To The Moon

This bear market is similar in many ways to the bear market that followed the 1973 oil crisis. Then too there was an oil shock. In a short space of time, the price of oil tripled, and during the entire 1970s oil became nine times more expensive. Today, the world consumes six times as much oil as in the 1970s, yet on balance, the global economy is less dependent on oil. Looking at the explosive rise in natural gas prices and electricity prices in Europe, one could argue that things are worse now than they were in the 1970s. Yet it is often said that things are not nearly as bad as in the 1970s and that it is unlikely that the mistakes of the 1950s will be repeated.

According to Niall Ferguson, this time it is worse than in the 1970s. According to him, the mistakes central bankers made then are very similar to the mistakes they make now. Inflation was seen as temporary and insufficiently combated. But no negative interest rates and quantitative easing then, post-Corona, monetary madness has struck. He also pointed to higher geopolitical tensions. The current war is lasting much longer than the Arab-Israeli war of 1973. Then it was over in 19 days, now we are already six months further after the Russian invasion in a war that already started in 2014.

The important difference between then and now is that productivity growth is now even lower, while global debt has risen sharply. Demographically, too, our situation is much worse. In the 1970s, the baby-boom generation started working. At the same time, these people started saving for retirement, which meant that although they were productive five days a week, they were soon working one day a week for retirement. Not surprisingly, inflation then starts to fall. Now the baby boom generation is retiring. That means they are no longer productive, but thanks to the well-filled savings pot they are going to consume five days a week, which causes more inflation.

Since the Cuban crisis, there has been a steady decline in tension between the Soviet Union and the United States. The rapprochement with China ultimately ensured that the Soviet Union stood alone. Now, on the contrary, tensions are constantly rising and, while sleepwalking, the likelihood of greater accidents is increasing. Furthermore, Ferguson points out that such geopolitical shocks occur in clusters, just like shocks on the stock exchange. The financial crisis and wars coincide remarkably often. The mistake people make is that in such an environment they do not give sufficient consideration to extreme outcomes, because they rely on the relative stability of the immediate past.

The Gini coefficient also peaked in the 1970s. Not since the start of the industrial revolution had incomes been so evenly distributed. Since then, this has gradually decreased and an increasing part of the population is no longer able to buy a car or a house. That creates polarisation, just like in the 1970s. But in the 1970s there was lively politics, and in the end, the battle was fought in parliament. Nowadays, many countries are democracies in name only and the contact between politicians and citizens has been diluted. Moreover, democracy must be constantly defended, but now many government leaders seem intent on dismantling it.

What is important for investors today is that there is a good chance that we are in a different environment, a different regime, away from the forty years of falling interest rates and constantly rising profits, with Goldilocks as the ultimate ideal. The outcome need not be worse in the long run, by the way, but it does mean that we should not rely too much on rules of thumb that worked in those forty years and that we should take more account of extreme outcomes.