Venerable Financial Times columnist Martin Wolf wrote a strong piece attempting to find historical precedents for the current investment environment, and, as his title “Unsettling precedents for today’s world” indicates, he finds geopolitical danger lurking everywhere.
Mr. Wolf found today’s predicaments similar to the Cold War, as China’s ascendancy presents an ideological threat to the west similar to the Soviet Union.
Similarly, the author sees parallels between now and the years before the First World War as the U.K. global economic dominance receded – from 23 per cent of global manufacturing in 1880 to 14 per cent by 1913 – while a resentful Germany ascended and the United States grew into an economic superpower capable of deciding the outcome of both world wars.
Mr. Wolf also refers to the inter-war years, a period where the U.S. retreated from Europe and an era of “civil strife, populism, nationalism, communism, fascism and national socialism” that highlights the political dangers arising from a populace that lost faith in political and economic elites after a financial crisis.
With his figurative tongue firmly and grimly in cheek, Mr. Wolf adds that the 1930s “are also a lesson of what happens when great countries fall into the hands of power-hungry lunatics.”
The two historical precedents that occupy my mind – 1937 and Japan after 1990 – are more investor oriented.
The U.S. recession of 1937-1938 didn’t get much attention until recently even though it marked the third worst downturn of the 20th century (those following 1920 and 1929 were worse). The Federal Reserve gets the blame for the 1937 recession as, thinking the worst of the great depression was over, they organized a major contraction in the money supply to prevent an ‘injurious’ credit expansion in 1936.
The end result of the central bank faux pas was a 10-per-cent contraction in real gross domestic product, 20-per-cent unemployment, and a 32-per-cent decline in industrial production. The Dow Jones industrial Average fell 47 per cent from March 1937 to March 1938.
The financial world is much more complicated now and I’m not expecting a major central bank error, even if the monetary tightening of 2018 appears to have been a mistake in hindsight. But the experience of the late 1930s remains relevant. It underscores the possibility that the crash of 1929 and 2008 are analogous in that developed world growth will remain dependent on ultra-loose monetary policy for much longer than most expect.
As for Japan, the 1990 economic collapse arose much differently than the 2008 financial crisis. But the aftermath – extremely high debt levels, an aging population, near-constant deflationary pressures, and insufficient consumer demand – offer a potential cautionary tale for current investors.
There is always a danger in using any one historical pattern to guide portfolio strategy – the world changes fast and no two situations ever match entirely. The context is always different, but human behaviour doesn’t change much and the multiple perspectives learned from history can provide vital direction for investors.
-- Scott Barlow, Globe and Mail market strategist
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