Why the Economic Cycle Action Plan Works!
5th of August, 2020
Different Times – Same Behaviour!
We talk about how the Calnan Flack Economic Cycle Action Plan is based upon history, but really if we boil it down it is based upon human emotions and reactions.
Many things change over time. Technology, legislation, rulers, social customs and accepted behaviours. As a race we have basically moved further up Maslow’s 1943 description of human kinds “Hierarchy of Needs”.
Over time human emotions haven’t changed. Our reactions and underlying drivers have been immutably set in our DNA and it is this that gives our Calnan Flack Economic Cycle Action Plan its strength.
Understanding human actions and reactions will massively improve your investment pleasure and profits.
The recent royal commission highlighted many wrong doings by our financial institutions. My dad Alan, used to say to me as a kid, “People change when it comes to money” and throughout my career I’ve unfortunately seen plenty of examples of this.
Most people for the part are good and will act with honesty and integrity.
But there are always those that will be tempted and will stray to taste the forbidden fruit. Life has always been like this, it is just the way some of society is wired.
It also goes some way to explain, not justify or defend, the actions of some that were uncovered by the recent Banking exposé.
Unfortunately, although it was presented as a new phenomenon, it’s been going on for centuries.
Let’s look back to 1834
It was 1834 in France, and King Louis Phillppe I held the throne. His reign between revolutions, was known as the July Monarchy and was dominated by wealthy industrialists and bankers and liberal market approaches.
In the city of Bordeaux, the Blanc brothers traded government bonds at the exchange. Much of the price of the local bonds was taken from the direction of the principal government bond market that traded in France.
This was hardly the information age as we think of it and it took about 5 days for this critical information to arrive in Bordeaux via Mail Coach from sweet Paris itself.
As in any market setting, those who are best informed can make the best decisions. Information is everything and it was no different for the Blanc brothers.
Remember this was not an era of mobile phones or Snapchat! But rather, the technology of the day, included semaphore telegraph stations.
Hundreds of optical stations that stretched all across Europe allowing messages to be waved from Amsterdam to Venice and between virtually any of the major cities in France.
But alas, this cutting edge communication technology of the time was strictly controlled by government only.
It is alleged that this did not stop Michel Blanc in attempting to establish his own private telegraph line in 1832 in order to gain an information edge over his rival traders. However, such attempts were quickly quashed by the authorities who asserted their public monopoly on such swift transmissions.
Unperturbed by the thwarted attempt for speedier information, the Blanc brothers subscribed to the old motto. “If you can’t beat them, join them”
“If you cant beat them, join them”
Since the French authorities had made it clear that there were to be NO private Optical telegraph lines, the Blanc brothers decided that they would just use the governments telegraph lines instead.
So, they set up an ingenuous code by introducing deliberate errors into the routine government messages that were sent.
See the way in which the telegraph system used semaphore flags, characters were sent individually by changing a set of flags. As soon as any error was denoted a back space would be inserted – remember this would be after the error had already been sent.
When the message finally reached its destination any errors, denoted by the back space, would be removed upon recording the message.
So all the Blanc brothers had to do was to bribe the inscriber to insert a deliberate error, indicating the direction of market movement, into the message, followed by a back space that would eliminate the error, ensuring the message was unaffected when it was written out for delivery at the end of the line.
The Blanc brothers then just had to bribe a former telegraph operator who observed the telegraph tower outside Bordeaux with a telescope and passed on the news to the Blancs.
Believe it or not this very profitable scheme went undetected for several years until a telegraph operator who was on the take got sick and tried to get his friend to take his place.
The Blanc Brothers go on trial
Like all good white collar financial crooks, the Blanc brothers stood trial but it was soon discovered that there was no actual law against the misuse of data networks and it was not insider-trading as the bonds had already traded in the French market. So the Blanc brothers were acquitted.
But it is a great little story that illustrates our drivers and human behaviour in action.
We see technological and infrastructure advancements not just impacting how business is being done, but how these advancements move quicker than the legislators can.
We see how information is KING! And the lengths that traders will go to obtain it first. It is reputed that economist David Ricardo’s “Good Boy” image may actually have a slight dent or two in it as it is thought that he too made the bulk of his fortune from inside information about the outcome of the Battle of Waterloo.
But is this any different to the trading firms that engage in high frequency trading today where speed is everything? Spread Networks spent $300M to bore a hole straight though a mountain to reduce transmission speeds from 17 to 13 milliseconds between Chicago and New Jersey for its high frequency trading platform.
The Semaphore telegraph system was new technology, protected by a government licence. Remember, the Blanc brothers tried to set up their own telegraph system, but the French government quickly quashed that idea.
The Optical telegraph lines were a disruptive technology for the horse and coach mail system. Another example of having to look at the events within the lens of the time.
The Semaphore system grew and over a period of time moved into private hands as it became profitable to do so and then eventually was made redundant by new technological advancements by the likes of Samuel Morse and his new code.
Which is no different to the problems that high frequency trading is causing. Based on new technology these trading firms are challenging the current government licenced stock and futures exchanges as well as the law itself.
As we continue to say, whilst the behaviour continues to echo history and the drivers remain- the cycle must repeat and the Calnan Flack Economic Cycle Action Plan will continue to provide a framework for our investment actions.
To me it’s parallel circumstances, the same behaviour, just different times.