Early Warnings from History

WITH THE USUAL CAVEATS!

Historical parallels have been in mind a bit lately. The obvious parallel is Covid-19 and the Great Influenza of 1918, in which officials in power then and now repeatedly downplayed the threat (which, by 1923, would take up to 100 million lives). An interesting and important subject but hard to probe in the middle of today’s game.

I have written a couple of times since April about the great uncertainty in the financial markets. As many have noted, the stock market is not truly a reflection of the economy, but rather a reflection of the collective intelligence of all its participants about future performance of the market and the surrounding economy. It is, in other words, partially self-determining.

That’s dangerous for individuals and small institutional investors, who may lack both the gambling spirit and the ability to weather short-term losses. In this environment, with a virus raging across the nation and a market seemingly oblivious to the consequences of the toll in human life, commerce and employment alike, I have wondered what historical parallels might help us intuit, at least in some limited way, the unknowable: what to expect in the months and years ahead.

There is an old saying that one picture is worth a thousand words. This one may be worth many more:

The Great Depression (1930s) is the closest available parallel to our current straits: Then, we encountered a steep and sudden collapse brought on by speculative lending and resulting in massive unemployment.  Today, we have a steep and sudden collapse triggered by a virus – and resulting in massive unemployment. After the initial crash of 1929, the nation entered 2030 with an unemployment rate of under 10%. Two years later, it was nearly 25%. Today, we’re just over 10% — at least officially.

Thus, this picture suggests to us what we should be most worried about today. Then, like now, the market first appeared to be “bouncing back” quickly (which came to be known as the “sucker’s market”) – though far from all the way back. In the Great Depression that initial bounce gave way to another fall, to even lower depths than the first. That pattern then repeated itself for the next three years before the market finally reached its post-crash low in mid-1932, and the market hadn’t recovered even half its value at the onset of U.S. engagement in World War II – nine long years later.

The big question remains: Where are we headed? Trump would have us believe there will be a “V-shaped” recovery. The scientists say the virus will be with us for quite a while, suggesting future shocks for an indeterminate amount of time. Even if the reality is somewhere in between, the ride is not likely to be pleasant.

History tells us that there has never been a “V-shaped” recovery to a severe collapse, and there is little reason to believe the current market, amid the ongoing threat posed by the virus, can prove history wrong. Already, new restrictions are being implemented, and reports of an economic contraction starting in mid-June (the result of premature re-openings in a broad swath of the country) suggest bad news may be just around the corner. 

In this environment, it is impossible to rule out a repeat of the pattern that occurred almost a century ago. Optimists and practitioners may reject that possibility, but then they must confront the reality of the more recent (and relatively brief) 2008 collapse – recoveries are never swift, even (or especially) after you hit bottom quickly.

Many so-called experts say ‘wisely’ you simply cannot reliably predict the future. Naturally, it is a waste of time to argue with them, because ONLY time will tell.

But, people whose job is to make money for investors owe it to their clients to look at all the clues possible, and then devise an investment strategy that can straddle the good, the bad and the unknowable.

The benefit of this blog’s PICTURE is that it helps bring into focus a wider range of possibilities than have been generally under consideration.

The future is likely going to take longer to definitively show its hand than many expect.

There will be interim up movements that likely will also sucker a lot of people prematurely back into the market.

Let’s fervently hope that the coronavirus depression doesn’t end the way the Great Depression did.

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Coming next: markets and reality – ever Mark’s twain to meet?

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