Same as it ever was / Things will never be the same

By James Frazier

No matter how this economic crisis turns out, it is already assured a very prominent place in our memories. It’s not just the endless parade of scary headlines announcing precipitous market declines, massive government bailouts, skyrocketing unemployment, and high-profile frauds and failures. What really shakes us to our core is the thought, the mere possibility that “The end of the old way of doing things is here. Things will never be the same again.” What if this were true? What then, can we expect in our new, more uncertain future?

Let us start by taking a look at our current situation from a historical perspective. A cursory review of the last few hundred years reveals a virtual cornucopia of financial crises. Just to name a few: the Dutch Tulip mania of the 1600’s, the South Sea Bubble of the 1700’s, the Panics of 1873, 1893 and 1907, the Crash of 1929, the dot-com crash, and finally, our current situation. I highly recommend reading the stories of these panics, because the parallels with today are breathtaking. One cannot help but feel like history is simply repeating itself. Or, more interestingly, we may be seeing that the economy ¬– as one expression of human nature – operates within larger natural patterns that are built of cycles upon cycles: day and night, work and rest, breath, tides.  And likewise, the cycles of sickness and health suggest that once having lived through a health crisis, we often find ourselves looking at life anew, and forging new ways to move forward.

So let’s look at some history, ponder the present, and begin to imagine the future that may emerge from this time.

As an example of how things never really change, in his 1922 book, “The Stock Market Barometer”, William Hamilton wrote, “Prosperity will drive men to excess, and repentance for the consequences of those excesses will produce a corresponding depression. Following the dark hour of absolute panic, labor will be thankful for what it can get and will save slowly out of their smaller wages, while capital will be content with small profits and quick returns. There will be a period of readjustment… Presently we wake up to find that our income is in excess of expenditures, that money is cheap, that the spirit of adventure is in the air. We proceed from dull or quiet business times to real activity. This gradually develops into extreme speculation, with high money rates, inflated wages and other familiar symptoms. After a period of years of good times the strain of the chain is on its weakest link.” And thus the cycle begins anew.

What is the common, timeless element that unites us with our ancestors who endured similar, or possibly much worse, economic disasters? Human nature, of course, but even deeper, perhaps there is a connection between the natural and inevitable cycles of the human economy, and the ebb and flow of tides, the turn of seasons, the plant nutrient cycle, and other natural phenomena. From this perspective, transitioning from a period of exuberant excess to a period of quiet humility can seem as natural as exhaling after a deep inhale.

Just as surely as day follows night, we will muddle our way through this crisis and emerge on the other side. The only problem is that according to my watch, it is about half past midnight; we still have a ways to go until the sun starts shining again. History tells us that these cycles take time to play out, and there is no way to avoid the inevitable hangover after a period of excess. Try to avoid it as we might, we must experience it in order for the process to complete, and for health to return.

The reason for this is that economic boom/bust cycles are rooted in human psychology. In order to move on to a new cycle of sustainable growth, we must first complete a process of “letting go” of the vestiges of the old ways: the old home and portfolio values, the old sense of endlessly rising paper wealth. To use an analogy, experiencing the end of our nearly 30-year-long American bull market is like losing an old friend. We collectively move through the Five Stages of Grief: Denial, Anger, Bargaining, Depression, and Acceptance. Thus far, on the whole, we appear to be bargaining, with a good bit of denial and anger mixed in. We certainly have not moved on to the final stage of acceptance. Once the headlines reflect a humility or acceptance of what has transpired, I would expect that the worst will be behind us, and a new dawn just around the corner.

For those of us that are long-term investors, we must continue to cultivate the patience, discipline, and vision to be invested now, carefully and strategically, for that distant new day. We must ask ourselves, not where the bottom lies, or when we will hit it, but rather, what will the world look like once we emerge from this experience? Or, once all the lessons of these hard times have been fully assimilated, what will new paradigm be? While there is surely much that has yet to be seen or even imagined, I feel confident that sustainability, responsibility, community, and stewardship are going to be our cornerstones as we humans look to re-start this millennium on a new foot.

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James Frazier

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