Christmas allows the opportunity to pull a book off the shelf and read. This year’s thriller was “The Great Swindle” a dated (1960) historical account of the South Sea Bubble.
It’s all in there for today; credit, greed, hubris and collapse. Winners and losers. A number of parallels caught my eye. Back in 1720 there were many “bubble” sceptics and these included Britain’s first Prime Minster, Robert Walpole and the then Archbishop of Dublin who wrote “..I am not concerned in it, for I think, if the debts of the nation may be paid by th[is] folly…it will be very well for the public”. Indeed, many felt that the transfer of the public debt burden onto individual stock holders was a good thing. No need to go into the particulars of what the scheme was, but in modern day parlance it was a “debt for equity swap for UK plc”.
Skip forward almost three hundred years and many of the debates of the 1720 are today’s debates, but in reverse. Today, it is generally accepted that government debt issuance to fund the state is a good thing – the exact opposite to the purpose of the South Sea Company. One of the overriding structural changes of the last ten years has been the transfer of debt from the private to the public sector. Today’s balance sheet increase – QE – has its critics, but few argue that that response didn’t soften the impact of the 2008 recession.
South Sea led to asset price inflation as those who profited and exited South Sea investments bought carriages, houses or land. A similar comparison could be made of asset owners over the last ten years, who are seen as having benefited from QE and zero interest rates. Today’s zero interest rates has impacted materially savers solely reliant on negative real return deposits.
The South Sea Company proved to be a get rich quick scheme despite the veneer of Parliamentary respectability seeking to reduce the country’s debt burden. The timeline of today’s ZIRP is in stark, prolonged contrast and very different to the flash in the pan of 1720. Wiser punters such as Sara, The Duchess of Marlborough saw that “this…project must burst in a little while and fall to nothing”. Whilst Walpole stabilised the South Sea bubble in late 1720, it wasn’t until 1733 that the Company was divided up and over another hundred years before South Sea successor companies closed. Maybe an interesting thought to the timeline where by QE is unwound in today’s G7 economies?
At peak valuations in 1720, the value of the South Sea Company was more than the total of Great Britain’s national debt at £50m, and GDP at an estimated £64m. It makes the UK’s asset purchases of £435bn by the end of 2016 – being a mere c.25% of GDP – look rather tame by comparison. Both post 2008 and post 1720 the issue of the day was stabilisation and dealing with deflation caused by bubbles.
So what does this all tell 2018’s investors? If there is a bubble out there, likely it’s called Bitcoin or tech. Bitcoin, like tech stocks, offer exciting chances of betting on a new, different future – much the same way as the South Sea Company did in 1720. But more pertinently it’s not the bond market. Whilst government bonds most likely drift higher in yields in 2018, it’s not a bubble – there will be more to worry about elsewhere.