Strategic thinking

This Crisis is Different

Warning: This post requires a strong stomach. I hug my friends and family often, but I deal in, and am deeply interested in reality. Proceed with caution.

I grew up during sanctions in South Africa. The world finally took notice of the racist National Party that ran the country and decided to hit SA with a wave of activism thanks to many brave souls who had been working for decades to bring awareness to the issue. The economic impact was significant as foreign companies pulled out of the country, as did foreign investment. There was economic pain, but it brought about healthy change.

I was working at Credit Suisse First Boston in London in 1998 to 2000 when Long Term Capital Management collapsed. A massive hedge fund which many of the banks, including CSFB, were exposed to. That cost many jobs but things bounced back.

I remember when the Russian Ruble collapsed around the same time. IIRC it cost CSFB about $600 million. We saw a few layoffs.

Then I joined during the dot-com boom. I headed out to Santa Monica where I was based for a while. I remember being in my apartment in the early 2000’s in Marina del Rey watching CNBC live and watching the market collapse in real-time. When I returned to London the company went through multiple rounds of layoffs.

I stuck around until pretty close to the lights being permanently switched off in the London office. eToys, worth $6 billion at its peak market cap was delisted from Nasdaq and the assets were sold to KB Kids for $2 million.

And of course we all remember the sub-prime mortgage crisis of 2007/2008. What fun that was.

This time is different, for two reasons. Firstly, all those other stories were due to business, market or economic forces. They were man made. LTCM, Russian Ruble, dot-com bubble, badly rated and badly priced debt during the housing crisis. We did that.

This thing is not man-made. It’s completely exogenous. Something external to the machinations of us puny humans. It is not something we can fix in the short term because it’s not something we broke. We just had a lot of kids and mother nature took an interest in us as a source of food for a new pathogen. Technically cities are infestations of humans – a rich feeding ground for a new kind of monster. And with over 4.3 billion people traveling by air each year, flitting around the globe was easy.

Having survived many economic crises with the usual levers, financial regulators and central banks have run home to mama and are using the usual levers. Only this time they’re pushing them much harder than they’ve ever been pushed before. But we didn’t break this, so we don’t get to buy our way out of it.

The second, and most important difference, is that this is a global event that is almost simultaneous in its impact. The economic impact of this has been compared to a hurricane. Now imagine a hurricane with the impact of Katrina in every major economic center at the same time around the globe. We can’t bail others out because it’s hitting every city in every country within a few months of each other.

I think back to when I worked for CSFB. When LTCM collapsed – hey OK so we took a hit but there’s still other investments, other sectors, other countries that are doing OK. And those other investments buffered the impact.

Same with the Russian economy collapsing in the late 90s. OK so we lost Russia for a minute. But there are a huge number of other investment areas and business sectors that create a buffer.

We’ve seen countries rise and fall, sectors like technology fall and rise back up. We’ve seen major terrorist attacks on individual cities, and those same cities rising from the ashes even stronger. We’ve seen hurricanes or earthquakes taking out major metropolitan areas and they rise back up.

This time it’s different. For the first time in my life, every economy on the planet – every city, every country, every region – will take a major economic hit. Now you might think that doesn’t matter because we’ll just work our way out of it with the help of courageous central bankers, legislators businesses and individuals. Well, here’s the problem…

Remember I mentioned the collapse of the LTCM hedge fund? That was triggered by the collapse of the Russian economy and the 1997 Asian financial crisis.

Remember the sub-prime mortgage crisis? That was triggered by a fall in home prices after the housing bubble collapsed, which lead to mortgage delinquencies which caused a crisis in housing related securities.

Remember Madoff’s hedge fund? His ponzi scheme almost collapsed in 2005, but survived. Then the market downturn, thanks to the sub-prime crisis of 2008, finally revealed the fund to be a ponzi scheme.

You could even argue that the dot-com bust was triggered by two things: Greenspan raising interest rates, which made borrowing more expensive for the dot-coms – and also Japan entering a new recession. The combination of these two events led to a major pull-back in investment in overvalued tech stocks.

The global economy has not yet collapsed. We are at the leading edge of the storm right now. The stock market collapse you saw is anticipating the collapse of the global economy. It is not actually the collapse. Same with the recent $2 trillion bailout.

The collapse is just beginning and it’s off to a smashing start with 6.6 million Americans applying for unemployment benefits last week. That’s the most ever by a massive margin. Expect similar next week. And the week after that.

Taleb’s concept of anti-fragile is applicable here. Systems that are fragile, but have been surviving thanks to favorable weather and calm seas, are about to experience the worst economic storm in modern history. The damage from this storm will become apparent once it has passed. Just like the 2008 crisis, we will see ships that started out fragile, completely destroyed. They will cause collateral damage. There will be many failures because this is a global event. And it has not yet begun.

2 replies on “This Crisis is Different”

Interesting post Marc.
I think it goes further than this.
Because everything is so broken we are seeing a system change. Just as we saw the USSR states change from communism to capitalism we are seeing capitalism fail and change to a sort of state controlled socialism. Countries are paying salaries in the private sector. Public Health systems are all important. Interesting times. I expect China, Cuba and North Korea will do very well, as essentially no or little change for them.

Take care, keep thinking and writing.

I disagree on several points.

Everything isn’t that broken. I’ve seen broken in many developing countries and lived through a revolution. Also was there when the Brazilian Cruzero collapsed with 1% inflation per day. Seen Zimbabwe’s issues. Spent much time in many other emerging markets and it is a very different picture from what you’re seeing in developed countries today.

As an aside, this is a common misconception in developed countries: That things have fallen apart. It’s caused by political leaders trying to foment drama with the contest for attention during election cycles. Things in the USA are actually awesome compared to most of the rest of the world.

You’re talking about a fundamental ideological change. You mentioned the USSR. That was precipitated by the states in the Soviet Union seceding from the Union. Not because Capitalism is better or worse than the previous economic system. More open markets was just a default state that they gravitated towards after the fall of a communist union.

Capitalism actually failing looks like hyper inflation, severe deflation, extreme volatility. We haven’t seen any of these, and yeah I’m sure the wall street folks think that the VIX is a little high right now, but consider the South African rand over the past week and it’s precipitous drop versus the dollar. Now that’s volatility.

Countries are not paying salaries. Make no mistake on this. A single cash infusion does not a salary replace.

Having lived under public healthcare in the UK for 5 years and France for a year, and under private health care in the USA and South Africa (South Africa is a kind of hybrid) I can tell you that private healthcare seems like the greener grass, but it has it’s flaws too. UK public healthcare resulted in me thinking I hadn’t broken a bone, when in fact they called me back a week later with a correction: I had and there was nothing I could do about it at that point because it started healing. I also saw someone very dear to me lying on a gurney with a severe head injury for hours without being treated in the ER because the doctor ‘lost’ her patient.

I’ve been treated in the USA for far worse and US healthcare saved my life twice. So There are pros and cons for both public and private.

China and North Korea are not very nice places to live if you’re in the median of income distribution. Cubans haven’t had an easy time of it either. Expecting North Korea to do very well seems a little odd to me.

Thanks for the comment. Obviously we disagree on much.



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