Studying History in the Post-Bubble World

It must be snowing all over Europe. Zurich was beautiful in the snow. So is Paris. The snow seems to quiet the place down…and cover over its imperfections. And the cafes and bars…brightly lit, warm and charming…are so inviting you can barely make it home at night.

This morning, it is still snowing. We were tempted by several cafes. But we made it into the office anyway. There’s reckoning to be done; someone has to do it.

Yesterday, the Dow cracked a bit – down 132 points. The crack in the gold market widened; gold fell $39.

What does it mean? Everyone is talking about the rise in the dollar. It’s up to $1.43 per euro…a three-month high.

“The US economy all of a sudden doesn’t look so bad; the rest of the world doesn’t look so good,” was one explanation given in The Wall Street Journal. Investors are going back to safety, said another report.

We were puzzled as to why stock markets were doing so well. If investors were really fearful, you’d think they’d be pulling their money out of expensive stocks, especially out of the go-go ‘emerging’ markets. This year, the three leading performers are Brazil, Russia, and Indonesia, up 140%, 129%, and 115% respectively. Even in the US, shares are selling for far more than recent experience would seem to justify.

But yesterday, maybe the sell-off in the stock market finally began. We’ll have to wait and see.

Meanwhile, over the last couple of weeks, an idea has been taking shape. The future is like a child. It will grow into an entirely new person. One that has never existed before. But it is a product of the past too. It may have Mom’s eyes…or Aunt Lou’s quick temper. It lives in a house originally bought by Dad when he was working for IBM in the ’80s. And it uses money that is controlled by an organization set up under the Wilson administration.

When we look ahead, we see enough elements of the past to confuse and mislead us. “Those who do not study the past are doomed to repeat it,” say the schoolteachers. But what about those who DO study history? At least one of Hitler’s top generals had in his pocket a copy of Caulaincourt’s recollections of Napoleon’s disastrous Russian campaign, when he was taken prisoner at Stalingrad.

We are supposed to believe that investors can avoid the calamities of the past by studying what happened in previous market cycles. To some extent it is true. You read enough stories of bubbles and you begin to get an instinct for them – at least at the extremes. That is how some of us were able to foresee the dotcom blow-up in ’00…and later, the blow-up in the financial sector in ’08.

Part of the problem is just filtering out the noise in the system. Probably 99% of what you heard is just noise – distracting information, misunderstood phenomena, and dubious data. When you read the commentariat…the pundits…the newscasters, economists, and analysts who are telling you what is happening and what lies ahead, you have to remember that most of them had no idea what was happening two years ago. Now, they have even less of an idea of what is happening.

We don’t have any idea either. For, like a newborn babe, this period in our financial history bears some resemblance to past cycles. The most striking resemblance is to the depression period of the ’30s in the US…and the long, slow depression in Japan since 1989. But it is different too. As you will see, below, we have far more to reckon with that we did in the ’30s.

Of course, those who misunderstood the financial bubble of ’03-’07 (Ben Bernanke thought it was a period of “Great Moderation” caused largely by his own superior handling of the Fed) now misunderstand the post-bubble world.

They think it is a technical challenge. They imagine that if Bernanke – whose bid for another term cleared the House yesterday – can just make the right adjustments, everything will be hunky dory.

Alas, Bernanke will do an even worse job than we would do. We have no idea. He has a bad one.