“Everything that can be invented has been invented.” - Attributed, probably falsely, to Charles Holland Duell, Commissioner of the US Patent Office from 1898 to 1901.
In his 1992 book The End of History and the Last Man, Francis Fukuyama suggested that, with the Berlin Wall having just fallen and Western liberal democracy having seemingly conclusively vanquished all competitors, not least the Soviet Union, humanity had reached “not just.. the passing of a particular period of post-war history, but the end of history as such: That is, the end-point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.”
An interesting and provocative thesis, certainly – but one that barely survived the rise of China, let alone the Global Financial Crisis, which revealed that what we think of as free market capitalism had, in the Anglosphere at least, by 2008 morphed into something better understood as ‘crapitalism’, replete with bailouts for the super-rich, and austerity for the taxpayer – and everybody else.
Now that the world is wrestling with the aftermath of the Coronavirus pandemic and contemplating the chilling impact of the grotesque overreaction to it on global trade, globalisation seems to have gone suddenly into reverse.
The world has experienced dramatic economic reversals before, but previously they’ve tended to occur in wartime. In his book The Economic Consequences of the Peace (1920), the economist John Maynard Keynes writes of the extraordinary living standards of the affluent in Britain just before the eruption of war in 1914. While the majority of the population worked hard for a type of existence barely above subsistence,
“..escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”
Another aspect of what would soon become known at the time as ‘the Great War’: nobody saw it coming. The fund manager Harris Kupperman highlights the complacency in securities markets even as armies mobilised across Europe:
“A few years back, I read an incredible white paper regarding investor complacency in the final weeks leading up to the First World War. Archduke Ferdinand was assassinated, global powers were trading demands, with the threat of war and investors didn’t care. As the crisis heated up and the armies began to mobilize, investors still were in a fantasy world. Back then, bonds were the primary liquid investor product and a potential war would weaken a government’s ability to redeem the bonds in gold—hence bond prices would collapse if there was a war. Four days before the war started, with armies mobilizing, outside of a few basis-points move in Austria, no one feared a crisis. Why were investors so complacent? There are plenty of reasons; there hadn’t been a European war in their lifetimes, economic conditions were reasonably robust and everyone trusted the politicians to sort things out.
“I bring this all up as I sense a similar complacency surrounding the Coronavirus. Let me start by saying that I’m not a medical professional—I didn’t even get good grades in high-school biology. I have read my fair share of information by “so-called experts” but am well-aware that at this stage, most of what’s out there is just a bunch of theories using faulty Chinese data to arrive at a best guess for what will happen. Given the range of possible outcomes I have read, it is clear that there is absolutely zero consensus as to what will happen.
“If diverging opinions on what will happen amongst “experts” sounds a lot like analyzing the stock market where the “experts” are also mostly wrong, then you’re paying attention to the potential for outlier events. With this virus, you need to gather your own information, understand it as best as possible and then try to reach an actionable hypothesis based on the fast-moving information.”
One of the most impressive pieces of entertainment – if you can quite call it that – that we have seen over recent years is the 2019 HBO / Sky co-production Chernobyl, a practically forensic examination of what precisely went wrong in what remains the worst civilian nuclear disaster in our history to date. The atomic plant at Chernobyl blew up in April, 1986. The Berlin Wall itself fell in November 1989. The intervening years saw any credibility associated with the Soviet economic model drain away like sand in an hourglass. So our question is: could Coronavirus end up being China’s Chernobyl ? A follow-up question. Could the world monetary and governmental authorities’ response to Coronavirus – the ongoing acceleration of policy towards full-blown Modern Monetary Theory and all the ‘helicopter money’ likely to come with it – be their Chernobyl, too ?
These are not entirely idle questions. Monetary systems undoubtedly have a shelf life. President Nixon took the US dollar off gold in 1971. The current unbacked fiat money system has already lasted longer than many alternative systems that preceded it. And, just like the Soviet system, it has outlived years of sensible commentators pointing out that it was utterly unsustainable. The world policy response to the Coronavirus may turn out to be an economic turning point in more ways than one.
We have long argued that the global debt system is also utterly unsustainable. The only real question is how our current debt predicament gets resolved.
One way would be for the governments of the world to engineer enough economic growth to keep the debt serviced. The rapid spread of Coronavirus looks like a nail in that particular coffin. Not least in the euro zone, which was flirting with recession even before the outbreak emerged.
Another way would be for the governments of the world to default explicitly on their debts. Since we live in a credit-based monetary system, the implications of widespread sovereign default do not really bear thinking about.
Which leaves us with the third and final option, and also the option to which all heavily indebted governments throughout history have always ultimately resorted: they try and inflate the value of their debt away. We have already suffered over a decade of the most extreme monetary experimentation through the likes of Quantitative Easing and more recently Negative Interest Rate Policy, but one suspects that the deflationary impact of Coronavirus will make the coordinated rollout of an even more aggressively inflationist policy – perhaps both fiscal and monetary – practically a done deal on the part of our major central banks.
If it were as easy as printing money, Zimbabwe would be one of the richest countries on the planet. It plainly is not that easy. Investors are, in our view, right to be concerned about the looming impact of ‘the macro’ on the major asset classes of (listed) equity and debt. The spread of Coronavirus appears to have answered the question conclusively about what we get first – namely a deflationary shock, and then an inflationary response. To which only two words then become really relevant. Got gold ?
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: firstname.lastname@example.org.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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