Transcription
So, I spend a lot of time trying to find new angles on financial markets, proposing videos on topics not often seen on YouTube Finance or podcasts that differ a bit from what's seen everywhere. And this time, to find something a little different, I had to go back over 300 years. I stumbled upon two texts from 1701 and 1719 in a used bookstore. So, I'd like to present an old grimoire, and so on, quite aged. In fact, it's simply a 2020 reissue. So, here's this small modern book, and two things fascinated me even before I opened it: the date 1701, of course, which is insane, almost a century before the French Revolution. There were obviously no stock exchanges at that time. Stock exchanges as we know them didn't exist at all. And then the other point that really struck me as odd was the author. The author is Daniel Defoe. Now, I don't know if you remember from middle school or high school, but if it doesn't ring a bell, he's the author of Robinson Crusoe. And I checked, he wrote Robinson Crusoe in 1719. So, in the same year, he was writing a book about a castaway on a desert island and a text about the stock market in the streets of London. And what's nice about these little texts by Defoe on the stock market is that we find all the basics of psychology. So, we find bubbles, we find manipulations, false rumors, panic movements, and the same debates as today about regulation, the role of markets, and speculation.
To truly understand how shares were traded in 1700, you really have to forget everything we know today. So, we're in London, but there's no London Stock Exchange. This exchange would be created exactly 100 years later, in 1801. So, here we are dealing with a totally informal system. In practice, trading took place in the street, notably in an area called Exchange Alley, or directly in what were called coffee houses. These were cafés where merchants, investors, and brokers would gather. And there, of course, everything was done verbally. You'd enter a café, find someone you wanted to trade with, and negotiate the price face-to-face. There was no official price, no order book with buyers and sellers, and most importantly, nothing to secure the transaction. So, here, it was truly a one-on-one interaction, and everything relied on personal relationships and trust. And of course, liquidity was nothing like it is today. There were no opening or closing hours. Liquidity depended directly on the number of people present in the café or in the street at the time you went there. And over time, some of these coffee houses actually became real mini stock exchanges.
So, shares were traded, of course, but the majority of securities were bonds, and especially English government debt. Starting in 1697, we begin to see an attempt at initial organization with John Castin, in particular, who regularly published price lists for certain stocks, certain commodities, and certain bonds. These were the prices being discussed at Jonathan's Coffee House, right in the heart of Exchange Alley, where most transactions took place. And I even found images of an old list from 1697, truly among the first. And these kinds of documents are quite amusing. It's typically the kind of thing I'd love to buy at auction. I saw that this type of sheet sells for a few thousand euros. If I find one at auction, I'm buying it immediately. Now, it's true that it's something very rudimentary. It's absolutely not official, it's not really reliable, but it already proves that a little information was starting to circulate in London about the prices at which stocks, bonds, and commodities were being traded.
So, as I was saying, an important point: the market at that time didn't primarily revolve around company shares. Obviously, the core of the market remained government debt, what were called Exchequer bills, meaning English debt bills. Investors lent money to the state, to the English state. The state gave them pieces of paper saying, "Here's what you lent us, here are the coupons you will receive." And it was these little pieces of paper that were exchanged in the streets or in the cafés. So, as everywhere, as in France, as elsewhere, English finance was very closely linked to state financing and the need to fund wars at that time. On the stock side, there were roughly three available. We had the Bank of England; now, I know it's strange, but at the time it was a private company, so its shares could be traded. A private company created to finance the state. Then we had the East India Company and, a little later, the South Sea Company. And these two did essentially the same thing: they would bring textiles by ship from Asia, particularly from India. So, textiles like cotton, silk, etc., tea, and spices. So, essentially, they imported everything that was in high demand in Europe and had large profit margins. They exported very little. In fact, when ships left London, they primarily carried money, physical money, I mean coins, often in metal form, to buy goods in Asia.
These two companies had a competitor, and this competitor was none other than the first multinational that ever existed, the first company whose shares were actually traded in Amsterdam: the Dutch East India Company. And it's in this context that Daniel Defoe wrote these two pamphlets, which are very, very critical of the stock market. Now, I say the stock market, but as you've understood, it didn't exist yet. So, they are very critical of speculators. In the first text, he explains that England is facing a very concrete economic problem: transactions are slowing down. A part of the economy seems blocked, and for him, it's the fault of these so-called speculators. And he gives a specific example: the East India Company. He explains that he looked at all the stock prices for this company and saw completely wild variations. And I told you that finding stock prices wasn't easy. Finding prices from a year ago, two years ago, three years ago was complicated. He looked at prices over 10 years and saw completely crazy variations. He saw the stock price rise to 300 pounds sterling, drop to 37, rise again to 150. So, truly enormous variations. And what he says is that the intrinsic value of this company probably hadn't changed much in the meantime. He says it might have moved by plus or minus 10%, but no more than that. So, even then, he had clearly understood that there's the value of the company on one hand and the stock price on the other, and that psychology can make stock prices completely disconnected from reality. He explains that this market is dominated by emotions, by fear, by hope, much more than by fundamentals. And that's completely crazy because he states it very clearly in this text dating from 1701. But in these texts, Defoe doesn't just talk about psychology; he also talks about pure manipulation, insider trading. But we'll get to that just after. But before that, a quick detour to talk for 2 minutes about my partner SaxoBank. You know, Saxo supports my channel, but more importantly, it's my favorite platform for managing my portfolios daily. What I'm looking for is quite simple, really. It's like everyone else: the ability to invest everywhere without feeling confined to a limited offering. With Saxo, we're talking about over 23,000 stocks, 7,000 ETFs, and over 5,000 bonds. Another criterion that's important to me is having clear and consistent fees, whether in Europe, the United States, or Asia. And precisely, since I'm talking about fees, if you open or transfer a securities account, a PEA, or a corporate account, you can benefit from €500 in transaction fees offered for the first three months via the link in the description.
Now, let's resume our dive 300 years back in time because Defoe doesn't stop at the stock market; he also directly criticizes the behavior of the East India Company, the main listed stock. He explains that this company holds about 1 million pounds sterling, which was truly enormous for the time, and for him, it was very bad news for the economy because this money was immobilized. It's important to understand that at that time, when we talked about money, we talked about physical currency, coins, silver coins, and there was no modern banking system capable of creating liquidity easily like today with central banks. So, when a company accumulates money and doesn't circulate it, it actually withdraws liquidity from the system and slows down the entire economy.
Here's a funny anecdote in the book, funny for me as a Frenchman: he explains that fortunately, this company wasn't French because the King of France would probably have considered that this money should be used, that he would have found a way to recover it, with the idea that still holds true in France today: if a company doesn't know what to do with its money, the state will always know how to spend it. And I found it very amusing to read in a book written in 1701 that France, if companies are considered to have too much money, the state will gladly take it from them. Then Defoe lists everything that's wrong with the current English stock market system: prices are too volatile, speculators influence the market, and a portion of the currency is no longer circulating. And he proposes solutions. First, he wants to punish speculators. For him, they are clearly the culprits. Second solution: he proposes merging the two English East India Companies into a single, smaller entity and limiting transactions on their shares. He also proposes introducing a 10% tax on transactions. So, now it's getting serious. And finally, he wants to precisely regulate imported products and quantities. So, this is really economic planning. So, in his logic, it's not at all a free market logic. It's a logic of control, even planning. And what's interesting is that at that time, there was no economic theory. There weren't all the theories we know today yet, but we already see two visions emerging that would clash until today. On one hand, those who want to regulate, control, and plan to prevent abuses and stabilize the economy. And on the other hand, we have those who want to defend the idea that the market should self-regulate, that prices should be formed freely, and that state intervention can ultimately create more problems than it solves. But all of this wasn't yet truly theorized. And this second vision, particularly of market freedom, would be explained by Adam Smith in 1759 with the idea of the invisible hand. But this is almost 60 years before, and none of that exists, but Defoe was already a bit ahead of his time. That's for the first text from 1701.
But time passes, and Defoe becomes increasingly frustrated. He sees all the scams continuing in the coffee houses, in Exchange Alley, and so on. He publishes a second text that is much harsher. The tone is much harsher. He accuses speculators of being public nuisances that the state must absolutely stop. And in his little book, he includes the speculators' response, which is quite amusing, by the way. The speculators reply to him, "But if you want to eliminate us, you have to eliminate the whole system. The state has to repay its debt. You have to stop issuing new securities. You have to abolish companies. You have to stop credit altogether. Otherwise, as long as there's a market, we'll be here and we'll continue to buy and sell." This drives Daniel Defoe crazy, who describes the system as, and I quote, "a complete system of swindling." It's very strong. He doesn't say people are dishonest. What he says is that the system itself pushes them to this type of behavior.
Then, there's a whole section where he gives concrete examples of scams. He explains how a beginner who comes to these coffee houses just to buy their first securities is systematically ripped off. Each time, they'll be told, "I have a great deal, there's news that hasn't come out yet, but I'm telling you personally," and so on. So, he shows us all the tricks of the scam, and he says that a beginner buying their first securities will inevitably get scammed. He then goes further by mentioning the practices of a certain J.C. This is an anonymized character in the book; we know today it refers to Josiah Child, a former director of the East India Company. Defoe explains that information is extremely limited, and sometimes the company deliberately plays with this to move stock prices. So, they might informally announce that a ship is lost when it isn't. Or conversely, they'll announce a successful arrival when the cargo has actually been destroyed. And apparently, it was common practice to have this kind of false information provided by the company to influence prices in its favor.
But apparently, it's not just false information. When Child wants to buy shares of his own company, remember, he asks his brokers to create a negative atmosphere, and so on. The brokers might, for example, hint at bad news. Sometimes they'll even announce they have a large sell order. They don't say from whom, but everyone understands it's a sell order from Child. And since everyone knows that these brokers are the boss's brokers, they are listened to very carefully, and this will move the price up or down. And that's what Child would do when he wanted to buy a lot of shares. He would spread bad news and then buy in bulk. And what's funny is that we see that some of these practices, like fake sell or buy orders, have occurred even recently with high-frequency traders who placed fake orders. This is called spoofing or phantom orders. It's forbidden. But there have been periods where, like this, a large fake sell order was placed to push the market down. So, this famous Mr. Child would accumulate an enormous fortune through trade, but also through insider trading, scams, and fraud. And he would transform this fortune into power. He bought land, had an immense property built that resembled a small Versailles, and entered politics. He became an MP, a member of parliament, and began to influence English politics.
So, we understand better why Defoe was so frustrated and why he absolutely wanted to regulate. Because when you see someone spreading false rumors, engaging in insider trading, and so on, and ending up as a superstar politician, it naturally makes you want to rebel and shake up all this finance, this jungle where it's the law of the strongest. So, for the diagnosis, there's a lot that holds up in this little book, honestly. And indeed, in 1720, one year after the publication of the second text, one of the biggest bubbles in history would occur with the South Sea Company, one of the two maritime transport companies, which would experience a massive bubble, ending in a crash, ruining Isaac Newton in the process. A very interesting story, but not the subject of the video. But I find that Daniel Defoe, while having the right diagnosis, is mistaken, particularly about the solutions. Because what he proposes, fundamentally, is a form of planning. He tells us that we need to limit trading, control companies, control prices, impose taxes on transactions, and so on. And history has shown us that this doesn't work very well. We saw it much later with planned economies like in the USSR. Planning stifles innovation, it stifles economic dynamism. The thing is, we seem to be stuck between two solutions: markets, or rather, completely unregulated speculators where it's the law of the strongest, where those with the information win and everyone else, 99% of the population, loses; or else, planning, a regulated market, but one that won't function sufficiently for the economy. Challenges. I have the impression that for 300 years, this has been global finance: trying to find a balance between these two systems.
So, when I read this book last week, my first thought when I closed it was, "Wow, it's amazing how much better the stock market works today." Today, we have real-time information. Companies can no longer publish just anything. They are required to publish every quarter, by the way. They publish their results but also their activities. The information is verified, accessible to everyone, and so on. So, yes, manipulations exist, but they are much rarer. Well, that was a bit of my naive side. And then this Monday, March 23rd, back to reality. 6:49 AM Washington time. In less than 2 minutes, over 6,000 oil futures contracts were traded. We're talking about approximately 580 million dollars, 10 times the usual volume. Some traders were betting on a drop in oil prices, while others, perhaps the same ones, probably the same ones, were massively buying American stocks. We're talking about a trade of 1.5 billion dollars off-market, before the indices opened. About 15 minutes later, Donald Trump published a message where he spoke of very constructive discussions with Iran. Immediately, oil dropped by 15%. US stock markets rallied, and the very lucky ones who had positioned themselves 15 minutes earlier made enormous amounts of money in a few minutes.
So, obviously, I immediately drew a parallel with the book I had just read, and I was preparing this video precisely. And I thought, "It's incredible what Daniel Defoe described 300 years ago: insider trading, fraud, and so on, still exist." Now, it's perhaps less frequent, we agree, it's less in cafés and so on, but it still happens, unfortunately, and even at the head of the most powerful country in the world. And I must admit, that made me think a lot. But from your perspective, what is your view of today's stock market? Has nothing really changed fundamentally in 300 years? Are there still billionaires, people who are very connected, who profit from the system, or has the system become much cleaner than before? Honestly, I don't really know which way to lean; I'd be more in the middle, but do you have a strong conviction? For you, has the system not changed, and is it still the insiders versus the rest of the world? Let me know in the comments. Alright, thank you all, and bye.