Any Hope for Investors?

May 14, 2022

In the Old Testament book of Proverbs,we find an intriguing verse to consider in times of trouble.?The King James Version puts it like this:?“Where there is no vision (hope), the people perish.”

?--?Proverbs 29:18.

My experience in markets began a year before the market crash of 1987. ?This history gives me some perspective, helping me switch back and forth to compare our situation today with the experience of October, 1987, a month that saw a one day drop in the DOW Industrial Average of 25+%.?Do I see comparisons to today??Yes, of course.?But our days present differences that make me more skeptical that change for the better is possible any time soon, or without plenty of pain.

First, there is the difference in interest rate environments.?Back in 1987, ten-year bonds were pushing 9%.?In normal markets, ‘riskless’ rates like these force a switch from Stocks to Bonds,?particularly for institutional investors and managers of pension funds. The logic is clear:?Why risk more in stocks--an asset that in those days averaged an annual return of ~10% per year--when I can buy bonds and get a riskless US Dollar return of 9%??Is the 1% difference favoring stocks compelling enough to stay invested, when there are good ‘riskless’ alternatives??

Back in October 1987, even retail investors thought the same way and, accordingly, the big switch occurred and the stock market tanked almost overnight.?On that big day, I witnessed the carnage on the floor of Chicago’s S&P 500 futures pit, a sight that will stay with me forever.?The feeling among traders was one of markets punching them in their stomachs. Although I had begun a career in markets only a year before, I felt something was amiss.?Dread filled the streets, and traders like zombies roamed the exchanges staring into space, wondering if they could ever recover. Until that moment, nobody had witnessed such a performance in the annals of market history.??

Q: So, you say patience is a virtue??

A: The British reply, Bollocks!

After the meltdown, some of us went back to our textbooks and studied how 1987 compared to 1929, famous for the ‘big one,’ the Great Depression. We discovered 1987 was far worse as a one or two day event, while 1929 was more like Chinese water torture--a slow draining of blood that lasted quite a while. More than sucking the air out of the balloon of investors, 1929 destroyed the confidence of investors for decades to come, even professional managers.?After the decline, no one looked at stocks the same way again for quite awhile.?

The chart below from 1929 illustrates the extent of the duration and impact of the Great Depression.?In short, markets waited until 1954—around 25 years later--before it saw new highs.?For investors, that’s a lot of waiting for things to improve.

But for those readers whose investigation and understanding of US markets is limited, or to take a sample from a more recent event, consider the next chart showing the effects of the market bubble in Japan, circa 1989.?As readers will note, the same Nikkei Index that tanked after the Japanese bubble burst in 1989, has STILL not recovered to its old highs, more than 30 years later.

What is most disturbing about recent stock market performance is we cannot point to a single factor for the cause.?As we mention above, the typical culprit of higher interest rates causing a shift from risky to riskless investments (stocks to bonds), is not a factor. ?The FED Funds rate is rising. but remains at 1%, not 9%, as in 1987.

Inflation is one factor to consider, but even here we have a strange disconnect from traditional market conditions.?Back during the famous spike in oil prices in the 1970s, and the creation of OPEC, the US Dollar also suffered, and the price of gold rose dramatically as a hedge against rising prices. Inflation was front-and-center of our lives, and some of us can still recall lines at the petrol stations that grew even as oil prices rose. ??

?Today, by contrast, we have some supply chain issues, to be sure.?But if you can pay for the petrol, you don’t fear long lines at the pump...yet. ?Put differently, this is not your parents’ stagflation, circa 1970.?Likewise, we don’t see the rise of gold prices, nor do we see a weakening of the US Dollar.?In fact, the Dollar is strengthening aggressively against the Euro and the Yen.

What is most disturbing for our collective future, and comes as a key ‘tell’ for what is happening throughout the world, is the financial fallout from Russia’s incursion into Ukraine.?The US and Europe have stepped into a pile of trouble, a new ‘inflection point’ for global markets and the economy.? By freezing the foreign assets of a sovereign G20 country and stealing the toys of?some high profile Russian Oligarchs—Yachts,?Football Teams, Real Estate—our politicians are risking our future.?Two can play this game. By changing the rules of how sound economies function, the US is on track to destroy decades of sound policy, foreign diplomacy, banking and predictable international regulations. Stealing the piggy bank of another country is not the brightest way to make a point. This may boomerang back in our direction in another way.

Sanctions Don’t Work

We are looking at one of the Bravest New Worlds of Finance we've ever encountered in our lifetimes.?First, we now know US and European Central Bank sanctions against Russia have failed miserably. ?Imagine a country like the USA or region like the EEC that freezes $300 Billion in foreign assets of another sovereign country, and then threatens to despoil these assets and incorporate them for personal use.?We have crossed a Rubicon and have burned bridges that renders impossible the notion of returning to the ‘good old days.’

The most laughable part of this adventure by the US and EEC Treasury gurus is the intended results:?Not only have sanctions failed, but they have put the Russian Ruble on track for one of the best performances of any major currency in 2022.

The Russians have played the US and Europe like Rachmaninoff played the piano.?The chart below shows the time-line of the Russian Ruble against the Dollar, before the incursion began, sanctions commenced, and currencies were priced a few days ago.

For all the hoopla from our leaders and financial experts working with government, this one looks like a complete win for Vladimir Putin. ?More than the price increases, the fallout from our piracy--the theft of Russian assets--suggests much more trouble ahead, on many fronts.?From oil and natural gas prices, to food and fertilizer distribution, to metal production, Russia calls the shots from here, onward. ?Whatever your political position on Ukraine, The West has blown up the post war stability of our global financials, in a frightening way. ?My guess is no government can dig itself out of such a gothic mess. More to the point, no thinking country watching this soap opera unfold will fully trust the US and Europe again. Forget the notion of new foreign investment capital raining down on New York, London or Brussels. That horse has left the barn.

Moreover, and to pound another nail into the coffin that houses The West, Putin has managed to align former enemies to his advantage. From China to India to the Middle East—unlikely frenemies—the West has managed to spurn former alliances to its own detriment.? The loss of confidence is incalculable.

The Meaning of Markets

Calling the markets these days is like shooting fish in a barrel.?We have arrived at the Perfect Storm, a confluence of factors we rarely see in tandem.?Between raging inflation, the lack of a reliable supply chain, a new world order of finance and politics, and breathless political stupidity by the West, we can no longer take anything for granted.?And People are no longer part of this equation.

Markets hate instability and unpredictability.?Not long ago, I commented to a friend that the last leg on the stool to fall in the US, to eliminate any notion of polarized politics run by greedy politicians, is Wall Street.?Only after money begins to lose value, and investors run for the exits, can the world shift for the better.?

Swiftly we are learning that politics is a giant sucking subterfuge, a control mechanism, a way for the elite to profit at the expense of the Working Class.?Moreover, capitalism without accountability is fast becoming a joke. ?One's few of Mr. Putin aside, whoever made the decision to sanction Russia had better figure out how to dig us out of this mess…for the sake of the world.?

Our political class’s failure to work together diplomatically, or intelligently, reminds me of that famous US comedic team of Laurel and Hardy, and their tagline to one another when they were facing self-inflicted trouble....Oliver Hardy, the father figure of the couple, would throw up his hands, roll his eyes and moan to his sidekick, Stan Laurel:

?“A fine mess you’ve gotten us into, Stanley.”

Smart comedy tends to engender the notion of hope at the end of the tunnel. These two comedians, in spite of themselves, always came back the next week with another episode of orchestrated chaos, and magic. There was enduring hope written between the lines.?