This Time IS Different: History Won’t Help Us Understand the Crash
They’re often called the four most expensive words in history.
This time is different.
Often, you’ll see those words alongside some story justifying why stocks have diverged from the fundamentals.
Right now, many analysts are reverting to the most recent market crash and using that to explain what will happen with our current market crash.
That perhaps the old rules will apply to this one.
As Jim points out today, looking at the financial crisis, the tech bubble, or even the Asian financial crisis won’t help us understand what’s happening here.
Instead, Jim reckons we need to go back much further in time…some 90 years…to truly get a grip on what we are witnessing now.
If his analysis is right, we have a few rough years ahead of us.
Read on for more.
Until next time,
According to Jim Rickards, the recent market crash we’ve witnessed is just the beginning. A total financial collapse might be next. Learn how to protect your savings and investments before it’s too late. Download your free report now.
Don’t Believe the Happy Talk
US stocks stumbled out of the gate early in the week, at least partially on fears about a resurgence in coronavirus cases.
South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.
We can also expect a rise in US cases as several states lift their own restrictions.
From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…
It’s not like other market crashes
In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.
That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it doesn’t even begin to scratch the surface.
This collapse is worse than 2008, worse than the 2000 dotcom meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis, and many more panics.
You have to go back to 1929 and the start of the Great Depression for the right frame of reference.
But even that does not explain how bad things are today.
After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.
In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.
Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?
Well, ‘Dr Doom’ Nouriel Roubini, can give you some idea.
Roubini earned the nickname Dr Doom by predicting the 2008 collapse. He wasn’t the only one. I had been warning of a crash since 2004, but he deserves a lot of credit for sounding the alarm.
The factors he lists that show the depression will get much worse include excessive debt, defaults, declining demographics, deflation, currency debasement, and deglobalisation.
These are all important factors, and all of them go well beyond the usual stock market and unemployment indicators most analysts are using. Those economists expecting a ‘V-shaped’ recovery should take heed. That’s highly unlikely in the face of all these headwinds.
A PhD won’t help you understand economics
I’ve always taken the view that getting a PhD in economics is a major handicap when it comes to understanding the economy.
They teach you a lot of nonsense — like the Phillips curve, the ‘wealth effect,’ efficient markets, comparative advantage, etc. — but none of these really work in the real world outside of the classroom.
They then require you to learn complex equations with advanced calculus that bear no relationship to the real world.
If economists want to understand the economy, they should talk to their neighbours and get out of their bubble.
The economy is nothing more than the sum total of all of the complex interactions of the people who make up the economy. Common sense, anecdotal information, and direct observation are better than phony models every time.
So, what are everyday Americans actually saying?
According to one survey, 89% of Americans worry the pandemic could cause a collapse of the US economy. This view is shared by Republicans and Democrats alike.
PhD economists dislike anecdotal information because it’s hard to quantify and does not fit into their neat and tidy (but wrong) equations. But anecdotal information can be extremely important.
With so many Americans fearing a collapse, it could create a self-fulfilling prophesy.
If enough people believe something it becomes true (even if it was not true to begin with) because people behave according to the expectation and cause it to happen.
The technical name for this is a recursive function, also known as a ‘feedback loop’. Whatever you call it, it’s happening now.
Based on that view and a lot of other evidence, we can forecast that the depression will get much worse from here despite the initial severity.
But as usual, the PhD crowd will be the last to know.
Don’t believe the happy talk. My analysis tells me we’re in a deflationary debt death spiral that has only just begun.