It was August 1939 and Adolf Hitler was finalizing his plans to invade Poland. The world economy was still limping its way through the Great Depression era, and the sharp downturn in the economy and financial markets of 1937 was in the immediate past, with the great crash having culminated only just a few years prior.
Here was a monthly chart of the US Dow Jones Industrial Average over the period:
The large white candle inside the red rectangle I have drawn in was September 1939, as August had been a relatively weak month. Apparently, the invasion triggered a ‘relief’ rally, or perhaps hedge funds were covering shorts? The subsequent seven months saw a consolidation unfold, and then the Nazis invaded France.
Humans have not evolved to be rational. We spend much of our conscious lives deluding ourselves into thinking we are a rational species, but really we evolved to survive. Part of that has been our collective ability to grin and bear the epic amounts of tragedy and suffering through the history of our species. Confronting the grim reality of how the majority of our brothers and sisters exist and have existed throughout history would be like watching Schindler’s List on a never-ending loop.
The human and economic tragedies which are now clearly unfolding in Europe, as well as a growing number of developing markets like Sri Lanka, are difficult to confront. What has been transpiring in EU and UK power markets, for example, (Doomberg has been covering this with expertise) is now obvious, just as Hitler invading Poland was ‘obvious,’ yet it can be difficult for people to get their heads around the implications.
Fast forward to more recent history, and one with which I have direct memory. The 2008 Global Financial Crisis involved similar, if less dire, denialism.
Here was the Russell 2000 Small Cap Index (weekly chart) from the period, with my red rectangle highlighting the period from January through late summer 2008:
That sideways consolidation took place as SocGen imploded, Bear Stearns was bailed out, then Fannie Mae and Freddie Mac went bust, and by the start of September, the US economy had been 8 months into a recession. As someone who was positioned and prepared at the time for what was ‘coming,’ I viscerally recall how ‘crazy’ markets and consensus views seemed. It was enough to make me doubt whether I was the crazy one.
The ‘crap the bed’ candles on the right side of the red rectangle were around the TARP votes, when many STILL remained in delusion as to what was transpiring. Indeed, the Russell 2000 closed the week of September 15, 2008, only about 12% off its July 2007 all-time high!
Here was Walmart during the period - a good place to ‘hide’….for a while.
Here was Uncle Warren’s Berkshire, which perhaps could have been bankrupt weeks later had the federal government not bailed him out for a second time:
Here was the Utilities sector ETF, another vaunted ‘hiding place’:
I wrote on June 30th on the Kayfabe Capital Twitter account that the probability of a multi-week market rally seemed pretty high, as market cycles have a way of unfolding in what retrospectively seem crazy ways. How the hell could people be so blind and crazy?!
People being ‘blind’ is part of the delusion that is the human experience- a feature and not a bug. Much of the world is likely facing truly dark times in the coming months. But if Hitler invading Poland could not awaken the collective out of delusion, why would Fannie and Freddie going bust, or EU electricity prices going up by a factor of 10+?
Rather than focus on the human tragedies unfolding, it makes us feel better obsessing and speculating over what words incompetent central bank bureaucrats utter in the mountains of Wyoming. Ahhh…just writing that sentence has reframed my mind as I grin and bear. But at some point, and my guess is not too far away, we’ll all have to be confronted with reality whether we like it or not.