Financial uncertainty (1929)

Quantitative Cryptography in Financial Markets (8)

Author: Professor Michael Zhang Mai

1920s At the end of the year, when the art and physics circles realized the importance of uncertainty, the financial market in the United States also ushered in the greatest uncertainty. At that time, the United States welcomed the arrival of the new century with unprecedented prosperity. The period from 1920 to 1929 is a decade of rapid economic development, and the United States has a special vocabulary called the roaring twenties. In this 10 year, the United States experienced a wave of industrialization, and people's demand for consumption was unprecedented. The completion of infrastructure such as power grid and sewer defines urban life, and the latest technologies such as automobiles, railways, highways, skyscrapers, movies, telephones, telegrams and radios have brought people new experiences.

With the rapid development of finance and insurance industry, the proportion of service industry in GDP has risen sharply. The first generation of white-collar workers appeared in the city, and a large number of women can enter the office to engage in secretarial work. At that time, the women's group had just awakened (from the impressionist paintings, how to understand the "uncertainty" of Rambika's self-portrait in art, "Opening Rambika in Blue Bugatti" is the work of 1929). They started their own business and began to control their property freely. Many people invest their money in the stock market. 1924 real estate speculation in Florida has made many people get high returns. People need to find a relatively safe investment channel for the hot money of real estate speculation, and a large amount of funds poured into the stock market, which led to the stock price being continuously pulled up.

The Federal Reserve used a series of measures to warm up the stock market, including "quantitative easing", and later changed its pleasant name, that is, lowering interest rates, increasing the money supply, allowing government bonds to enter the market and so on. From 65438 to 0927, securities brokers lent 3.6 billion dollars. In the American economy, an average of $40 was invested in the stock market for every 100 dollar, and each investor increased the leverage by 10 times, which means that 90% of the money in the stock market was borrowed at that time. The topics among ordinary Americans are all related to the stock market. What we often see on TV are speeches made by President johncalvin coolidge, herbert clark hoover and Andrew Mellon, the finance minister, to appease investors.

The development of science and technology is also adding fuel to the financial fire. At that time, every restaurant, post office and small shop could find a small machine to print real-time stock quotes on a slender piece of paper, so that investors could find out the performance of their stocks at any time.

At that time, many investors quit their jobs and joined the stock market full-time. Thanks to leverage, many people earn money in a short time that they can't earn for a lifetime. When all investors think that the market will continue to rise without uncertainty, it may be the time with the greatest uncertainty.

1929, 10 at the beginning, irving fisher, an economist at Yale University, said in the The New York Times that "the stock price has reached a seemingly permanent plateau". This should be one of the most wrong interpretations of financial markets in history. Fisher has every reason to believe that he is right: in September of 1929, the Dow Jones Industrial Average expanded to a record high, reaching the end of the eight-year growth period, during which its value expanded sixfold.

Under some interpretation, the market fell 1 1% on Black Thursday, and fell 13% on Black Monday four days later. The following Black Tuesday fell 12%. Fisher couldn't believe how his deterministic model failed, claiming that the decline was only temporary. However, after that, people faced the Great Depression of 1930s which lasted for more than 10 years, and the stock market fell by more than 80%.

Fisher is not the only optimist on Wall Street. After witnessing the growth in the past decade, most economists, investors and industry leaders believe that the natural direction of the market is upward. For them, the beginning of the crash is not a sign of financial doom, but an opportunity to absorb on dips. The New York Times at that time was full of positive predictions. The president of Fair Trust Company said, "I won't worry about further decline".

Many optimists, including Fisher, went bankrupt in mid-June 165438+ 10. At that time, the Dow Jones index had shrunk by nearly half compared with its pre-crash value. Fisher went on to develop a new theory that led to the collapse: the excessively liberal credit policy encouraged Americans to take on too much debt, just as he himself did in order to invest more in stocks.

However, no one was listening. It was not until the 1950s that his theory was popularized. Many years after his death, milton friedman, an economist at Harvard University, declared him "the greatest economist in American history". Later, when the excessively loose credit line and huge debt caused the American market to collapse again in 2008, Fisher's debt deflation theory once again became the focus.

1929101On October 24th, Winston Churchill, then British Prime Minister and then British Chancellor of the Exchequer, was visiting the United States and visiting Wall Street. Seeing the crowd gathered at the gate of the new york Stock Exchange, he asked the Americans who accompanied him what had happened. He was told that the worst stock market crash in history had happened. Churchill lost all his investment in American stocks in this stock market crash, which was his advance payment for the manuscript. He promised to write a biography about his ancestor, the Duke of Marlboro. At the end of this book, he wrote four books, with a total of/kloc-0.0 million words, which took/kloc-0.0 years to complete. But at that time, he had not written a word, and the manuscript fee was gone. All his investment losses in American stocks should exceed10 million dollars today. That night, Churchill toasted "friends and former millionaires" at a dinner with new york's financial elite.

Not everyone has lost money. Joseph Kennedy, the father of President John F. Kennedy, heard that the shoeshine boy began to tell him about stocks, so he sold the stocks and quit, so he miraculously made a fortune before the crash of 1929 (this story was later called the shoe boy's law).

From early September of 1929 to mid-October of 165438+/kloc-0, the stock market value of new york Stock Exchange lost 30 billion dollars (about13 of the total market value of more than 80 billion dollars). However, this is only the beginning. Banks that used to lend money to shareholders as leverage have closed down because they can't recover their loans. The GDP of the United States has fallen by half in a few years. The DJIA- Dow Jones Industrial Average dropped from the highest point of 452 points 1929 in September to 58 points 1932 on July 8, a drop of nearly 90% in three years. GE's share price dropped from the highest of $396 to $8, and its market value evaporated by 98%.

For more details and stories about this history, please refer to the crash of 1929, and milton friedman also recorded this history in his book "The History of American Currency".

So what caused people at that time to suddenly focus on the uncertainty in various fields? The logic behind it is simple, that is, technology.

Technology will lead to uncertainty, and the invention of photography has made painters fly, because their duty is finally no longer to reflect reality rigorously, and their work has changed from recording reality to expressing their hearts purely. Due to the development of recording and stereo technology, music has also changed. What people need more is the pleasure of uncertainty brought by scene changes rather than the accurate reproduction of music scores. Art needs the participation of audience and audience brought by uncertainty. Science can turn uncertainty into a part of theory because of the development of experimental technology.

In the financial market, the positive self-feedback of investor confidence and stock price rise will bring false prosperity and make people believe that what happened in the past will always happen. Buffett's advice to investors is: "Don't lose money". Many behavioral finance studies give people advice: "Buy when you should, and sell when you should." However, how to judge your own position and decide your own actions? How can we avoid the trap of uncertainty?

The first thing we need to understand is that there are no fixed rules in the financial market. Investment opportunities are endless, but it also means that these opportunities are fleeting. People will follow the wind and encounter mutations. When investors are learning the laws of financial markets, financial markets are also changing quietly. When you think you have understood it, it has become a brand-new market that you don't know.

Based on this thinking, we will discuss how to understand probability and mathematics knowledge more deeply, so that these scientific knowledge can be better applied to the scene of financial transactions, and at the same time have a deeper understanding of financial markets.

A series of articles on quantitative cryptography in financial markets

Uncertainty in science: Does God roll the dice?

How to understand the "uncertainty" in art from the perspective of impressionist painting

In the infinite unknowns of financial markets, there are infinite possibilities.

The first step to gain true knowledge is to move towards the unknown.

How to interpret Socrates paradox with two-dimensional thinking mode

Thinking and solving problems from different angles will make truth a false proposition.

Impossible (1987)

Preface to a series of columns on quantum cryptography in financial markets.

Selected previous issues

Application of artificial intelligence in finance: forgetting backtesting

How to understand volatility? When will the next stock market crash come?