The Breakdown - BONUS: Rubbish Rallies and Investor Amnesia by the Finance History Guy Jamie Catherwood

Episode Date: June 15, 2020

After a week where bankrupt Hertz pumped 890%, the question is: what is the historical precedent?  Luckily, we have finance history guy Jamie Catherwood to fill us in. In this essay "Rubbish Rallies" (written by Jamie, read by NLW), Catherwood tells the story of an 1820s scam that turned into an 1860s market mania - even though everyone knew it had been a scam the first go around.  History might not repeat, but it certainly rhymes.  This is a bonus episode of The Breakdown, recorded originally last week as part of a private beta test for new content forms. If you like this type of episode, let me know @nlw on Twitter. 

Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and CipherTrays. The breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. What's going on, guys? Welcome back to the breakdown. This is an experiment in this special bonus episode. So some of you may have seen that for the last couple weeks, I've been doing a beta test of some new types of content.

And really what this is about for me is just exploring what type of bonus or auxiliary content would be interesting for the breakdown audience. And so last week, obviously so much of our discussion was about the Robin Hood Rally, right? And the Wall Street Betts era of new investors and what it means and is it new or is it a reflection of something. old. And so whenever there's a discussion of whether some new trend is actually a new trend in finance or is really just a version of history repeating or rhyming, I turn personally to Jamie Catherwood. Some of you have heard Jamie on the podcast. He did an episode about the history of pandemics from a financial perspective. But Jamie is the finance history guy on Twitter. He's at Oshonnessy Asset Management. And he wrote a great piece last week called

rubbish rallies. That is the story of an 1860s boom of land grants that came from an 1820s scam. Everyone knew the 1820s thing was a scam, but somehow still, despite that, these 1820s land grant scams pumped in 1860s. So this week when I was doing this kind of beta test, I actually decided to just do a reading of his piece. I shared it with Jamie. He liked it. He thought it was cool. So now, instead of just leaving it kind of buried, I'm going to share it with you guys. So I hope that this is a fun way to close out your weekend, which I can only presume was epic, and start a week which will be nothing but even more epic. So thanks for listening and check out rubbish rallies by Jamie Catherwood.

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financial institutions from crypto laundering risks while protecting user privacy. Years of research have created the world's best cryptocurrency intelligence with the best attribution and deepest token coverage. So if your virtual asset business isn't using CypherTrace to manage compliance risks, you should start now. Learn more at cyphertrace.com. A speculative year. 1825 was a year of bubbles and manias due to low interest rates and cheap credit.

investors that had relied upon government console bonds for their source of income were forced to reach for yield and returns by investing in riskier assets. Most of the speculative fervor in this period manifested itself in high-yielding Latin American debt, minting stocks, and domestic joint stock companies. Winton summarized the boom in domestic schemes. From this time, bubble schemes came out in shoals like herring from the polar seas, illustrated by the fact that the number of bills coming before Parliament for forming new companies shot up from 30 in March to 250 in April. All manner of companies were floated. Many were related to assurance. There were also some novel ventures, such as the Metropolitan Bath Company, which aimed to pump seawater to London so that poor Londoners could experience seawater bathing, and the London Umbrella Company, which intended to set up umbrella stations all over the capital. Many ventures, however, were errant swindles

designed to test investor credulity. Such examples include the Resurrection Metal Company, which intended to salvage underwater cannonballs that had been used at Trafalgar and other naval battles, and a company, possibly a parody which was set up to, quote, drain the Red Sea in search of the Golden jewels left by the Egyptians in their passage after the Israelites. While each of these ventures are ridiculous in their own right, this article will be focusing on the bubble marked out in the image below. Poyas. Gregor McGregor and the Poyas scheme. Before discussing the rubbish rally, similar to the one Hertz is enjoying today, we must understand the elaborate Poyas scheme of the 1820s. Gregor McGregor not only had the most Scottish name imaginable, but was named the King of Conmen

by the Economist for pulling off the greatest confidence trick of all time. How does one earn this royalty status among conmen and scam artists, you may ask? In McGregor's case, it was by finding an uninhabited piece of land off the coast of Honduras, creating a fictitious country called Poyas, and selling over a billion dollars worth of Poyas bonds in London by misleading investors into thinking the uninhabited jungle he had found in Honduras was actually a legitimate country boasting beautiful architecture, an opera house, parliamentary building, cathedral, and more. As he sailed back to London, McGregor began plotting how he would lure investors into his new scheme. As it turned out, however, the British public did not name much convincing.

for investing in the sovereign debt of another Latin American country like Poyas, given the rampant speculation in Latin American debt that already existed. McGregor was able to easily capitalize on this mania. When the Grand Sikau of Poyas, McGregor's self-appointed title, arrived in London, he wasted no time spreading the word about investment opportunities in his newly discovered kingdom. McGregor even published a book detailing the tropical paradise of Poyas, and how attractive the country was for both investors and settlers alike. An excerpt from the book below even claims that McGregor had avoided making exaggerated claims,

about Hoyas. An excerpt from the book below even claims that McGregor had avoided making exaggerated claims about Poyas. He, McGregor, has endeavored as much as possible to avoid making any statement which might appear doubtful or exaggerated, and he has therefore confined himself as much as possible to such plain and positive facts as are established beyond the shadow of a doubt. The hype surrounding McGregor and Poyas steadily evolved into a full-fledged mania, as thousands of engravings were sold around London and Edinburgh, portraying the magnificent buildings and infrastructure of Poyas. Just to reiterate again, the reality of was that Poyas was a largely uninhabited jungle, with no infrastructure of the sort, but no matter.

Nonetheless, offices were opened in London and Edinburgh for selling Poyas land grants to excited applicants at four shillings an acre. After drumming up a frenzy from the British public, McGregor focused his attention on courting investors. In 1822, the Scotsman issued 200,000 in bonds offering a 6% yield. Measured in today's money, the value of those bonds eventually reached $3.6 billion. Incredibly, the bonds were backed by the export tax revenue that Poyas would allegedly generate, despite the fact that there was no infrastructure, people, or business in the region. At one point, the Grand Sikau even secured bonds against the revenues of non-existent mining companies in Poyas. These boring details, however, did not prevent investors from purchasing McGregor's fraudulent bonds.

Perhaps this was due to the fact that McGregor's pitch came at a time when the government bonds only yielded 2 to 3%. Consequently, when McGregor offered investors a 6% yield on the Poyas bonds or double the government consuls yield, they leapt at the opportunity. chasing returns would cost many investors their lives. Trouble in Paradise Investors in the Poyas Kingdom were jolted back into reality when the settlers arrived at their new home in Honduras. The first ship, Honduras Packett, set sail on September 10th, 1822, with 50 settlers on board.

Many of them came from poor background, and they had left their homeland for the utopia that McGregor had promised. Few would live to take the return journey back to Britain. As the ship finally pulled into the port of Poyas, nothing could have prepared the passengers for what they encountered. far from being a tropical paradise with beautiful infrastructure, the land was uninhabited and undeveloped, apart from a couple of mud huts on the beach.

Unfortunately for the new arrivals, the discovery was only the beginning of their troubles in paradise. Shortly after they came on land, a hurricane tore through the region, sweeping away their ships. In an instant, the poyous investors and settlers found themselves stranded. Then, when the situation couldn't seem to get any worse, the settlers were stricken of either yellow fever or malaria. Eventually, seven ships in total came to poise with passengers looking to settle in McGregor's fairy tale paradise, Of the 240 that arrived, only 60 survived. The rubbish rally. So what does Poyas have to do with the Hertz bankruptcy rally?

Well, just like the rally in Hurt shares following bankruptcy as a logical and difficult to comprehend, there was a rally in Poyas assets some 40 years after the scheme was exposed as a worthless scam. The scenario would be like sponsorship packages for the disastrous fire festival rising in value after Netflix's documentary about the scam was released. The book's speculative notes written in 1864 gives an excellent account of this rubble. Rally that is equally confounding as the recent rally in Hurt Shares. What follows is an excerpt from 1864. But among the most recent remarkable recovery in the prices of worthless, or supposedly worthless securities, is that connected with the great country of Poyas, till within the last

eight or nine months it was presumed that the Poetian bond and land warrants were thoroughly dead and forgotten. Gregor McGregor, otherwise styled Sikau of Poyas, was mixed up and which through the attempted loan and sale of land warrants promoted emigration to the mosquito territory, which was described as a paradise of delights, but which was eventually found to be a land devastated by malaria and infested with animals of prey and venomous reptiles. No wonder, despite attempts to reorganize the undertaking and to infuse fresh blood into the management, that the successive reports received of disasters by sea and land to the vessel sent out caused the whole affair to be blowing up, and that the Sikau of Poyas and his colleagues suddenly sank into oblivion and disgrace.

The Poyas Bond was the first to feel the severity of the blow. It struggled and struggled hard for vitality, but the money advance was gone, and in course of time, it died out. Not so with the land grants. They were held to be worth something, even if ever so fractional, and representing territory, should there be, according to the Malaysian philosopher, only enough turf, a lark on, it might someday or otherwise produce a value. For a lengthen period, that value was nil, notwithstanding every now and then a few transactions took place. If the price went from 6d per acres to 10s or 15 shillings, a sudden flood of grants came forward and soon swamped the market. At one time or another, projects have been talked of for improving the whole area within the limits

of Central America. And since it has been said that Poetian claims would be admitted, the rumors have brought the grants into more notice, and again, the price is actively fluctuated. A few years ago, a mixed commission was named in Nicaragua or Honduras, which was deputed to investigate a variety of claims against the general governments of those countries, and then it was through the certainty of these securities, if they ever possessed a chance of being valuable, were approaching the important crisis. A sort of indiscriminate demand arose for them. Nobody actually knew the basis of the rise, but everybody spoke with a mysterious air, and talk of the prospects of a new El Dorado.

At this date, a great number of people got into these securities, and old stagers, at last, persuading themselves that there was something in reality in the grants and price, one pound and one pound shilling per thousand acres, to no small extent of territory for the money, the quotations went up to one pound ten shilling and two pounds. When parcels of the grants had been dealt in for a few months, and no further rise was attained, the fever began to cool. And little further, having been heard of the mixed commission or its progress, sellers appeared, wishing to be relieved of what they purchased. The result was natural. A decline occurred, and without any interval of moments succeeding, a reaction of five-shilling and ten-chilling very speedily took place. Everyone who was in

wish they had got out. And, to add to the disappointment, the Dutch, it is said, were so bitten by what was alleged to be false information that they had determined never more to negotiate the warrants. Here was a crushing blow to the future of the Polyasian land grants. It seemed as though they were doomed to complete extinction. Two or three friends of mine had purchased largely, regarding the warrants as a sort of lottery ticket. If they turned up a prize, all well and good, if, on the other hand, they remained a bank, they could afford to lose their money and not be prejudiced by the sacrifice. Many others were in similar condition, and though Poetian land grants drooped from the endeavors made to realize, and at length stagnated at the price of about five shillings permanently

for at least three or four years. There were no failures announced through speculation. One of these friends, who at that time had not the slightest idea that he would ever come to want, was subsequently by a series of misfortunes reduced to absolute poverty, and the last thing he attempted to part with was his thoughtlessly purchased parcel of Poetier's warrants. In his emergency, he went to another friend of mine to request a loan, and being a man of punctilious honor, he would not accept the amount without depositing security. That security, the friend's smiling as he received it, was this very parsable of poeasians. But the sequel is yet to come. A year or two passed, nothing more for the moment was heard about poey's stock or warrants. Singularly enough,

when the tide turned animation was again manifested in the low-class foreign stocks, a sort of presentiment possessed me, that old blue-and-green-backed security would come into vogue, and if not to the same extent as formerly, at least sufficiently, and so is to relieve in substantial state the necessities of this poor fellow. I bade him be of good cheer and assured him I felt convinced Poyes would rally in him a better man. I kept my eye on Poyes, principally for my poor friend's sake, although I am myself somewhat interested. And month after month, I ask among the second-class dealers and little go-men whether there is any price for land warrants. Some smile at the notion of a price for such a security. One, only one dealer promises to let me know

if there's anything in them. One morning, as I alight from the omnibus, which brings me near the Royal Exchange, I am tapped on the shoulder by my friend in the rubbish market, who says quietly and cautiously. There is a move in poise. They've gone rapidly to 30 shares per 1,000 acres. I ask if there can be any reason. None, he says, that I can divine. Perhaps it is, I rejoin, and request that he will let me know what the price is later in the day. He says he will. Meanwhile, I write off to my poir friend and tell him of the prospect of chains. That night, the price goes to 40 shillings, and the final quotation is, to use the customary phrase, 40 shillings to 50 shillings. There must, I fully understand, have been some activity in the market, for as I leave the city for home late,

I hear a jubilant spirit, an outsider, as he holds confidential converse with a lampposts, and slaps an imaginary friend on the back, wish luck to the cuckcacay of Poyace and the Kikikin of Cannibal Islands. My poor friend arrives in the morning, but not quite soon enough to secure the top price for up to 50 shillings. Poeses go, and as soon as they touch, they recede to 40 shillings. Like all people, when they see the value of their negotiable property rising, he hesitates to sell, and thinks naturally enough the price may still advance further. He, however, takes counsel from one or two intimates, who show him how desirable it is that he should seize the golden opportunity, and the chief of these being a broker, he resigns himself to his hands.

The sum obtained to example, considering that many thousands of land grants he possessed to liquidate numerous small pressing liabilities and leave something for his future wants. Never have I before seen so strikingly exemplified the indirect advantage gained, as it were, from a miscellaneous adventure. After this short recital, I think the majority of us may put to the question, what is and what is not an investment? The lesson. One man's trash is another man's treasure. Whether it be the vestigial assets of a fictitious nation called poise that was already outed as a scam, or the shares of a company that just declared bankruptcy, financial history is riddled with rubbish rallies that make absolutely no

sense on paper. However, they continue rallying until the inevitable crash occurs as investors are snapped back to reality. Everyone knows what the outcome of the Hertz fiasco will be, so tread carefully.