Crowds In Investing and Social Movements, Are We Heading For A Time When The Crowds Hit The Streets?

Are Americans Ready For A Revolution?

May 28, 2014 by John Myers 

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“While all our ancient beliefs are tottering and disappearing, while the old pillars of society are giving way one by one, the power of the crowd is the only force that nothing menaces, and of which the prestige is continually on the increase.” — From Gustave Le Bon’s 1895 book, The Crowd: A Study of the Popular Mind

Imagine sitting in a theater watching a movie. Behind you someone jumps to his feet and shouts, “Fire!”

You can’t smell a whiff of smoke, nor can you spot a single spark. The smoke detectors are silent; the automatic sprinklers motionless. Yet none of this matters. Within seconds, The Crowd has been created. People everywhere are screaming out. A mass of people begins to make its way to the fire escape. Assume you know for certain that there is no fire. You face a choice: either plant yourself in the center aisle and oppose The Crowd, or throw yourself into the throng.

If you are a principled man or woman, you might think it’s your duty to oppose The Crowd. Guess what? Fulfilling that duty will be the last thing you ever do. A panicked crowd is not going to listen to what you have to say no matter how well reasoned it is argued. Opposing it is like opposing a cattle stampede. If you stand in its path, you will surely be trampled to death.

The problem with crowds is they have no ear for reason. Once a contagious fear grabs ahold, a crowd loses all sense of objectivity all reason. Truth is meaningless.

There is no way on Earth that you are going to reverse it until the hysteria has run its course.

Crowd Control

The longevity of a government is often dependent on its ability to control and, in some cases, incite a crowd.

Napoleon understood this as well as any leader and used his influence to revitalize France after it had torn itself to shreds during its bloody revolution. The powers that had preceded him — most notably the Jacobins — were able to incite the masses, but thereafter could not control them. A testament to this was the summary execution of Robespierre with the guillotine, the instrument he used so effectively during the Reign of Terror, a 13-month period that claimed the lives of 20,000 Frenchmen.

Crowds are not only pervasive in politics, but are also indigenous to investment markets. As a result, conscientious investors must always be wary of crowds. If one starts to form, markets take on a life of their own, quite apart from reason or reality.

One of the earliest examples of a market gone awry after being besieged by a crowd is the case of the South Sea Bubble.

According to Wikipedia, the South Sea Company “was a British joint-stock company founded in 1711, created as a public–private partnership to consolidate and reduce the cost of national debt.” The real objective of the company and its creator, John Blunt, was to bilk the investment public. After British Parliament legalized the sale of stock in 1711, the South Sea Company issued debentures worth 100 pounds a share. Immediately, the stock rose; but not because of any ventures undertaken by the company.

None of the company directors ever traveled to the South Seas; and none of them took seriously any trade with South America, still a protectorate of Spain, which was unwilling to share any of its spoils. For a decade, this inconvenient fact did not matter. Yet Blunt was able to entice the cream of English society into its venture. Royalty, noblemen and even members of Parliament bought into the South Sea promise.

As this new money washed in, it was used to pay off the few that sold out. By 1718, the South Sea Company attracted a much wider audience. Everyone from cobblers to milkmaids learned of this great new venture that promised profit without work.

Propelled by the capital of the masses, the South Sea speculation took off. The price of a single share began to skyrocket: first to 500 pounds, then to 700 pounds and finally to more than 900 pounds. Then in the summer of 1720, the roof craved in. The plague arrived in England, and a sense of foreboding was everywhere. Money became tight, and investors began to sell out.

But when several of them moved to sell, the company was unable to pay off. The South Sea Bubble burst.

Huge fortunes were wiped out, and thousands of speculators were left penniless. By October 1720, the nation was embroiled in a full-scale financial crisis. Bankruptcies swelled, the real estate market collapsed and, in the end, the government itself fell. England was shaken to its core.

Part and parcel of the South Sea Bubble, and typical of all speculative bubbles over the past 300 years, was the participation of The Crowd. Typical to the late stages of a bull market is swelling public interest. This often creates a crowd.

Cautiously at first, and then later with reckless abandon, The Crowd becomes overwrought with greed, propelling it into a feeding frenzy. Thereafter, markets reach unsupportable heights that can no longer be levitated because the universe of new buyers has run dry. The markets collapse underneath their own weight; and another crowd, rank with fear, rushes for the exits. The bullish excesses on the run-up are now exceeded by the bearish impulses of the downside.

This pattern of surge and crash has occurred repeatedly since the South Sea Bubble. To dismiss it now would be like dismissing the ebb and flow of the tides of human behavior.

Nothing Civil About Civil War

For decades, my focus with the masses was which way they would take the markets. The stock market crashes of 1987 and 2008 showed me that is not going to be the total crisis of confidence if markets face big downward swings only to be puffed backed up by imaginary money created by Congress and the Federal Reserve and that real crisis is going to be when the Federal government steps forward and institutes draconian laws upon all Americans.

What the Federal government doesn’t yet realize is the conflict coming into play from two masses: the liberal lobby for President Barack Obama — with his pro-gay, pro-black, pro-socialist agenda, executed by his secret National Security Agency drone army — and freedom-loving, gun-owning Americans who are willing to fight and, if necessary, die for the Constitution. These are the masses headed to battle, to civil war. And I expected it will happen two years after the 2016 Presidential election. For the first time in my life, I fear blood in the streets.

Yours in good times and bad times,