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   Investment Thoughts - Capital Markets
The Priceless Parable of Price Discovery
“Gentlemen prefer bonds.” So quipped Andrew Mellon in 1929 as stocks fell and investors rushed into bonds, pushing their yields down and prices up. Historians recount that the flight to safety had anything but a smooth landing.

Within two years, almost all of the sovereign bonds of foreign nations had defaulted, triggering massive losses for American investors and a stream of bank runs that would mark the darkest days of the Great Depression.

 

What cometh from this despair? Why hope, of course.

 

Picture the backdrop 85 years ago: Shanty towns that would come to be called ‘Hoovervilles’ had sprung up across the nation as the Clutch Plague took hold. The largest was located in New York’s Central Park. Suffice it to say, the men laboring a handful of city blocks south did anything but take their good fortune for granted. They knew penury was but a paycheck away. In response, they did as we all must during this season – they gave of what they had.

 

On Christmas Eve, 1931, workers at the Rockefeller Center Construction site pooled their money together to buy a 20-foot balsam fir tree. Erected at the work site, it was decorated with, “strings of cranberries, garlands of paper and even a few tin cans.” Today, a half a million people from all over the world will gaze with wonder at this humble tree’s successor. Another half million will follow in their footsteps tomorrow as will be the case every day it stands, shining as a beacon of hope in its purest form.

 

To mark the occasion of this holiday season, please accept all I can humbly offer you, week in and week out – my words. For those of you who have read these missives for some time or ever heard me speak, you’ll recognize what follows. For newer readers, settle back. You’re in for not one, but two, real treats, one of which is wrapped in an iconic robin’s egg blue box.

 

It will come as no surprise to any who have met him that the giver of the gifts you’re about to receive is Arthur Cashin, one of the greatest storytellers of all time. For over a decade, I’ve had the honor to call him friend. Readers of Cashin’s Comments, a daily offering that delights his followers the world round, would agree that it’s hard to pin down the very best story he has told over the years. These are my two favorites.

 

You may note that 2017 marks the 30-year anniversary of a momentous day in stock market history. It is Cashin’s recollection of the day that followed the 1987 crash that is among my favorites. On the Tuesday, October the 20th, the Dow initially opened up 200 points. But trading quickly turned negative. Adding fuel to the panicked fire, banks were in the process of cutting off lines of credit to the specialists on the floor. What would have followed, had the banks stood firm, could have been catastrophic.

 

At the moment bad was turning to worse, Alan Greenspan was on an airplane headed back to Washington DC. The freshly appointed Federal Reserve chairman had landed in Dallas on Black Monday just in time to learn that while he had been in flight, the Dow had fallen by 22 percent. This shocking news prompted Greenspan’s cancelling his Dallas engagement and heading back to DC. Unfortunately, for the markets, he was once again in the air, just as another historic sell-off ensued.

 

As Cashin wrote on the 25th anniversary of the crash, news that Greenspan couldn’t be reached was of little comfort to NYSE Chairman John Phelan: “Desperate, Phelan called the President of the New York Fed, Gerry Corrigan. He sensed the danger immediately and began calling the banks to reopen the credit lines. They were reluctant but Corrigan ultimately cajoled them. The credit lines were reopened and the halted stocks were reopened. Best of all, the market started to rally and closed higher on the day.”

 

I hope you agree the story of the day the NYSE didn’t crash harder is a classic. But it doesn’t resonate as much as it once did. Since October 19, 1987, the stock market has operated in an increasingly contained vacuum thanks in large part to overly-easy monetary policy. That makes the following story, generously gifted to me in its unabridged form by Cashin, the most relevant of the day as we look to the new year with stocks at record highs. The two main characters of this timeless tale are Charles Lewis Tiffany and John Pierpont Morgan.

 

Being the astute jeweler that he was, Mr. Tiffany knew that Mr. Morgan had an acute affinity for diamond stickpins. One day, Tiffany came across a particularly unusual and extraordinarily beautiful stickpin. As was the custom of the day, he sent a man around to Morgan’s office with the stickpin elegantly wrapped in a robin’s egg blue gift box with the following note:

 

“My dear Mr. Morgan. Knowing your exceptional taste in stickpins, I have sent this rare and exquisite piece for your consideration. Due to its rarity, it is priced at $5,000. If you choose to accept it, please send a man to my offices tomorrow with your check for $5,000. If you choose not to accept, you may send your man back with the pin.”

 

The next day, the Morgan man arrived at Tiffany’s with the same box in new wrapping and a different envelope. In that envelope was a note which read:

 

“Dear Mr. Tiffany. The pin is truly magnificent. The price of $5,000 may be a bit rich. I have enclosed a check for $4,000. If you choose to accept, send my man back with the box. If not, send back the check and he will leave the box with you.”

 

Tiffany stared at the check for several minutes. It was indeed a great deal of money. Yet he was sure the pin was worth $5,000. Finally, he said to the man: “You may return the check to Mr. Morgan. My price was firm.”

 

And so, the man took the check and placed the gift-wrapped box on Tiffany’s desk. Tiffany sat for a minute thinking of the check he had returned. Then he unwrapped the box to remove the stickpin.

 

When he opened the box he found – not the stickpin – but rather a check from Morgan for $5,000 and a note with a single sentence – “JUST CHECKING THE PRICE.”

 

Please share this timeless legend of price discovery far and wide. Do your part to make sure this priceless parable keeps giving the greatest gift of all — hope.

 

 

Money Strong, December 21, 2016-Danielle DiMartino Booth

02.01.2017


 

Themes

 

Asia

Bonds

Bubbles and Crashes

Business Cycles
Central Banks

China

Commodities
Contrarian

Corporates

Creative Destruction
Credit Crunch

Currencies

Current Account

Deflation
Depression 

Equity
Europe
Financial Crisis
Fiscal Policy

Germany

Gloom and Doom
Gold

Government Debt

Historical Patterns

Household Debt
Inflation

Interest Rates

Japan

Market Timing

Misperceptions

Monetary Policy
Oil
Panics
Permabears
PIIGS
Predictions

Productivity
Real Estate

Seasonality

Sovereign Bonds
Systemic Risk

Switzerland

Tail Risk

Technology

Tipping Point
Trade Balance

U.S.A.
Uncertainty

Valuations

Yield