Are we set to repeat the history books’ mistakes? Jim Duffy comment

I think it is fair to say that none of us remember the Great Depression of 1929, which lasted a decade.

Will shopping save the UK from potentially a 1929-type Depression? Picture: Keystone.

October 1929 saw Wall Street sent into sheer panic. Like all stock markets, sentiment rules the day. Forget the charts, analytics, Harvard MBAs and super computers – how investors feel is the primary arbiter of stocks and shares behaviour. It didn’t end well, and millions lost their livelihoods, savings, businesses and, in some cases, lives. Of course, that is history, right? It could never be repeated as today we are so sophisticated and smart. Think again…

Weeks before the current pandemic hit the UK and the USA, markets were already sensing something was quite literally in the wind and they tanked. They fell fast and hard and many of us with private pensions, ISAs and investments were caught with our pants down.

It was lightning speed and while we contacted our brokers, financial advisors and banks, it was too late, the damage had been done. That is how quick it happens. Forget how clever markets are now. Remember, it is all built on sentiment. But it gets worse.

Only this week, the UK Government has unleashed a torrent of communications from ministers telling us to get out and shop! Yes, shop, shop, shop. Hit the high street, wear a mask and try not to barge into the person next to you as buy cheap clothing from the likes of Primark. It is time to get the economy going again. So go shopping. Really? Is that it? Is that what will save the UK from potentially a 1929-type Depression?

Dilemma

Well, if it is we are stuffed. Stuffed in two ways, actually. But any masters degree I may have is not in economics, monetary policy or pure maths, so why would you listen to me? Well, the answer is two-fold.

First up, the Great Depression saw a stock market collapse as we have experienced over the last few months. There was a bull market running away at that time. Similar to what we have experienced over the last few years. Millionaires and janitors all piled into the good times. Sound familiar? Then bang. It hit.

And while it felt terrible there was a rebound. The markets sprang back in a V-shaped recovery. Phew! Then there was truly nothing to keep it all going. Unemployment rose. Banks had loans that could not be repaid and huge sectors like agriculture could not make the sums add up, selling produce for virtually nothing (with no EU grants). And the markets dropped and dropped and the rest is history.

You see where I’m going here? Can someone please tell me where the fundamentals are that will prop up the economies of Europe and the USA? And please don’t tell me that shopping will save us all.

Secondly, and I did allude to it, we are a lot smarter now? MBAs galore in corporate leadership roles. Algorithmic alarms on globally joined-up computers to keep everything in check. We are far more aware and no financial Titanic could ever happen these days. I’m not so sure. Think about it.

Central banks have pumped trillions into economies since the 2008 financial crisis. We were only just getting over that – AKA austerity. And now here we are again, with even more fresh money or “debt” being printed, albeit at lower rates of interest. Big corporate giants need bailed out because the MBAs got it wrong and bought back huge chunks of their stock.

Great for share prices, dividends and making themselves wealthy. But it really sucks when reality kicks in. And, like Oliver, they come begging for more stimulus. No, I do not think that shopping will save us from what could be ahead in the next 12 to 24 months. It might feel good to be out and about and spending.

But underneath the veneer of the new normal lurks real structural danger. We are leveraged with debt upon debt at a macro-economic level. Loads more jobs will be lost and people will struggle and use debt to help them get by. Even this month, I heard the term “perpetual” bonds being considered by the EU. Essentially this means printing money that will be paid back for centuries. I can’t see a happy ending. Perhaps the thousands of MBA graduates can.

Jim Duffy MBE, Create Special

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