eventually must be corrected.
- Inadequate safety buffers: In the late stages of an economic expansion, borrows and creditors overreach in their use of debt, lowering the margin of safety in the financial system.
- Adverse leadership: Prominent people in the public and private spheres implement policies that raise uncertainty, which impairs confidence and elevates risk.
- Real economic shock: Unexpected events hit the economy and financial system, causing a sudden reversal in outlook of investors and depositors.
- Undue fear, greed and other behavioural aberrations: Beyond a change in the rational economic outlook is a shift from optimism to pessimism that creates a self-reinforcing downward spiral. The more bad news, the more behaviour that generates bad news.
- Failure of collective action: The best-intended responses by people on the scene prove inadequate to the challenge of the crisis."
