Episode #110: “At Some Point, the Stresses Are Going to Be So Great that Some of the Countries (In the European Union) Are Eventually Forced to Leave”
Guest: Dr. Bryan Taylor. Bryan serves as President and Chief Economist for Global Financial Data. In 1990, he began collecting and transcribing financial and economic data from historical archives around the world, which are now collectively known as the GFDatabase. He is also a prolific author, having written numerous articles and blog-posts utilizing data derived from all of GFD’s databases. He is also the author of Debts, Defaults, Depression and Other Delightful Ditties from the Dismal Science.
Date Recorded: 6/19/18
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Summary: In Episode 110, we welcome author and market data expert, Dr. Bryan Taylor.
Meb begins by asking how Bryan built the massive financial database that is Global Financial Data. Bryan walks us through how the database developed over time.
The conversation soon turns to Bryan’s book, Debts, Defaults, Depression and Other Delightful Ditties from the Dismal Science. Bryan tells us this is actually the first of two books. It includes stories about the past that people might find interesting – some of the crazy things that have happened in the financial markets, as well as an inference about what that might mean for the future. The follow-up book will focus on a number of specific cases, from The East India Company, all the way up to some of Trump’s companies.
Next, Meb changes gears – there are a few contenders getting close to becoming the first $1T company. Meb uses this as a chance to look back at the first $1B company.
Bryan tells us that title goes to Standard Oil. He then walks us through its history, including its practice of pushing prices down to drive competitors into bankruptcy, the Sherman Anti-trust Act, the break-up of Standard Oil, and the effect on shareholders.
This conversation dovetails into a conversation about which company today – Apple, Amazon, Facebook, or Google – is more likely to face a threat from government oversight. Listen in to get Bryan’s thoughts.
The guys then get into inflation. It turns out, the 20th Century had the highest inflation ever. What might be in store for us in the 21st Century? Bryan and Meb discuss this, touching on various governments’ ability to pay debt, growth rates, Bryan’s red-flag metric (when the interest coverage ratio to GDP exceeds 5%), as well as the most likely path for US and global interest rates.
Meb then uses his recent trip to Greece as a springboard for a discussion about the future of the EU. Bryan tells us it’s an all-or-nothing situation. And the concern now isn’t over Greece, it’s over Italy. It might be the first country to drop out of the Euro. If so, it will face severe consequences in trying to be independent. Plus, it could have a domino effect, leading to other countries leaving and the entire system falling apart. He concludes by telling us that “at some point, the stresses are going to be so great that some of the countries (in the European Union) are eventually forced to leave.”
Next, Meb moves toward Asia. He brings up a quote from Bryan about the future market-cap of Asian stock markets (as the biggest in the world) and asks if this is a no-brainer “buy Asia” right now. Bryan gives us his thoughts but notes that Asia has lots of internal issues that need solving before they can challenge the US as the primary engine of returns going forward.
Next up is an interesting discussion of what investing used to be like, how it changed, and how it might change for us going forward. The conversation touches on investing in the 1800s, how World War I flipped everything on its head, and the current concern of nationalism.
There’s plenty more in this episode – the need to be conscious of how integrated global markets are these days… the historical period that most closely resembles today’s investing climate… what Bryan is working on now… And Bryan’s most memorable trade.
Get all the details in Episode 110.
Links from the Episode:
- 1:58 – How Bryan became interested in creating a massive financial database
- 4:27 – At one point did he realize this was going to be a business
- 6:17 – The motivation behind Debts, Defaults, Depression and Other Delightful Ditties from the Dismal Science
- 9:36 – Reflecting on the world’s first billion-dollar company, Standard Oil, as we approach the possibility of the first trillion-dollar company
- 14:10 – First 10 and 100 billion-dollar companies
- 15:09 – Bets on who will be the first trillion-dollar company
- 16:59 – Which of the companies approaching trillion-dollar valuations faces the highest risk of government oversight
- 18:08 – What are the prospects for inflation moving forward
- 20:49 – Any market factors we should be looking at as warning signs for investors
- 22:45 – What is the trajectory for interest rates
- 24:40 – Future for Europe and the Euro
- 27:46 – Will Asian stocks overtake US equities in market cap
- 31:15 – How the tariff wars will play out
- 32:12 – What assumptions about markets could be flipped on their head moving forward
- 32:39 – GFD Guide to Total Returns
- 32:48 – Ken Fisher’s books
- 37:54 – How Bryan’s historical research has impacted his views on his investments
- 38:44 – Elroy Dimson Podcast Episode
- 41:44 – What topic did Bryan find most fun in researching his book
- 43:09 – Does the market landscape today remind Bryan of any historical market period
- 47:38 – The work they did adding to Nobel Laureate Shiller’s work
- 51:42 – Any big projects Bryan has planned
- 54:21 – Data on private companies’ market cap
- 57:01 – Most memorable trade
- 58:33 – Following Bryan – Global Financial Data’s website, the GFD Blog
Transcript of Episode 110:
Meb: Listeners, a pre-podcast note, for about the first five minutes, the audio is a little muffled, but I promise you, it gets better and you want to listen to this one. It’s a really fun discussion. So stay tuned.
Welcome Message: Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing, and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Welcome, podcast listeners. It’s full-on summer here in Los Angeles, and today we have an awesome show for all you market data hounds. Back in 1990, our guest began collecting, transcribing financial economic data from historical archives all around the world. Meanwhile, he went on to become the president and CEO of Global Financial Data. We’ve been a long-time subscriber. He’s also a teacher, author having most recently written “Debts, Defaults, Depression and Other Delightful Ditties from the Dismal Science.” We’re happy to have him here today. Welcome to the show, Dr. Bryan Taylor.
Dr. Taylor: Thank you very much.
Meb: So it’s great to have you and, you know, we’ve chatted before over lunch and I’ve known you for a really long time. I was actually in prep for this podcast trying to find some of the oldest conversations. I remember citing you in some of our papers and presentations almost a decade ago, which is crazy how time flies. But for those who aren’t familiar, maybe take us back a little bit. I don’t actually know the origin stories of how one goes and starts with the interest, or even the idea of building a massive financial database. Maybe walk us kinda through that process on how you got to where you are today.
Dr. Taylor: I have a PhD in economics. And for a number of years, I was teaching both finance and economics. Then I became a broker at Dean Witter. And when I was doing that, my goal was to help my customers get a higher rate of return. And so I figured the best way to do that was to understand how financial markets have behaved in the past in order to, you know, help fully determine how they would do in the future.
So I started to collect data on just the basic industries that were out there to get as long a history as possible. And once I did that, I started sharing what I had collected with other people. And you have to remember that this was 25 years ago when all of the digital data that is available today simply was not available anywhere. And so the people who I showed the data to were really fascinated by it and wanted to get access to it. So that’s how the idea of putting together a vast historical financial database came about.
And so after collecting the data for several years, I put the data up on the internet offering it to anyone who wanted to subscribe to it, and I got lots of people who wanted to subscribe to it. And so I just then proceeded to expand the database as much as possible. Now back then, you had libraries with books in them. And I would go to all the libraries and get the books and Xerox the pages, and bring back stacks and stacks and stacks of pages to then convert the data on the pages into electronic format so that our customers could collect the data. And so one thing just led to another. And I’ve been collecting data ever since then, and still continue to add data to the database every single day.
Meb: What point was the timing when you said, “Okay. You know, maybe this is actually, you know, the root of a functioning business. Was there a moment when you said, “Hey, I’ve been getting all this inquiries. I’m eventually gonna launch this as a sort of for-profit enterprise.” Was there a year? Was there a particular moment that came to mind?
Dr. Taylor: No, it was fairly gradual. I mean, initially, I would put the data on three and a half-inch floppies and CD-ROMS and mail them out. Then eventually, we went online and made the data available so we could download it directly. But, yeah, yeah, I started cutting back on my classes, and then it just became a full-time job.
So there was no, like, this-is-it point. But I think after doing it for a couple of years, I began to realize that this is going to be the main focus of my life rather than teaching. [inaudible 00:05:24].
Meb: That’s awesome. And then, you know, it’s funny how often I see y’all cited. As some of the top hedge funds and writers in the world, we’ll often cite your research. We had a fairly humorous beginning. I think I told you this when we had launched many years ago. But the way that I originally came across GFD and how to access was through my friend’s wife who was a Stanford graduate business school student. And then many of the business schools, I think had had access to some of these databases, but yours was really the only one that had so many of these total return series. And as a young quant, one of the biggest problems was always getting access to quality data. And there are so many just junky sources out there. But if you really wanted to test ideas on asset class and sub-asset class, everything else, yours is a really big content, one of the best sites. And then since then we’ve been a subscriber for a decade.
So if you think about this database, it’s part engineering and simple kinda drudgery work of uploading and finding it. But it’s also a lot of detective and almost historian work where you got to go find these data series. And the cool part about your book again which the title is “Debts, Defaults, Depression and Other Delightful Ditties from the Dismal Science.” By the way, which, listeners, will be free to download on Amazon on June 30th. So in a couple of days, Saturday June 30th, you can download this for free, or buy it for five bucks.
So kind of my first question is, you know, you started to meld being a historian and being a database administrator. What are some of the main… As you think about the mindset of learning from the past to prevent similar mistakes in the future, is there a subject that you started to think about when you started writing this book that really stuck out in your mind as valuable for readers to think about? And we’ll get very specific on topics in general. But was there any sort of initial reason for deciding to write this book or a particular topic that made you say, “Huh, I really wanna put this together as a piece?”
Dr. Taylor: Well, this book is actually the part of two books, because the two books are a collection of floods that I have written using data from the database during the past five years. And so, what I wanted to do was to go find stories that people would find interesting about the past and about the financial markets. And in particular things that, you know, they would hopefully know absolutely nothing about, and could enlighten them about some of the crazy things that gone on in the financial markets in the past. And hopefully learn from them and get an understanding of how the financial markets have worked in the past, and maybe some inference about how they’ll work in the future.
So visually I was thinking one book, but then I realized that there was so much material in this book that it needed to be split into two books. So this book is the first book which came out a couple of months ago, and it’s mainly a macroeconomic book. And so I wanted to throw together subject about the economy in general. The second book which should be coming out in July or August as the latest is called “Stock Market Scams, Swindles and Successes.” And it goes over a number of different cases from the East India Company which the Dutch originated in 1601 up to the companies that Donald Trump ran back in the 2000s.
So both of these books cover an extensive amount of history. And the idea is just to show people how you can use the data in the database to understand what happened in the past, what some of the patterns are, and then to give people a greater feel for why it’s important to look at the past and what we can learn from it.
Meb: So, Bryan, I think that’s interesting, and let’s use a recent example as sort of a timely historical crystal ball. You know, we have a scenario right now where there’s about half a dozen contenders, they’re getting pretty close to becoming the first trillion dollar company, and you had some fun pieces where you’ve talked about four centuries of global research in four paragraphs where you kind of look back and you say, “Well, what was the world’s first billion dollar?” Then $10, then $100 billion company. Maybe talk a little bit about that, because I thought that’s a pretty timely but fun history lesson as well.
Dr. Taylor: Sure. Well, the first billion dollar company in the world was actually Standard Oil. And the story about how they became the first billion dollar company is actually quite interesting, because Standard Oil was founded by Rockefeller, and it was traded over the counter actually when it was the largest company in the entire world. Because Rockefeller owned most of the stock and he basically didn’t care about other people owning the stock. It was not important to him. So he didn’t have to raise any capital. So he just allowed his shares to be traded over the counter. And it wasn’t until 1920 that the stock actually listed.
Now, in the 1880s, Standard Oil took basically complete control of the oil business in the United States. What he would do is he would lower the price to drive his competitors into bankruptcy, and then after they were forced into bankruptcy, he would buy them out and take them over. So by the 1890s, he represented probably about 80% of the oil market. Then you had the Sherman Antitrust Act passed. And there were a couple of companies that the government went after to break them up, and one of them of course was Standard Oil. So the government took them to court, sued them, won, and decided to break up Standard Oil into over 30 different companies.
Now, in a way, this was actually beneficial to the shareholders, because instead of having one huge company run by Rockefeller, you would have 30 companies and each of them would be freed up to maximise their profits on their own. So the interesting thing is that after the Supreme Court passed the decision to break up Standard Oil, and the time when they were actually broken up, the stock price of Standard Oil increased. And the other interesting thing is not only that, you have the largest company in the entire world being traded over the counter. It wasn’t listed on a single exchange. But they actually listed shares that represented Standard Oil after it had been broken up, both in terms of the Standard Oil company of New Jersey which is now ExxonMobil and the 30 companies. And they were called the Standard Oil subsidiary shares, and the Standard Oil ex-subsidiary shares. And the subsidiary shares actually increased in price more than the ex-subsidiary shares, the ExxonMobil shares.
And by the time that the company was actually broken up, in 1911, its market capitalization had increased from 400 million to a billion dollars. And so it probably would not have become the first billion dollar company if the government had not decided to break them up. Now, after they are broken up, then the Standard Oil of New Jersey portion went back down to being worth only 400 million. But then a few years later, its expansion brought it up to once again be worth a billion dollars.
And that’s, you know, one pattern that you see historically is that when a company gets large such as Apple, Google, Facebook, others, in the United States, the government usually steps in to break them up. The government tried to break up Microsoft. The government tried to break up IBM. The government did break up AT&T. So getting large creates a potential threat to the company, because the government inevitably will wanna to break them up, because they feel they had too much monopoly power.
Meb: Interesting. Do you recall from the article, the first $10 and $100 billion companies?
Dr. Taylor: For the first $100 billion company, I could double-check on that. But that didn’t actually happen until about 10, 15 years ago.
Meb: I think the reference you…I think it might have been a Japanese company in the late ’80s might have been the first $100 billion if I’m reading this right.
Dr. Taylor: Yeah. I mean, that’s actually interesting, because at one point, Nippon Telegraph and Telephone was the largest company in the world. If you look at who is the largest company throughout the 20th century, it was always an American company except for 1989 when you had the stock market bubble in Japan. And that created Nippon Telegraph and Telephone, which at that point was actually bigger than the entire German stock exchange. But then after the bubble burst, it became smaller and IBM once again because the largest company in the world.
Meb: All right. So as a betting man, we have Apple is probably the favourite. If you had to place a bet, who do you think is gonna be the world’s first trillion dollar company?
Dr. Taylor: I would still go with Apple just, because they’re the closest and you have momentum there. So I would put my money on Apple.
Meb: You know, it’s funny because you have a scenario right now and I forget who was talking about this. But if you look back per decade, the leadership of the top 10 market capital stocks in the world, you have a scenario where something like six of the top seven currently are U.S. stocks and it’s dominated by tech. But that’s pretty rare scenario. Usually, you see it as somewhat a diverse mix where you may have Chinese company in there, or Japanese company in there, and I think if a lot of people have read some of your papers would know that our market certainly go in and out of favour. And it’s not always a scenario where the U.S. is the best performing stock market in the world.
Dr. Taylor: No. And we’ve put together several articles looking at which were the largest companies in the world for the world itself, for the United States, and for England. And, you know, going back to the idea that the government will often step in to break up or takeover the largest company, during the 1800s, the two largest companies in the world were the Bank of England and the North Western Railway. And after World War II, the government of England nationalised both of those companies. And they were no longer independent companies, but the London and North Western Railway, and the Bank of England, both were bought out by the government. And the shareholders just got bonds in exchange for the shares that they owned.
Meb: You know, as you talk about these companies getting big, and particularly in the U.S., coming under monopolistic threats from the government, I seem to remember that, like, it’s a pretty hard hurdle for companies to get to around more than 4% of market cap, and usually the stocks really struggle after that. Of those companies, I wonder which you think has the most threat from government oversight. Do you think it’s Amazon, Facebook, Apple, or do you think none of them, or do you think it will be somewhat of a backlash in tech on tech in general where they’re gonna all come under fire? Any sort of general thoughts there?
Dr. Taylor: Well, I think Apple, you know, is more of a production company, they don’t really have the spread that Facebook, Amazon, and Google have. And I think those three would be the ones that would be most likely to be regulated or broken up by the government, simply because of the reach of their advertising. And it’s not only in the United States but it’s Europe as well. Europe has put even more stringent controls on the companies than the United States has.
Meb: All right. So let’s start to shift gears because I got about a dozen questions on all sorts of fun, econ topics, and we can kinda bounce back and forth there. A couple of quotes from the book and chapters, one, is the topic that I think people don’t think about that much here in the U.S. Some of the older folks have memories in the 1970s, but younger generation has really never lived through a period of high or increasing inflation. They’ve really just kind of experienced this declining, disinflation, very moderate environment. But some of the older crowd still worries about it. And there’s a quote you have and I’ll let you run with the idea where you said, “The 20th century produced the worst inflation in human history. Every single country in the world suffered worse inflation in the 20th century than any century before. What causes this inflation to occur? Will the 21st century bear high inflation as well?” So any thoughts on the general perspective inflation with a sort of glance back at history?
Dr. Taylor: Well, currently, I don’t think the 21st century faces the threats that the 20th century did and the inflation that resulted. I mean, you had a period of very large government intervention in the economy, which eventually generated the inflation. You know, and that was basically the cause of the inflation in the 20th century was the government’s inability to pay their debts and getting rid of the debt largely through inflation. I mean, the first case, of course, would be Germany, where you had the inflation rate going up to several thousand percent per day at one point.
Now, it never got that bad here in the United States. But inflation is a way that the government can get rid of its debt. And, you know, I think that would be a fear that as the government debt mounts up, that could be a possibility. I mean, if you look at the situation in the United States right now, our economy is as strong as it ever has been, but yet the federal government is running a trillion dollar deficit this year. You know, and I think Japan is in the situation. And the situation in Japan isn’t so much getting rid of the debt through inflation. It’s just that the economy is so stagnant that it’s unable to grow.
And so I think in the 21st century, maybe the fear should be a lack of growth rather than high inflation. You know, I think a country like Venezuela is the exception to the rule. But my fear is more of a lack of growth than an increase in inflation.
Meb: Are there any sort of metrics, if you look back historically, as far as whether it’s debt to GDP, or whether interest coverages or anything else that you see is kind of rules of thumb where you look at these countries historically, and my god, you have these serial defaulters in other countries that seem to always be getting into trouble? Is there any sort of rule of thumb do you look at or factors you think are more important or not as warning signs for investors?
Dr. Taylor: I think that is not so much the debt-to-GDP ratio especially today when interest rates are so low. If you look at Japan, their debt-to-GDP ratio is at two. So the amount of outstanding Japanese government debt is twice that a GDP. But their interest rates are so low it almost doesn’t matter. And when I look back historically, when the interest coverage ratio to GDP, in other words, how much debt the government has taken on, and how much interest they have to pay on that debt exceeds 5%. That’s when it really starts to absorb so many funds that the government could get in trouble.
Sweden faced this situation about 20 years ago. Canada faced that situation. And it really had to reorganise their activities to reduce the debt. So I think that would be the primary concern is the interest rates. And right now, with interest rates in United States around 2% to 3%, even with the debt equal to GDP basically, you still only have an interest to GDP ratio of about 2%, 3%, that’s fine. But if the interest rates were to go up to around 5% or 6%, then the United States would have some real problems that we would have to deal with.
Meb: And so, you know, from someone who’s a student in history and you say that, “Look, government bond yields in the U.S. are at some of the lowest level in 700 years, I think it was a quote from your book, what do you see is the most likely path for U.S. and/or global interest rates? Is it a scenario where you think we can just kinda cruise here in these mellow low interest rates? Are there any sort of historical presence where you think it’s signs that, you know, you’re really at risk for a rising interest rate environment? Or the alternative where you’re in a Japan situation where you have two decades of low interest rates? And for the first time, one of the bigger surprise to me is even seeing negative sovereigns. Any thoughts in general on kind of what you may see as the future path?
Dr. Taylor: I would think that the Japanese scenario of low interest rates and low growth is more likely a result simply because of the fact that the interest rates in the United States are remaining low even though the Fed has pushed the interest rates up. But if you look at throughout the world, the interest rates in Europe, in Japan, in other countries remain very low. And there are really no factors to push the interest rates up dramatically.
So my concern again would be that a Japanese situation of continued low interest rates and low growth will continue. In part simply because the demographics are such that very few countries are enjoying high rates of growth in the developed world. And there’s just few opportunities for expanding the labour force, expanding the factors that go into production, which would enable there to be high growth and high inflation.
Meb: Talk to me a little bit about, so I just got back from a wedding in Greece, in Mykonos, and was in Italy for a bit in Bologna and Siena, had a really great time. Gained a few pounds. But talk to me, put on your econ professor hat, what do you think is the outcome? What do you think does the future holds for the EU? Do you think it’s a situation where, you know, there’s a lot of stressors? For example, you quoted, you know, in the book you say most German taxpayers say, “Let Greece default.” We’re talking about debt here specifically.
“Once the current financial crisis is over with, Greece will start breaking the rules again using the threat of default to get hundreds of billions from the rest of Europe. Greece is like a member of the Mafia who goes over to Germany and say, ‘Nice little currency you got there. Give me 100 billion or I’ll smash it.’ Avoiding default only drags the crisis out, then raises the eventual cost of Europe. It is time to let Greece default and move on.” What do you see is the future path for Europe and the Euro as well?
Dr. Taylor: Well, it’s sort of an all-or-nothing situation, because right now the concern isn’t over Greece since they’ve basically been bailed out by Germany. The concern is over Italy. And the fact that they might be the first country to drop out of Euro. But any country that drops out of the Euro is going to face severe financial and economic consequences just readjusting their economy to being independent. I mean, on the one hand, you have countries like Italy and Britain who want to not be controlled by the Europeans and their financial policies. But the consequences of leaving and going on their own are so severe that they just really don’t wanna pull the trigger. And then the fear would be that if a country such as Italy were to leave, it can have the domino effect and the whole system could fall apart very, very quickly. And you could have a northern group of countries that are still linked together, while a country like Italy or Greece drops out. And their country just really goes into a depression as a result.
So if the old thing of, “Gee, it’d be nice if I could control things, but, you know, don’t ask for something, you might get it.” And if you look historically at previous at previous currency unions which have existed, at some point, they do break apart. And it’s just, you know, what’s going to be the stress point that pushes it to that. So in the near future, I don’t see the Euro falling apart. But, you know, at some point, the stresses are gonna be so great that some of the countries are eventually going to be forced to leave.
Meb: You know, I think that the main stressor in Italy right now is the fact they’re not in the World Cup along with the Americans, we could commiserate when I was over there saying, “Neither country is in there, so I need to pick a team, maybe our Mexican neighbours.” But pretty bad showing from the recent champs Germany as well. Maybe they’ll get it together.
Okay. Let’s move east a little bit. So one of the cool parts of your work and database is you have a lot of great total returns for entire stock markets and market caps of entire countries and sectors over time that go back pretty far. And it’s a fascinating topic because I’ve spent the last 5, if not 10 years, talking extensively about home country bias and how the U.S., particularly to our U.S. investors, only makes up about half the world market cap, but that shifted over time. And at various points in history, other countries have been bigger. And so you have a quote where you say, “Europe is no longer an engine of growth within the world economy and under Trump. Americans’ willingness to pursue open trade with the rest of the world is in question, where it not for the growth and the size of the internet stocks to dominate American stock market, Asia’s share of the world’s market cap would’ve grown even more during the past decade. How long before Asian stock markets become larger than America’s? Asia will probably be larger than America by 2030 and have over half of the global market cap by 2040 if not sooner.” So is this is sort of a no-brainer to buy Asia right now? So what other takeaways to make or suggestions when thinking about that quote?
Dr. Taylor: Well, the other side of that is just the fact that Europe has been a very poor investment during the past 10 years or so. I mean, you had a period of financial repression in the world from 1914 until the 1980s, in which European governments specially regulated financial markets and kept the European stock markets from growing. You have the same thing in Asia because you had socialism in India. You had communism in China. And even though there was a stock market in Shanghai up until the 1940s, once the communists came into power it was completely closed down. But now, the Asian countries have emerged. They are growing, and there’s no reason why they won’t continue to grow.
India is having very high growth rates and the size of their market has expanded dramatically relative to the rest of the world. So yes, I mean, I think the Asian countries will continue to grow and expand. They’re certainly a much better investment than the European countries. But, you know, still, the United States is the engine of growth today. We’re the country that has the Facebooks and the Googles and the Amazons and the other companies that are spread throughout the world. Now, China, on the other hand, has tried to imitate those companies with their local versions. And those local versions are very well developed within China. But China has to learn how to expand to the rest of the world. And with the, you know, political controls that they have in China, the controls over their financial markets and so forth, until they let those markets go free, I just don’t see how China can expand.
So on the one hand, yes, Asia definitely has lots of opportunities for growth in China and India, but they still have a lot of internal political problems that they have to deal with before they can become the engines of growth similar to what the United States is.
Meb: So there are some relatively recent interesting news flow, I’m not a big economics guy, but what do you think history tells us about this tariff spat or war we’re now seeing between the U.S. Trump and China? Any thoughts on how that may play out?
Dr. Taylor: You know, you just hope it doesn’t play out. You just hope that both sides get to their senses and avoid what happened to the 1930s where I remember a graph that Kindleberger drew and it was sort of like a spider’s web, and you could see the volume of trade in the world gradually sinking down into a black hole. And that’s what everybody wants to avoid. And I just don’t see any benefits from a trade war to any side. And we just have to, you know, do everything we can to stop that because no one wins a trade war. Everybody loses a trade war.
Meb: I had fun flipping through the book because there’s so many great examples of history. You talked about hyperinflation. And we used to give out, you can actually go on eBay and buy hyper inflated currencies from Zimbabwe or Turkey or all these other many places for very cheap, and I used to give them out on speeches. But a really interesting framework. And you wrote this probably 10 years ago. So we’re going back in time here. And I think this was from “The Global Financial Guide to Total Returns.” And in the post I wrote, I said it reminds me of a question from Ken Fisher’s book where he says, “What can you fathom that others find unfathomable?” Because there’s so many topics in investing that people just hold as just rules as, like, this is unmutable law. And so in your paper, you say, you talk about investing in the 1800s, which most of our listeners probably weren’t around then. We may have a couple, but you said, “Here’s about six statements about investing in financial assets in the 1800, one, most people invested in bonds, not stocks. Virtually all of an equity investor’s returns came to form of dividends, not capital gains. There’s very little difference in the returns of stocks and bonds.
“Three. Four, since the government did not issue treasury bills and deposits were not federally insured, there was no risk-free investment available to investors. Federal Reserve didn’t exist yet. Bond and dividend yields declined over the course of the century as the risk to investors and inflation declined, and although prices rose and fell in any given year. From 1815 to 1914, there’s no overall inflation in the U.S. and most countries were on the gold standard.” And then you said, “What is interesting about these points which would’ve been taken as a given before 1914 is that during the 20th century, none of these assumptions proved to be true.”
So maybe talk a little bit about as a historian, the experience kind of coming up with that perspective and conclusions, and also as you look forward. Financial markets have changed a lot in the last 100 years, how really all of those assumptions were flipped on their head. What do you think might be different looking forward as people think about investing? And what may be some of the case were this time it’s not different, and this is what we’d expect to see from history as well?
Dr. Taylor: Well, the primary thing that really flipped everything on its head was World War I, because in July of 1914, you really had a globalised international financial market centred on London. And if you were the Russian government, you would issue bonds. And those bonds would be paid in German Marks, French Francs, U.S. Dollars, British Pounds, Dutch Guilders, because all the currencies were linked to one another. And the way that the currencies were linked to another in part was through the bonds that have been issued by the Russian government, the bonds that had been issued by the American railroads. And if there were some difference between the exchange rate of a country and what the par value should be, they would just buy and sell the bonds and arbitrage the difference that way.
But once the war started, the international financial system collapsed. And the rest of the 20th century basically was spent putting it back together again. It wasn’t until the 1980s and especially the 1990s, towards the end of the century that the true globalisation, which had occurred 100 years before was really put back into place. Now, it was a different world that we had as a result of that. But, you know, no one in 1914 could have foreseen the degree to which the financial markets would just collapse, and in part because they were so integrated. And I guess, you know, the concerns of how could things be different in the 21st century from what they are today, would primarily be that the market has just become so integrated that we have returned to the way things were before 1914. And money does flow freely with the way that you have PayPal, credit cards, cryptocurrencies, and other things nowadays. Money can flow as freely as possible from one country to another. You can buy shares in any country from another country, and that simply wasn’t true 30 years ago.
And so the hope would be that markets continue to integrate, become international, and people can find the best places to invest their money. But the concern would be that nationalism, which wants to restrict international trade could raise its head and create the problems that existed after World War I in the world. And so, I mean, that’s really what we want to avoid. And if that were to happen, you would have the slower rates of growth that you have today, because of the barriers to trade. So the hope is that, you know, we can continue to open up the global economy. But, you know, there are people who don’t understand the benefits of that, and that’s unfortunate.
Meb: You know, so as you think about reading this book, and there are so many historical examples where, you know, as an investor, I mean, this is an older post but you talked about the 1970s, when Asian markets were emerging, they displayed very volatile tendencies. Hang Seng rose 880% between 1971 and February 1973 only to collapse 91% by the end of 1974. Poland and Russia and other stock markets went through similar bubbles and crashes when they emerged from communist rule in the 1990s. And, you know, there’s so many examples recently. Greece declined, I don’t know, 80% in this last kinda depression for them. Cyprus I think was over 90. And plenty of countries really struggled coming out of global financial crisis.
And so we had a fellow data historian, Professor Elroy Dimson, on the podcast who wrote the very great book, “Triumph of the Optimists.” And I think his perspective would be, I mean, you got to be a little bit of a comedian as well as a historian, because he looked back at these times in history where these countries will decline by 80%, 90%, which is…and 80% has happened in the U.S. in the Great Depression. And you’ve got to almost smile and say, “Okay. Well, how do you diversify that away?” And I think his recommendation would probably be a global market cap-weighted portfolio buy and hold.
But I’ve also seen you reference a few times in writing the possibility of market timing as well. So maybe talk a little bit about, you know, how your historical research has affected your world view on investing, and the ideas, and concepts, and if anything has changed. And maybe nothing has changed on how you think about investing versus maybe how you did 10, 20 years ago?
Dr. Taylor: Well, I think that today, you just have to be very conscious of the global markets, and how integrated they are, because they have become more and more globally integrated over time. Now what that has done is to cause markets to move together to a degree which simply wasn’t true 20 or 30 years ago. So I would think, if anything, the developments in the global market over the past 20 years would favour, you know, investing in a global index. And the benefits of choosing one country versus another over the long term just are not as great today as they were in the past, simply because the markets are so interdependent. And if you have news about a trade war between China and the U.S. or anything, all the markets are affected simultaneously.
If you look at the financial crisis back in 2008, every single market, you know, went down together in by similar percentages. Now you may have particular impacts such as Greece during the Euro crisis which would cause those individual countries’ markets to collapse. But I would say that I would agree with Dimson there that a global market cap index is, you know, probably a good idea nowadays. Me personally, I have my money in the S&P 500, in the Nasdaq. You know, I feel right now, the United States is performing and will continue to perform better than other countries’ stock markets. The U.S. will perform better than Europe. And then in United States, you avoid the risk that you have in the emerging markets. Emerging markets give you a higher rate of return, but they also give you a higher rate of loss. And if you want to avoid that, you know, I would go with a safer market like the United States.
Meb: Yeah, that’s certainly been the case for this cycle. The U.S. has really been the top-performing market and not by a little bit, by quite a bit. You know, as you put together this book and chapters, anything we didn’t cover? What do you really enjoy researching, writing about the most? You know, and there’s a lot of times, you know, I think where I’ll be writing about something and there are some topics that are kind of drudgery, and there are some topics that are just insanely fun where you’re uncovering a new gem or idea that maybe people haven’t thought of or talking about. Anything that comes mind to there?
Dr. Taylor: Well, I just like to find out, you know, all the ways that people think they can beat the market, how they can outsmart the market. And they always lose. The market always wins. I mean, because the market is the mind of millions of different people, and anyone who thinks that they can outsmart everyone else is just fooling themself. And, you know, maybe for a while, yeah, they see something that someone else doesn’t have, but they don’t know how to step away. They don’t know how to walk away from their profits and just enjoy them. They always wanna push it to the limit. But then they inevitably, like Wile E. Coyote, step over the edge and just fall down to the bottom. And that’s just a pattern over and over again. It’s, you know, as the saying goes, you know, “Bulls make money. Bears make money. But pigs get slaughtered.” And there’s a lot of cases of people getting slaughtered in my book.
Meb: I’m gonna use your Wile E. Coyote example at some point. Today, as you look around through history, does today in general remind you of any other specific time over the past couple hundred years? Do you look back and say, “Look, there’s a perfect analogue,” or are we in kinda totally unique sort of era?
Dr. Taylor: Well, I mean, there are both similarities and differences. I think the similarities are with the world at the beginning of the 1900s in the sense that you do have a global market, capital is free to flow throughout the world. And that will ultimately benefit investors not only in the developed countries but in the developing countries as well. You know, right now, things are going pretty well. So it’s sort of, you know, as the saying goes a Goldilocks economy. But, you know, the concern is what’s out there? I mean, we’ve been through a couple market bubbles.
And on the one hand, I think people are so conscious of the possibility of market bubbles that that’s less likely to be a factory unpacking the next market collapse whenever it occurs. But, you know, I mean, you were talking about how the U.S. has outperformed other markets. One thing I did was I analysed how many markets went up or down in any particular year. And although a few people in the United States may realise it, most of the world went through a bear market a couple years ago. U.S. did not. Our market sort of stabilised rather than going down. But Europe, many of the emerging markets had declined to 20% or more. And they bounced out of that.
So right now, we’re sort of at the beginning of a bull market phase. It could last for two or three years. But as the Fed gradually raises interest rates, I think in a couple of years, that will kick through and could stop the current bull market. But, I mean, I think for the next year or so, we’re, you know, in pretty good shape.
Meb: You know, what’s always surprised me, when I kind of watched what you all are up to or what you’re writing about is kind of the consistent gems or innovation. I mean, I recently saw you guys put out two articles, and you feel free to talk about either or two new modules. One was when you kind of unearthed a new bubble that happened during World War I. I wanna say was with Dutch shipping…
Dr. Taylor: It was Denmark.
Meb: Denmark. Maybe tell us a little bit about that? Because I thought that was really interesting. As a student of bubbles, I love reading about these and some of which are totally irrational, and some which maybe kinda irrational. Do you wanna summarise that a little bit?
Dr. Taylor: Sure. Yeah. Denmark was neutral during World War I. And a good portion of Denmark’s economy was in shipping. So when World War I began, they were neutral. They could ship goods from one country to another. And so the shipping industry just exploded, and these stocks of the shipping companies increased in value within a matter of a year or two, five-fold. And it wasn’t just bubble in the sense that everybody was pouring money into it, those stocks. And, you know, on the anticipation that at some point they’ll make profits. They did make profit. They did make dividends. The dividends of those companies increased by 400% or 500%.
And so in a way, it was a rational bubble because people are saying, “Oh, they used to pay a dollar dividends, now they’re paying $5 in dividends. So I’m gonna go put my money into those stocks so I can get the higher dividends.” And the bubble lasted basically as long as the war. Once the war was over with, they no longer have the benefits of neutrality and the stocks collapsed down. And they went right back to where they had been at the beginning of World War I.
So in a way, they followed a very logical process. The Danish had sort of a monopoly there. They took advantage of it. Stocks went up as a result. When the war was over with, they lost that monopoly. Stocks went right back down to where they started from. But the interesting thing I’ve pointed out was this was a bubble, which until we had done the analysis of the Danish stocks, no one had ever talked about. No one knew that they existed. And it just makes you wonder, “What other bubbles are out there, you know, that we could discover or other people could discover that no one currently knows about in the past?”
Meb: Tell me a little bit about, you know, as someone who is very close relationship and have spent an enormous amount of time with stock market evaluations and specifically the Shiller CAPE ratio, the 10-year PE ratio. I saw a recent announcement where you guys added something like another 40 years of history to Nobel Laureate Schiller’s work. Tell me a little bit about that, one. But two, also how you went about collecting and building that time series? Because I imagine there’s a lot of detective work going on in trying to put together something like that and extrapolate it back another 40 years.
Dr. Taylor: Yes. I mean, one thing that we have done is we have built up the most extensive databases for United States and the United Kingdom stocks available anywhere in the world. Our U.S. stocks database goes back to 1791, which was when the Bank of the United States was established, and the interesting thing about the Bank of the United States was that when it was established, its capital was $10 million. The capital of the entire U.S. Stock Market was about 14 million. So that single company represented about 80% of the United States Stock Market. The same was true and the second, Bank of the United States was established.
So we have data back to 1791 for the United States, back to 1694 for the United Kingdom. And in order to create indices for the U.S. and the United Kingdom, you need three things, you to price data, you need the dividends, and you need the shares outstanding so you can do a cap-weighted total return index, but then you also need the earnings. And, you know, you’ve heard of Standard & Poor’s. And Poor had introduced the American railroad guide back in the 1830s. And he kept track of all of the earnings, the prices of the railroads from the 1830s on.
So we collected that data, put into the database, and then calculated price index, added the dividends, calculated total return index, add their earnings, and then we were able to calculate the PE ratio. During most of the 1800s, railroads were 90% of the market. And so an index based purely upon the railroads would represent basically the entire market. So after we had collected all of this, we calculated the PE ratios for the companies using 25 of the largest railroads at each point in time in order that we could expand the Dow Jones Transportation Average, which of course, then was the Dow Jones Railroad Average back on a daily basis from 1885 back to the 1830s.
And so we were able to calculate the PE ratios and then calculate the CAPE ratios based on the PE ratios. Now, the interesting thing that we found was that initially, the CAPE ratios were quite high, because the railroads were reinvesting their money into the railroads to build them up. But then over time, as the railroads became more established, they started to pay dividends back to their shareholders. They started to generate earnings rather than just reinvesting all their money.
And so the PE ratios and consequently the CAPE ratios declined. So they produced the results that we would have expected. But now, you know, with the Shillers data, it goes back to 1870. Now, our CAPE ratios will go back to 1830s. And so you can see under different circumstances how the CAPE ratios perform in the United States.
Meb: I love it. Well, I’ve [inaudible 00:51:43] some of our papers and books with the extended data. And look, I wanna give you a compliment. I’m glad you and your team are doing it so we don’t have to, because I know it’s an enormous amount of work. So we’re extremely thankful that someone’s doing it. Bryan, you got a very curious mind, anything that you’re thinking about these days or pondering or researching now that you think is pretty interesting or have on the to-do list for the summer or the next couple of years?
Dr. Taylor: Well, what we’re working on right now, and I’ve written several papers on this is the ratio of market cap to GDP and how that’s changed over time, and the factors that have influenced that over time. I put together data on the market cap for the U.S. and the U.K. going back to the 1600s. And we also have data on GDP going back to the 1600s. So we can see how the market cap of all the equity markets have changed relative to GDP. Now over time, it has increased, but there are also periods in time such as between World War I and the 1980s where especially governments in Europe nationalised. They placed restrictions on new investments, and that impacted the growth of those economies. I mean, if you look at returns to shareholders in the United States and Europe, over time, the returns in the United States have been better in part because the United States government hasn’t introduced the financial repression that existed in Europe during most of the 20th century.
And so one reason I wanted to do this was, you know, a concern that the government might try to control markets in the future and to show that that ultimately hurts investors. More people have their money in the stock market today than ever before. And if the government tries to control the markets and repress them, everyone is going to be impacted. Everyone is going to be hurt by this. And I wanted to show that, you know, this is something which is going to impact everybody, it’s not just something that’s the top 1%. It affects everybody who is in the market. And so that’s one of my concerns right now that I’m doing research on.
Meb: You know, here’s an idea for you, and you may have this already, so I don’t know. One of the big changes we’ve seen in the U.S. in particular over the past 10, 20 years is due to increase regulations a lot fewer public stocks, and companies just stay private longer. It’d be kind of fun to see, and I think the U.S. government publishes this number, but basically if you were to come up with a time series of one, number of public companies and number of private companies, but more interestingly, probably the private company market cap by year. I don’t think you’d do it by month, but by year over time, is that something you guys have, or if not, do you think you could cobble together?
Dr. Taylor: No, we have that information. If you look at the number of publicly listed companies on the two exchanges, Nasdaq and the New York Stock Exchange, that has declined throughout the 21st century. There was probably about 8,000 or 9,000 companies listed on the New York Index and Nasdaq in 2000. Now there’s only about 3,500. The number of companies listed has declined by half. And that’s a trend you don’t want to see. But the regulations are so strict that most companies are like, “Hey, you know, I don’t wanna go through that.” Or once they become a large company which could threaten a Google or an Amazon, Google and Amazon just buys them up.
And so I think that’s a real threat that, you know, whereas, yes in the 1990s, you had all the internet companies, you know, coming out and most of them collapsed. But you have that entrepreneurial spirit there. And my fear is that the government regulations could strangle some of the entrepreneurial spirit which then would hurt the economy in the long run. You know, under the Obama administration, growth was not the main goal. And we need growth to be the main goal in order to expand the economy and to help the stock market to provide better returns to the investors.
Meb: And I’m just thinking I’m wondering, and I doubt this is the case, but as more companies stay private, if it actually affects so to a very large degree, I would assume it’s pretty minimal, some of the statistics like a market cap, market cap, public market cap to GDP, if there’s a large market cap of private companies, but I would assume it’s probably pretty minor size and comparison although I don’t know that. So a fun idea for an article in your summer to-do list, I don’t know.
Bryan, we got to start winding this down. We’d love to keep you here all day. But question we always ask everyone on the show as we say, you know, back in your history as an investor as well, is there one investment in particular that stands out for you personally as the most memorable? It could be good. It could be bad. It could be neither. Anything comes to mind?
Dr. Taylor: Well, you know, I mean, most of my time is dedicated in collecting the data. And so, you know, I’ve made good investments. I’ve made poor investments. You know, anyone has their ups and downs. I think what I had basically concluded is that just staying in the market and riding out the market tide is the best way to go. I mean, right now, my money is in the Nasdaq. It’s been on the Nasdaq since 2008 when I was like, you know, this collapse is crazy. It’s going to bounce back. And I just poured everything I did into the market, and it’s turned to be a wise investment. So, you know, I guess that would be my best investment was just to leave everything in the market and ride the tide.
Meb: Easy to say, hard to do, certainly emotions for investors. We talk a lot about it, you know, the buying and holding and ignoring all the geopolitical news flows is one of the most challenging hurdles for many investors, myself included, and that’s why I’m a quant and rely on people like you. Bryan, where can people find you if they wanna follow your research, and if they’re interested in subscribing, where are the best places to go?
Dr. Taylor: Well, our company’s name is Global Financial Data. And so our website is globalfinancialdata.com. If you go to the website, there’s a link there called research. And one of them is the GFD blog. So if they want to follow more articles that I’ve written, and I generally try to put up a new article every week, then I encourage them to go to our GFD blog and to read what I’ve put up recently. And I think, you know, in the past few months, I have put out some very interesting articles from a long-term perspective about changes in the markets, both in the United States and the world. And, you know, this research that I had done since the book’s been published. So hopefully, your listeners will go there and discover things that they don’t discover in the book.
Meb: We’ll make sure to add all these show notes to the blog with links of some of your articles as well as a link to your new book on Amazon, “Debts, Defaults, Depression and Other Delightful Ditties from the Dismal Science,” which as a reminder, you can download for free on June 30th, Saturday, otherwise purchase at any time. Dr. Bryan Taylor, thanks for taking the time out today.
Dr. Taylor: Thank you.
Meb: Listeners, you can find more on the archives at mebfaber.com/podcast. Subscribe the show on iTunes or our new favourite, Breaker. Please leave us a review. Let us know how it’s going, good, bad. Suggestions, you can send to the mailbag at [email protected] Thanks for listening, friends, and good investing.