Recently, I have been talking to my clients a lot about today’s environment. Politically and economically, how can we look at history to explain what is going on? This year was unprecedented, to say the least. Never in our history have we systematically shut down the entire economy in the blink of an eye. Millions of jobs lost, government bailouts to Main Street, the 2nd most volatile market crash in history, and the list goes on. 1sts for everything. Yet here we are as I write this, S&P fully recovered and more.
The damage done to the economy hasn’t been this severe since WWII, which I think is the perfect example of what we are living through today. One of the biggest comparisons is the connection of mobilization today vs WWII. In WWII we sent our brave men and women into the battlefield to protect democracy and today we are being asked to stay home and work for months on end to flatten the Covid-19 curve. Not a perfect example as the sacrifice made in WWII is insurmountable, but the connection here is we are still mobilizing.
Budget deficits
In both situations, huge deficits were used to fight the “war".” WWII cost $4.1T in today’s dollars. Pre vs post WWII, the U.S 10x’d their balance sheet. Today, governments have already spent trillions in terms of pure stimulus and the cost of the millions of job losses and equity losses. The tally at the end could be multiples of the cost of WWII. Only time will tell, but as a percentage of GDP and balance sheet expansion, I don’t think we will touch WWII.
Unemployment
I think the best way to look at unemployment is this: 20% of the population in the US was employed by the Armed Forces during WWII. Even though these people were employed, they weren’t participating in the economy, displaced if you will. Same thing goes today. Once we were displaced from the economy, unemployment shot up like never in history, to a whopping 15% in the US. The length of WWII vs Covid-19 makes me think unemployment will bounce back quicker. We are starting to see a huge bounce in people going back to work, but it could be a drawn out process.
Interest Rates
Interest rates and bond yields crashed in both cases. Governments scrambled around the world to cut rates to pay for the war. The bond market flexed, a risk to safety. In WWII yield curve control was used, and today we are seriously contemplating it. Yield curve control, different from quantitative easing (QE), means the Fed would target a specific part of the yield curve (in this case long dated bonds). Pushing down long-term interest rates then helps finance the war on Covid-19 and potentially give more time to pay it down or let the economy grow into it. Rates stayed low for many years during and after the war. I expect the same to happen today.
Wealth Disparity
This one is interesting. Wealth disparity was a theme in both cases. If you aren’t familiar with the history, between the start of WWI and the end of WWII, the difference in the share of national income between the top 5% of earners and the bottom 95% narrowed from 30% to 19.5%. The share of the top 1% fell from 13% to 7%. This isn’t a prediction for today, but this pandemic will cost a lot and taxes will be going up, no question. Maybe this is the catalyst that is needed to close the chasm between the 1% and the rest of the world. This Washington Post article from 2017 states that the only way to stop inequality is through war or some “bubonic plague.”
History suggests there is a way to lower inequality. But you’re not going to like it
We hear about it in the media all the time, and talk with our clients about it: How is the market where it is today when the economy is suffering insurmountable losses? With all the doom and gloom in the world, we need to remember that….
The Bull Market Began in the Darkest Days
There is always a light at the end of the tunnel. What you saw after WWII was one of the biggest economic expansions in history.
Excerpt from WW2 Bull Market:
“The market was already in a serious decline, which had begun in the summer of 1941, when the Japanese attacked Pearl Harbor on Sunday, Dec. 7.
The Dow fell 3% on Dec. 8 and another 3% the next day. The Dow hit 92.69, its lowest level since 1934, on April 28, 1942.
Then the market turned. There seems to have been no single event that triggered it. That was the beginning of a bull market that carried the Dow up 130% in four years.”
History can teach us that today’s environment is very similar economically and socially/politically. This is not a prediction, but a possible outlook of things to come. At the very least, I think we can count on low rates for a very long time. I also think there is a very good chance that March 2020 marks the start of a new secular bull market. Ben Carlson’s take of this from last year sums it up well, the markets did very well after WWII.
In a lot of ways, we are in better shape today than in WWII. No physical damage to cities and communities, much less casualties, lower unemployment, a stronger North American consumer, and lower interest rates.
It makes me hopeful as an investor that better things are to come. Looking at history gives us perspective on the current situation. Things might not be as bad as we think.
Other Sources
https://www.cnbc.com/2020/09/08/morgan-housel-economy-may-boom-in-2021-like-following-world-war-ii.html
https://voxeu.org/article/inequality-total-war-great-leveller