Hedge Fund CIO: The 1929 Crash Sparked A Chain Reaction That Led To WWII In 1939
By Eric Peters, CIO of One River Asset Management
“Illiquidity is creeping into credit markets,” said Indiana, the industry’s leading archaeologist, explorer. “Credit risks of the type Minsky identified have migrated from the banking system into capital markets.”
Corporate borrowings through bond issuance, in turn captured in exchange traded funds, are an important part of that risk migration. “Even with the stability of credit spreads, this rate rise battered credit funds.” LQD is -6% YTD. “Fund outflows are $6.8bln YTD – the pandemic outflow from mid-Feb to mid-Mar 2020 was just $4.5bln.”
“This week saw the return of credit ETFs trading at a discount to net asset values,” continued Indiana. “Small for now, averaging less than 20 basis points in the past three days.” As liquidity in underlying assets lessens, so too does the ability of participants to provide that liquidity through ETFs. “The discounts are capturing a marginal fray in liquidity conditions, an early warning,” said Indy.
“And the crown jewels of global financial markets – Treasuries – saw a surge in the cost of borrowing securities this week. Illiquidity in Treasuries rose sharply.”
Rapid Unplanned Disassembly (RUD)
The 1929 market crash sparked a chain reaction that lasted a decade, a rapid unplanned disassembly, leading humanity to WWII in 1939. US unemployment averaged 18.2% in the 1930s, CPI averaged -2.0%. The S&P 500 lost 42% in the decade (real return was -29%). The 1970s RUD produced two brutal recessions, US unemployment averaged 6.4% and CPI averaged +7.25%. The S&P 500 gave the illusion of health with a 17% gain. The real return was worse than the 1930s, with a 42% decline.
- In 1930, the US CPI was -2.7%, the S&P 500 inflation-adjusted return was -23% (the inflation adjusted 10yr Treasury note return was +7.4%). In 1931, CPI was -8.9%, S&P 500 real return -38%, 10yr note real return 7.0%. In 1932 (CPI -10.3%, S&P 2%, 10yr 21.3%). 1933 (CPI -5.2%, S&P 58%, 10yr 7.4%). 1934 (CPI 3.5%, S&P -5%, 10yr 4.3%). 1935 (CPI 2.6%, S&P 43%, 10yr 1.9%). 1936 (CPI 1.0%, S&P 31%, 10yr 3.9%). 1937 (CPI 3.7%, S&P -38%, 10yr -2.3). 1938 (CPI -2.0%, S&P 32%, 10yr 6.4%). 1939 (CPI -1.3%, S&P flat, 10yr 5.8%).
- In 1970, the US CPI was +5.8%, the S&P 500 inflation-adjusted return was -2% (the inflation adjusted 10yr Treasury note return was +10.3%). In 1971, CPI was 4.3%, S&P 500 real return 10%, 10yr note real return 5.3%. In 1972 (CPI 3.3%, S&P 15%, 10yr -0.4%). 1973 (CPI 6.8%, S&P -19%, 10y -2.4%). 1974 (CPI 11.1%, S&P -33%, 10yr -8.2%). 1975 (CPI 9.1%, S&P 25%, 10yr -5.0%). 1976 (CPI 5.7%, S&P 17%, 10yr 9.7%). 1977 (CPI 6.5%, S&P -13%, 10yr -4.9). 1978 (CPI 7.6%, S&P -1%, 10yr -7.8%). 1979 (CPI 11.3%, S&P +6.5, 10yr -9.5%).
In both the 1940s and 1980s, investors who had emerged from the preceding decade with their capital intact made vast fortunes, equity markets boomed.
“The 19th century was defined by the formation of nation states. The US had just emerged from its UK ties, the treaty of Vienna created countries such as the Netherlands, France just had its revolution and rid itself of Napoleon, Germany unified and Italy became a nation state,” said the Dutchman, a private investor, his fortune built in the markets, trade, finance.
“The 20th century was the era of the establishment of institutions, alliances, internal, global, the US Federal Reserve, the United Nations, many others in between.” International Monetary Fund, World Bank, World Health Organization, NATO, the list goes on. Programs too: Social security, Medicare, Medicaid, state pensions. Countless agencies: CIA, FBI, NSA, NASA, EPA, FDA and so on.
“A number of those institutions have come under siege in recent times and the level of trust embedded in them has eroded,” said the Dutchman, images of America’s horned Shaman seared in the global consciousness.
History moves slowly, then fast, all at once. We read books, watch movies, and they compress years, even decades, into tight chapters, creating the illusion that periods of great change are apparent as they unfold, obvious to those living through them. And this then allows us to ignore today’s seismic shifts even as the ground beneath our feet trembles.
“This erosion of trust can also be said about the Fed at a time when the need for credibility is perhaps greater than it has ever been, which makes the trajectory for financial markets going forward particularly difficult and potentially very volatile,” he said.
“And it appears that forces are now in motion that will redistribute wealth, shifting it from capitalists to the workers,” said the Dutchman, taking a moment to consider it all.
“There tend to be couple decades each century when it is a victory to have preserved your real wealth. This looks to be one of them.”
Sun, 03/07/2021 – 20:00