The Rice Shogun Bottom: Sentiment at the World's First Futures Exchange

The Rice Shogun Bottom: Sentiment at the World's First Futures Exchange

Before Elliott, there was rice.

Osaka, 1730. On the island of Dōjima, merchants trade rice they will never touch. The contracts are called chōai-mai, "book rice": paper claims on grain for future delivery, standardized in lots of 100 koku. That year the shogunate licensed the market, with membership rules and a clearing function a modern exchange would recognize. It had run without permission since 1697. The world's first organized futures market now carried an official seal.

Prices left the floor by messenger, flag signal and pigeon, and set the standard for rice across western Japan.

It is tempting to file all of this under history. However, let’s keep it in the present tense. And here’s why. Everything on that page is still on ours: the herding, the hope, the dread, the hunt for someone to blame. The crowd in Osaka did not need a chart to behave like a crowd. What it lacked was a way to measure itself.

This is the story of one bottom, one top, and a trader who wrote it all down nearly two centuries before anyone drew a wave.

Cheap Rice, Dear Everything

In about 1727, rice began to fall. Nothing else followed it down. Edo had a phrase for the condition: kome-yasu shoshiki-daka. Cheap rice, dear everything else.

That is a serious problem in a country that pays its warriors in grain. Every move lower reduced a samurai's income. But his costs remained the same.

Then the crowd did what crowds do near a low. Merchants expected still more rice to arrive in Osaka, so they held off buying. The hesitation pushed the price lower. This in turn justified more waiting. Nobody needed bad news. The expectation of it was enough.

Tokugawa Yoshimune now enters the scene. He is remembered as the Rice Shogun. For years the shogunate had banned futures trading as gambling that drove rice prices up. Now he needed rice prices up. So he sanctioned Dōjima. His government bought and stored rice, and compelled the domains and the great merchant houses of Edo and Osaka to do the same.

It did not work the way he wanted. Intervention against a crowd seldom does.

A market that must be ordered to buy has run out of volunteers. That is what a bottom feels like from the inside. Not a signal. A silence.

Five to Seven Times

In 1732, locusts tore through the farmland around the Inland Sea. The harvest was about a quarter of historical levels. Rice in Edo and Osaka soon cost five to seven times what it had during the glut. People starved.

Two years earlier, the Rice Shogun could not find enough buyers. Now the cities could not find enough rice, and they wanted a reason.

They found Takama Denbei. He was an Edo rice merchant who had worked with Yoshimune to steady prices. The rumor said he was cornering rice to push the price higher. The shogunate released rice to bring prices down, and failed. At New Year 1733, some 1,700 people descended on Takama's home and threw his belongings and rice bales into the river. It is counted as the first uchikowashi of the Edo period, a word that means, roughly, smashing. Afterward, Takama released his own stock to help steady the market.

We should be careful here. The famine was real. Locusts are not representative of crowd sentiment. Also, psychology does not own what causes the spike.

It owns everything around it. A buyer strike at the low. Policy that resists the old trend and then finally gives way. A villain at the high. At the bottom, the crowd wanted nothing to do with rice. At the top, it wanted someone to pay for it.

Every generation finds its Takama.

The Man Who Wrote It Down

Almost nothing is known about Ushida Gonzaburō. He went by Jiunsai. He came from Ise. By his own account, he gave sixty years to the rice trade. His dates are a bit unclear, but if that arithmetic holds, he lived through the glut, the famine and the riot.

In the autumn of 1755, with another famine underway, he finished 137 short verses on the rice market. He titled them San-en Kinsen Roku. English-language sources usually render it as The Fountain of Gold: The Three Monkey Record of Money.

Read a few now and they could be captions for the Rice Shogun's market:

> When field and mountain alike are bearish, play the fool and buy rice.

> When ten thousand of ten thousand are bullish, play the fool and sell.

> When a price leaves everyone aghast, that is the boundary between high and low.

> Always buy at the pass of weakness, where the castle falls. Buying where it frightens you is the secret.

He went well past slogans. He described a decline that needs no news at all: when the mood that should lift prices is spent, it is nature for them to fall on their own. He described the cycle itself: stillness, pushed to its extreme, moves again. He found yin and yang in a single grain of rice, round in the middle and pointed at both ends.

The three monkeys in the title are the familiar ones who see, hear and speak no evil. Ushida's version: see strength, and do not drown in it; keep selling in mind. Hear weakness, and do not drown in it; keep buying in mind. And talk about neither, because talk confuses people.

One verse deserves a line to itself:

> Autumn skies high, the crowd's mood strong, and I too want to buy: that is the season to sell rice.

And I too. He did not exempt himself. He treated his own appetite as the signal.

I have used it too. In March 2000, I went short technology into about as much bullish conviction as I have ever seen. Part of me wanted in. That part was not foolish. It was human, and it was the loudest voice in the room. The Nasdaq closed at a record on March 10. By mid-April it was down a third.

The Founder We Needed

Here the story turns on us.

Open almost any English-language history of technical analysis and you will find this book credited to Munehisa Homma, the legendary rice trader from Sakata, along with its most famous contrarian lines. Japan's National Diet Library catalogs it under Ushida. Homma's own collected maxims date to the late 1700s, decades after Ushida finished.

The candlestick, the invention Homma is best known for, fares no better. Steve Nison, the man who introduced candlesticks to the West, concluded it was unlikely Homma used them at all. The charts more likely took shape in the Meiji era, in the late 1800s.

Homma was real, and by every account a formidable trader. But estimates of his fortune in today's money run from $10 billion to $100 billion. A tenfold spread is not a record. It is a legend compounding by repetition.

So the origin story of crowd psychology is itself a crowd story. The Edo mob needed a villain at the top, so it made one of Takama. The trading world needed a founder, so it made one of Homma and handed him another man's book.

Nobody checked. Everyone else already agreed.

The Reason Beyond Reason

Economists have studied Dōjima for decades, and much of that work circles one question. Was this an efficient market? The market does indeed get tested in Fama's sense. One study goes looking for rational expectations in eighteenth-century Osaka rice futures.

Ushida answered in 1755. When the crowd's mood is weak, rice should rise. When it is strong, rice should fall. He called it a reason beyond reason, in the nature of things, true precisely because it feels backward.

That phrase is the whole divide. One side models the market almost as an abacus. The other watches the people standing around it.

In 1938, R.N. Elliott published The Wave Principle, 183 years after Ushida finished his verses. The main claim was the same. Elliott just used different wording. Collective mood flows between optimism and pessimism, and the swings repeat in recognizable patterns.

What Elliott added was the thing Ushida never had. Ushida could tell you what the crowd would feel at the extremes. He could not tell you where it stood between them, how far a move had left to run, or at what price a read was wrong. Verses carry wisdom. They do not carry invalidation levels.

Structure does. Degree, sequence and a level that retires a count the moment price crosses it. At any given moment an analyst may hold several probable paths at once. He then lets price strike them off one by one. That is not prophecy. It is bookkeeping for human nature.

And human nature shows up everywhere. On a flag relay out of Osaka. In a buyer strike in the late 1720s and a mob in 1733. On every screen we will watch this week. Something atavistic in us still checks the crowd's opinion before consulting our own.

The old Dōjima market was shut down in 1939. The crowd never closed.

Before Elliott, there was rice. After Elliott, there are probabilities and parameters.