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Peter thornhill on the history of sharemarkets and if this time is different

‘Here we go again’ or ‘this time it’s different’?

With ‘breaking news’ shattering our peace, I would like to add some comfort for committed investors. Whilst this current crisis is the result of a pandemic over which we, as individuals, have no control, each one of us has control over our financial response.

Readers familiar with my views will know I advocate the boring long-term predictability of shares.

The last time we faced a financial meltdown was the GFC and I was browsing through an article I wrote at the time and relating it to earlier events.

I reproduce it here in an edited and amended form as my view of the financial implications has not changed. I ask for your indulgence to recall what was written in October 2008.


What a difference a day makes!

London Evening Standard, Thursday 25 September 2008: "BAILOUT HOPE BOOSTS SHARES"
London Evening Standard, Friday 26 September 2008: "BAILOUT CHAOS HITS THE CITY"

Since no one knows what is going to happen in the short term, it would be stupid of me to claim any foresight. The heroic claims to having foretold this current setback will be ex-post.

Fear is based on ignorance. Fear is one of the most contagious and destructive diseases known to man. Even if you are not an investor, fear of current events will still strike at you or your family. Every second article has the word 'panic' and the 'D' word (depression) is appearing with greater regularity as indices are daily hitting new lows. Markets are now being suspended with increasing frequency as selling pressure overwhelms them.


Fear is stronger than greed

Don’t look for ‘cause and effect' reasons for what is happening; fear is a far stronger force than greed. Useless comparisons with the very recent past abound and attempts to give some credibility to the commentary is laughable, such as:

"On Wall Street, the key Dow Jones index fell below the key psychological level of 10,000 for the first time since 2004" or "the FTSE 100 index was falling through the psychological 5000 barrier"!

What the hell is psychologically important about some big numbers? I maintain my stance that all the economic theory counts for diddly squat when the herd is spooked. Behavioural finance is the new order. After losing a staggering 20,000 pounds in the South Sea Bubble, Sir Isaac Newton was moved to comment that he could, "calculate the movement of the stars, but not the madness of men".

There have been many other crises during the twentieth century. An understanding of history should have given all those in power today enough foresight to have avoided the worst but perhaps the balance of bankers and mathematicians to historians in positions of influence is wrong!

I doubt that any of what is happening presently will be enough of a scare to curb the hubris of future governments and their ill-advised generosity, or to avoid the waste of productive capital inherent in artificially supporting property prices. If consumers cannot be happy without irrational rises in property or share prices, then we are all off to hell in a hand cart.

I forlornly hope that consumers have had enough of a scare to understand that just as nations cannot live beyond their means, the same rules apply to them. Reckless leverage and a misguided reliance on property can destroy nations, banks, and you and me. I personally am confident that nothing will change in the long term.

To understand what the future holds I commend Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and first published in 1841. To help get a handle on the present I commend Manias, Panics, and Crashes by Charles KindlebergerOn the larger issue, Kindleberger says:

"It is necessary now to move to a critical question, one that probably cannot be resolved. Assume that we have demonstrated that destabilising speculation can occur in a world of individuals whom it is convenient and fruitful to consider as normally rational. Permit this world to be perturbed by a 'displacement' of one sort or another, largely from outside the system, giving rise to prospects that individuals misjudge, either for themselves or for others. At some stage, investment for use gives way to buying and selling for profit. How likely is the speculation to lead to trouble?"

How likely indeed. I think I can say from my understanding of history the answer is an unequivocal YES.

Where present events will lead in the short term, I wouldn't have a clue. There have been substantial declines in our portfolio values, but of the 54 companies in our portfolio that have reported so far, five have reduced their dividends with the reductions ranging from very little to a complete suspension. Twelve have maintained their dividends and the balance have increased.

The test for us will be in March/April 2009 when the next dividend season gets underway. Whether this is a sustained decline and a depression results, nobody knows. However, if it should come to pass then I will rely on history.

Our parents were in their late teens and early twenties when the depression arrived. Our grandparents went through two world wars and the depression. The only social security system was the community.

I do not believe that my wife and I are any less resourceful than they were (by observation I cannot speak for others). I do not wish to sound melodramatic, but I am tired of all the hyperbole and self-seeking wailing associated with current events. Personally, we are not overgeared so we will simply pull in our belts, live within our means, hunker down and wait for the cloud to pass; just like our parents. As for our children, hopefully they will learn a valuable lifetime lesson!

There is a famous saying, "It's always darkest just before the dawn". A perversion of this is attributed to Mao Zedong which goes; "It's always darkest just before it is completely black." Remember, your perception is your reality.


On to 2020 and too much reliance on governments

That’s the end of the 2008 article and I will make some observations regarding the differences between now and then.

The decades of ‘rescue at all cost’ policies of central banks and governments predate the GFC and have become increasingly irrational with each new rescue. We all need to become more resilient rather than relying on larger and larger handouts to alleviate our discomfort.

The GFC was purely a financial problem whilst we are now facing the Covid-19 ‘black swan’ event overriding the ‘rational’ market correction we were long overdue for. With Donald Trump now having his Moses moment, the US government is supporting speculative ETFs to part the waters and allow everyone to escape the looming problem. It caps every other ridiculous attempt.

This article by Stephen Bartholomeusz in the Sydney Morning Herald, 21 April 2020, is brilliant. It is titled "Zombies must live or die on merits, that's capitalism". It captures what is wrong with government policy.

Over 2000 years ago, Plato observed that the longer democracies existed – the longer their freedoms and equalities extended – the more incoherent they became, leaving them susceptible to the cynical corruption of a tyrant, who

“ ... offers himself as the personified answer to the internal conflicts of the democratic mess. He pledges, above all, to take on the increasingly despised elites”.

Let us hope that everyone learns from this event, including politicians and leaders of industry.

I spelt out in the above article our personal strategy and it remains the same 12 years later. The GFC had a hugely positive impact on our finances, despite the dividend cuts and the huge number of capital raisings at the time. This will probably be repeated now.

On a more positive note, we must acknowledge that industry is the dynamo that drives a nation's fortunes and this dynamo is driven by human endeavour. Human endeavour is not about to grind to a halt unless history can be ignored and this time really is different. Stay safe and calm.


First published on the Firstlinks Newsletter. A free subscription for nabtrade clients is available here.