Sundays I like to that don’t make it into the column during our usual hectic working times around here.   

An Historical Markets and Virus View

Even if you don’t subscribe to, we still love to share (and get feedback) on our curious views of history, markets, and the ability of humans to form “false correlations.”

False relationships, when viewing data, is very dangerous territory because it drives people to ascribe “cause & effect” to the  wrong things.  This propensity is laid out in in Thomas Gilovich’s book “How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life.”

It’s not that we deliberately set off to mislead ourselves; it’s that we tend to take the  most available data instead of measuring the multiplicity of other data sets that may inform us more accurately.

For example, in the current period, we’re in the midst of a Supply Chain Breakdown.  The  correlation to the coronavirus is there, but it’s really a kind of third-hand “source” of what will ail us into the future.

Let’s look at some of the earliest stock market data leading into the Great Depression:

There were a huge number of economic events within this date-range:

  • The long-running Depression from 1893 to about 1900 was in evidence.
  • Towards the end of those “Gay 90’s” optimism appeared and the markets rose.
  • The markets worked their magic as invention swept America, too.  December of 1903, man took flight.    Ford was founded in 1903.  Things were looking up, but….
  • Then came the San Francisco Earthquake April 18, 1906; but -at least visually in the data- it was not an especially “big driver.”  The Market had peaked two months earlier and was in a position where technical analysis could argue a further decline was due, anyway.
  • What followed the quake in late fall was the Knickerbocker Banking Crisis.  While some attempt to link the quake to the Knickerbocker Panic, Wikipedia reports that while there was previous quake-induced market instability, “Primary causes of the run included a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.
  • When, on April 6, 1917, the U.S. entered World War I, the market had, once again, already peaked and was in a technical position to decline.  Which it did, losing about a third of its value into year-end in 1917.
  • The Spanish Flu began in the fall of 1918 and was mainly over by the end of 1920.  This area is shown in red.  And please notice that the market continued up for several months, thereafter. But, it did reverse course and begin a descent from 1919 into late 1920.
  • The market bottomed within this region.

On  “Kindling and Causes” of Panic

The world stands this morning on the doorstep of a multi-year, great economic Depression, in my view.  Even now, however, the cause is not squarely-centered in the public mind.

We’re in a global financial and supply chain crisis.  To be sure, the disruption of Chinese manufacturing may have been the “spark” – no question about that – but there’s something much more important going on:  Financial Engineering is failing.

The reasons have everything to do with Compound Interest and the Costs associated with a “wide and deep” supply chain versus the “modern” era’s “skinny supply chains,”  augmented by B2c business models, and the effects of  debt saturated “money.”

Time to kick back with a fresh cup and “picturize” a bit.

Two Rivers: A Supply Chain Failure Model

The major aspect of what’s going on today may be, I think, properly modeled by simply considering two rivers.

Before the advent of computers and networks, say prior to 1960, or so, Manufacturers mainly sent product to Distributors.  These, in turn, sent things on to Retailers and there was plenty of Charmin, assured Mr. Whipple, was it?

The River Model here is “Mississippi.”

Fast forward the runaway, indeed frenzied, moves to enhance technology, increase returns, deficit spend, and water-down the purchasing power of money.  Even genius-level entrepreneurs got into the movement.  Famously, Elon Musk’s Tesla Motor’s  successfully challenged the “old way” of distributing automobiles.

But there was more:  Amazon matters as the key hybridization of the 1895- Sears Roebuck and Company mail-order catalog giant.  But, instead of a printed catalog, the genius of Jeff Bezos was to “Do Sears as a website.”  The remains of Sears, lacking technical vision to grasp the new future, failed.  Retailer/Catlog houses (Montgomery-Ward, J.C.Penny, and many others) lost ground.  Communications left the mailbox and rotary phone and clicked-ahead.

Concurrently, there arose – in the breakdown of the Big-10 of Accounting – to what’s now the Big Six – cadres of very smart accountants (financial engineers) who realized that “Money invested in inventory doesn’t pay a return.”  And so, inventory levels were reduced to absolute minimums.

Just-in-Time manufacturing led to higher “inventory turns” and companies streamlined operations further.  Throughout the process, companies bought-bac k t heir own stock and artificially jacked-up stock prices to the retail public (small investors).  It was the Virtuous Cycle at its best.

The River Model for this?  The narrow gorge of the Colorado River as it transits Grand Canyon park.

Toilet Paper Runs Instead of Banks

This transition left Global Markets in an extremely vulnerable position.  Whereas in earlier times, the “wide and deep” [Mississippi River] model could withstand shocks (because inventory was widely dispersed geographically available) caused by regional changes in demand, in the “modern model” when the “narrow and fast” river model [Colorado through Grand Canyon] was running, there’s simply not enough product to refill empty shelves, rapidly.

In Palestine, Texas, and much of America, finding toilet paper has become an art form.  And in this part of The South, there’s a shortage of black-eyed peas and other high-protein legumes.

To the credit of Financial Engineering, I believe that “profession” simply failed to realize that their efforts to end “money at rest”  shifted the modern era from a high potential for “1930’s-style Bank Runs” to the more modern local grocery store “Toilet Paper Runs.”

Even today, people continue spending with high confidence of their “money working” – but the Devil in the Back Room is supply chain collapse.

Due to the ongoing Global Pandemic, we’re in the Colorado River Model and somewhere upstream, the water has been shut off.

China has every incentive needed.  But since the Colorado Gorge runs fast, when it fills up completely becomes a crap-shoot.

Public Policy Responses

We can judge these using our “Two Rivers” model.

On some, like “Let’s Build American Wells to Replace the Shut-off Water Upstreamn.”  The problem is we’re in the Colorado.  That’s hard rock country so drilling a well for water here will take 2-4 years.

We can be asked not to hoard.  As in “Don’t empty the river…others need to drink, as well…:”

The prepper types (like us) don’t trust anything now that the “water’s been shut-off upstream.”  We’re working on gardening, thank you.

The good news?

Well, if you find some, do leave a comment.  We think even when the water comes back on (figuratively) there’s now a national “drought mindset” evolving and that points in the direction of continued socioeconomic disruption.

And even when we weather Wave 1 of the virus, little is likely to change in time for Wave 2.

Write when you get rich,