Global Financial Data has the most extensive collection of CAPE Ratios available anywhere.  Our CAPE Ratios cover over 50 countries and the CAPE Ratio for the United States begins in 1841, 40 years before the CAPE Ratios that were calculated by Shiller using data from the Cowles Commission. The Cyclically-Adjusted Price-Earnings (CAPE) Ratio is an inflation-adjusted average of earnings paid over the past 10 years relative to the current price of the market. A recession can have a dramatic impact on the CAPE Ratio, pushing it up as earnings decline, reducing the average amount of earnings paid over the past ten years.  A recession can have a particularly large impact if net earnings turn into losses which are netted out against profits in the future.  Although losses for the stock market as a whole are rare, they do occur. The last time the S&P 500 reported a net loss was in the fourth quarter of 2008, which was the first quarterly loss the S&P 500 had registered since 1936! Since 1871, the S&P 500 has never registered net losses for a full year, only for quarters in 1936 and 2008. We can see the impact of this loss on the CAPE Ratio by comparing the 7-year CAPE Ratio with the 10-year CAPE Ratio.  The 7-year CAPE Ratio has already removed the 2008 losses from its calculations while the 10-year CAPE Ratio will begin excluding the losses in 2019. As the graph below illustrates, the 7-year CAPE Ratio dipped below the 10-year in 2016 just as the 2008 losses were removed from the calculations.  Since then, the 7-year CAPE Ratio has remained below the 10-year CAPE Ratio and is currently about 4 points below. We would anticipate that the 10-year CAPE Ratio will see a similar drop even if there were no change in the price of the S&P 500, and with the S&P 500 flirting with a bear market, this will drive the CAPE Ratio down even further. It appears that the 10-year CAPE Ratio for the S&P 500 peaked in January 2018, ten years after the quarterly loss, and is now on a steady downward path for the next few years if only because the losses and low profits of 2008 will no longer be included in the calculation of the 10-year CAPE Ratio.  How much the current bear market drives down the CAPE Ratio remains to be seen.  

Global Financial Data has the most extensive database on historical stocks available anywhere.  In particular, we have collected data on stocks that listed on the London Stock Exchange from the 1600s until 2018.  London was the financial center of the world until World War I and many countries in emerging markets listed shares on the London Stock Exchange before a stock exchange even existed in that country.  This enables us to calculate stock market indices for emerging markets during the 1800s and 1900s before stocks listed on local exchanges and local emerging market indices were introduced. This is one in a series of articles about those indices. Singapore is one of the most important financial centers in Asia, and has grown from a small island of 1.6 million in 1960 to over 5 million people with a per capita income of over $55,000. Any information about the historical performance of stocks in Singapore is a welcome addition to the financial history of the city-state.  

Singapore Before Singapore.

Stamford Raffles founded Singapore as a trading post of the British East India Company in 1819.  The city became part of the Straits Settlements in 1826 and its capital in 1836. The British were defeated in the Battle of Singapore on February 15, 1942 when 60,000 British troops surrendered to the Japanese in one of the worst defeats of British forces in history. The Japanese surrendered on August 15, 1945, but the failure of the British to protect Singapore from the Japanese lowered Britain’s standing in the eyes of Singaporeans. Malaysia and Singapore were granted self-government in 1959, but because of economic and political differences, Singapore seceded from Malaysia and became an independent republic on August 9, 1965. The Malayan Stock Exchange was set up on May 9, 1960.  Floors for trading shares were set up in both Kuala Lumpur and in Singapore.  After Singapore seceded, the structure of the stock exchange remained the same, but its name was changed to the Stock Exchange of Malaysia and Singapore.  When currency interchangeability was terminated between Malaysia and Singapore in 1973, the Stock Exchange of Singapore separated from the Kuala Lumpur Stock Exchange. As this brief history shows, there was no trading of Singapore stocks in Singapore before 1960.  Singapore stocks were traded in London or not at all. GFD has been able to collect data on a handful of Singapore stocks in order to put together an index of Singapore shares before local trading began.  

Singapore Shares Before Independence

Singapore, as well as most of Malaysia, was a center for rubber production before World War II. The largest of these companies was the Straits Rubber Co., Ltd. which was registered in 1909, reorganized in 1919, and was acquired by Consolidated Plantations in 1972. Two other Singapore rubber companies registered in London were the Bukit Sembawang Estates and the Singapore United Rubber Plantations.  These three companies made up the Singapore shares that traded in London before 1960. In essence, GFD’s Singapore stock index is an index of rubber companies. The market capitalization of these three companies remained small peaking at $2 million in 1920, and remaining below $1 million between 1921 and 1957. There is a gap in the index between 1957 and 1961 and after 1961, the Singapore Traction Co., Bajau Rubber and Produce Estate were added to shares of the Straits Rubber Co. to represent Singapore stocks in London.  The price index of Singapore stocks from 1915 until 1957 is provided below in Figure 1. One dollar invested in Singapore stocks in 1915 would have returned $0.48 by 1957, an annual loss of 1.73%.  Return data goes back to 1920 and $1 invested in Singapore stocks in 1920 would have return $2.97 in 1957, and annual return of 2.90%. Stocks would have provided an annual dividend yield of 5.05% during that same period of time. The data begin again in 1961 and continues until 1977.  Actual data from the Singapore Stock Exchange begins in 1965.  We can chain link GFD’s data to the Financial Times Straits Times Index and extend that index back to 1961 providing even more long-term data than was previously available.  

Conclusion

Singapore illustrates the benefit of using data from the London Stock Exchange to learn about the past of Asian markets.  Though Singapore is no longer an emerging market, it has become a major financial center of the world with per capita income of over $55,000 per person.  However, before gaining its independence, Singapore was a major port that shipped rubber to the rest of the world and the Straits Rubber Co. was the largest corporation in the country.  The performance of the stock market followed changes in the price of rubber for decades, but once Singapore gained its independence, rubber lost its importance, and it is today one of the financial capitals of the world.

Though few people have heard about the collapse of the Hatry Group of companies in September 1929, some people have claimed that it triggered the New York stock market crash of October 1929 and ultimately the Great Depression.  Our review of the facts has led us to believe that the collapse of the Hatry Group had little impact on financial markets, despite the claims to the contrary. Hatry no more caused the crash of 1929 than Bernie Madoff caused the Great Recession of 2008.  

Clarence Hatry: Flamboyant Entrepreneur

Clarence Hatry was a dedicated self-promoter who never had a chance of being part of the British upper crust.  Hatry was the son of a prosperous Jewish silk merchant and was bankrupt by the age of 25. He built his fortune by speculating in oil stocks and promoting industrial conglomerates. Like any entrepreneur, he had spectacular successes and spectacular failures.  He built a retail conglomerate, the Drapery Trust, which he sold to the department store Debenhams. He engineered the merger of the London bus corporations into the London General Omnibus Company, ran a stockbroking firm that specialized in municipal bonds, set up the Photomaton Parent Company, which operated a chain of photographic booths, and controlled the Associated Automatic Machine Corporation which owned vending machines on railway platforms.  He certainly knew how to diversify his holdings.  

Hatry made large profits and spent money freely trying to buy his way into the British elite. Before he went bankrupt in 1925, he owned the biggest yacht in the British Isles. He lived in a house formerly owned by David Ricardo at 56 Upper Brook Street, then moved to an ornate mansion at 5 Stanhope Gate in Mayfair which had a swimming pool on the roof where he held parties. He installed a Tudor-style cocktail bar in the mansion’s sub-basement which he labeled “Ye Old Stanhope Arms-Free House.” Hatry got the 16th Marquess of Winchester to be the chairman of Corporation and General Securities, Ltd. Of course, he also owned a house in the country, racing horses and all the other signs of being part of the British upper class. But the British elites which would never have accepted him, no matter how much money he spent.  Hatry belonged in Hollywood, not Mayfair.  

The Collapse of the Hatry Group

Hatry’s hubris led him to think that he could rationalize the British steel industry by merging a number of steel and iron companies into the United Steel Companies which he bought for $40 million in what was to be a leveraged buyout, but at the last moment, the bankers withdrew their financing.  Hatry began scrambling for cash, and even went to Montagu Norman, the head of the Bank of England to get a bridge loan for the acquisition.  Now, you have to understand, this was equivalent to P.T. Barnum going to J.P. Morgan to borrow money for his museum.  Norman simply told Hatry he had paid too much for United Steel. Hatry began borrowing money against his companies and eventually committed petty fraud, by forging City of Wakefield 4.5% bonds which he used as collateral to raise money.  Corporation and General Securities Ltd. had issued the bonds, raising £750,000 of which only £450,000 was turned over to the city of Wakefield. Rumors about Hatry’s overextension began to circulate and the value of his companies began to plunge.  By September 17, Hatry had assets of £4 million and liabilities of £19 million. Hatry knew the end was nigh. If Hatry didn’t know how to enter British society in proper fashion, he certainly exited in proper British form.  Hatry called his accountant and admitted to his forgery.  His accountant called Sir Archibald Bodkin, the director of public prosecutions and advised him of the “stupendous” scandal and that Hatry would turn himself into the office the next morning.  The next day, Hatry had lunch at the Charing Cross Hotel, and went to Sir Bodkin’s office in the Guildhall, where he and three other directors were refused bail. They were remanded to custody.

 

   

On September 20, trading was suspended in the Drapery Trust and the Hatry Group of companies.  This included Corporation and General Securities Ltd., which was an investment trust that had issued the forged City of Wakefield bonds, the Photomaton Parent Corp., the Automatic Machine Corp., Retail Trade Securities, Ltd. and the Oak Investment Corp.  According to one headline from a 1929 newspaper, these companies had already plunged in price by £8 million ($40 million).  Corporation and General Securities was trading at 4/6 (about $1) so even with trading suspended, most of the losses had already been incurred.  At the trial, it was announced that the six principal companies had liabilities of $143 million, of which $67.5 million was irretrievably lost. Shareholders in the Hatry Group were allegedly forced to liquidate their stocks in New York to cover their losses in London which helped to precipitate the crash of 1929. When we reviewed the six companies that were suspended, we found that none of the companies was listed in the Investors Monthly Manual, which listed the 1000 largest securities traded in London.  Moreover, the $40 million loss in the value of these six companies represented about 0.1% of the value of shares that were traded in London.  In Lords of Finance, Liaquat Ahamed claimed that the Bank of England raised interest rates to 7.5% because Sterling was imperiled by the Hatry collapse, but how such a small group of companies could have caused a panic in London and New York seems hard to fathom. The collapse of the Hatry Group no more caused the Crash of 1929 than Bernie Madoff caused the collapse of the American financial system in 2008. The New York stock market declined the week of September 20, but another month passed before the market collapsed.  If the Hatry Group had collapsed a few months earlier or later than September 1929, few would have noticed.  

Hatry’s Revenge

Hatry was sentenced to 14 years in prison for his fraud, of which he served 9 years. While Hatry was in prison, he worked in the prison library.  After Hatry was released, he bought into Hatchard’s bookstore in Piccadilly, which is the oldest bookstore in London.  The bookstore was doing poorly and Hatry discovered the reason for the store’s poor performance was that many of its customers were using the bookstore as a library and weren’t paying for their books.  Hatry told the customers that he planned on removing the books from the book store window and putting a list of what the members of the British elites owed in the bookstore window. This unique method of debt collection worked, the customers settled their bills, and the bookstore was successful.  Hatry got payback against the elites who had rejected him.

 

Global Financial Data has produced indices that cover global markets from 1601 until 2018.  In organizing this data, we have discovered that the history of the stock market over the past 400 years can be broken up into four distinct eras when economic and political factors affected the size and organization of the stock market in different ways.  Politics and economics define the limits of financial markets by determining whether companies can exist in the private or the public sector, by controlling the flow of capital in financial markets, and by determining the level of regulation that companies face in maximizing their profits. The first era covers the period from 1600 until 1815 when financial markets funded government bonds and a handful of government monopolies. The British East India Company was established in 1600.  For the next 200 years, financial markets traded a very limited number of securities.  After the bubbles of 1719-1720, shares traded more like bonds than equities. Investors were more interested in getting a secure return on their money than investing for capital gains. The second period from 1815 until 1914 was one of expanding equity markets, globalization of financial markets, and a reduction in the importance of government bonds relative to equities. This changed in the 1790s when first canals, and later railroads changed the nature of financial markets forever. Investors discovered that transportation stocks could provide reliable dividends as well as capital gains.  For the next hundred years, investors had the opportunity to invest in thousands of companies that could generate capital gains as well as dividends. Financial markets became globalized and the transportation revolution enabled the global economy to grow.  By 1914, capital flowed freely throughout Europe and the rest of the world, enabling investors to optimize returns globally. The era of globalized financial markets came to an end on July 31, 1914 when the world’s stock markets closed down when World War I began. During the war, capital was directed toward paying for the war. Attempts to restore globalized financial markets after the war failed. Financial markets operated on a national level, not on an international level.  Before World War I, markets provided similar returns because they were integrated.  After the war, national equity market returns diverged because capital was unable to flow to the countries with the highest rates of return. After World War II, Europe nationalized many of its main industries and the United States regulated industries. It wasn’t until the 1980s that equity markets became globalized once again when deregulation and privatization swept over the world’s stock markets. The poor performance of markets and the economy in response to the OPEC Oil Crisis of the 1970s brought the role of government in regulating the economy into question.  Privatization swept over the capitalist economies, and the former Communist countries opened stock markets and began to integrate with the world’s financial markets. The global market capitalization/GDP ratio increased dramatically.  There is no definitive date when this transition occurred, so the bottom of the bear market in bond and equities in 1981 is used as the starting point of this new era.  

The Fifth Era: Financial Singularity

Computer scientists talk about the possibility of a technological singularity, when the creation of artificial superintelligence could create computers that exceed human intelligence and lead mankind into a new era.  There is a lot of debate about whether this will ever occur or could occur, but some scientists believe it is only a matter of time. We could also think of a future in which there is a financial market singularity, a point at which global financial markets become integrated into a single, 24-hour market that operates independently of national borders and exchanges.  With the advent of artificial intelligence and blockchain, a financial singularity has become not only possible, but probable.  The main question is not whether this will occur, but when it will occur and how. Equity markets are fully globalized today, and barring any dramatic change in the global political economy, they are likely to remain fully integrated for some time to come.  Although there is always the threat of re-regulation of different parts of the economy, nationalization of entire industries seems unlikely.  Nationalized firms would be unable to survive in the globalized world that exists today. Asia will continue to increase its share of global market capitalization at the expense of Europe. Today, financial markets are driven by technology which makes it easier and cheaper to integrate financial markets into a single market.  The foreign exchange market is a global market that trades 24 hours a day.  Money is digital and moves around the world on electronic networks.  At some point in the future, equity and bond markets will trade 24 hours a day in a single market.  How long it takes to reach that point depends upon technology and politics. Computers will enable markets to become more integrated in the future.  Both artificial intelligence and blockchain will enable financial markets to move away from the exchange-based markets that exist today and be replaced by markets that never sleep and reside in the cloud.  There is no reason why global financial markets shouldn’t become fully integrated in the near future just as regional stock exchanges have integrated into national exchanges in most of the countries in the world. What still needs to be done is for markets to move toward singularity. Politicians in Europe, America and Asia need to provide the institutional framework that will enable the financial singularity to exist.  If politicians fail to create the conditions for integrating national markets into a single international market that operates 24 hours a day, markets will integrate independently of national exchanges. History has shown that existing exchanges rarely lead the way in introducing new technology. Electronic exchanges are born independently of existing exchanges.  NASDAQ grew as a challenge to the NYSE and AMEX in 1971. Instinet, Island, Archipelago, BATS, the Investors Exchange and others grew independently of the major exchanges while dark pools trade hundreds of millions of shares daily.  Yet, in all of these computerized changes, existing exchanges such as the NYSE was an adapter, not a disrupter, and has been forced to play technological catch-up. During the past 20 years, the NYSE has been behind the curve, following technological changes, not leading them, as its share of the trading of NYSE stocks has slowly declined. Twenty years ago, 80% of trades in NYSE-listed stocks were traded on the NYSE. Today only 30% of consolidated trades take place on the NYSE.  More NYSE shares are traded through Nasdaq than on the NYSE, and about 40% of trading is off the exchanges in dark pools. If the stock market in the first half of the 20th Century was 1,000 floor traders trying to out-trade each other, and the second half of the century was 1,000 money managers trying to outsmart one another, the stock market of the 21st century may be 1,000 computer engineers trying to out-program one another. Over the past two centuries, exchanges have lost their advantage of providing price transparency, liquidity and timely execution at a minimal cost.  Bonds, commodities and foreign currency have all migrated from exchanges to over-the-counter computers.  Institutions trade between themselves and the retail market in shares is collapsing as index funds and ETFs continue to grow in popularity. The NYSE and other exchanges have lost their advantages in the market and their very existence is now in question. Given this, it is our prediction that the financial singularity will occur independently of efforts of existing exchanges to merge into a single market.  We believe this will happen in the 2020s, but when and how, we do not know. But even when all this happens, and exchanges disappear, companies will still raise capital by issuing shares to the public, billions of people will still rely upon stocks for their investments, and we will still worry about whether the stock market will go up or go down tomorrow. If you would like to read the full version of this article on the Five Eras of financial markets, please go to: The Five Eras of Financial Markets.