Authored by Simon Black and Tim Price via SovereignMan.com,
In the late spring of 1720, Sir Isaac Newton decided to sell his stocks.
Newton had been an investor in the South Sea Company, a famous enterprise which effectively commanded a trading monopoly with South America.
The investment had already made Newton a lot of money, he was up more than 100% in a very short time.
In fact, investors were clamoring to buy up the South Sea Company’s stock, and the share price kept climbing. And climbing.
Newton sensed that the market was getting overheated. It no longer made sense to him. So he sold.
There was only one problem: the share price of the South Sea Company kept climbing.
All of Newton’s friends were getting rich. So, against his better judgement, Newton went back in, repurchasing shares at more than three times the price of his original stake.
The market then collapsed, and he lost virtually all his life savings.
The experience is said to have given rise to his bemused response:“I can calculate the movement of stars, but not the madness of men.”
* * *
It’s now been roughly ten years since the Global Financial Crisis began.
In the time-honoured manner of regulators, they waited until the battle was largely over, then waded onto the battlefield and shot the survivors.
The decade since has seen unprecedented monetary stimulus, i.e. central bankers have expanded their various money supplies by trillions upon trillions of dollars, giving rise to a massive bubble in asset price worldwide.
Stocks are at all-time highs. Bonds are at all-time highs. Property prices are at all-time highs. Many alternative assets like private equity and collectibles are at all-time highs.
Yet asset prices keep climbing.
Perhaps desperate to avoid the mistakes of Isaac Newton, Scotsman Hugh Hendry, founding partner of Eclectica Asset Management, has recently annou...