Despite the sense of panic out there, I don't believe that the world is about to see a repeat of 1929. We are just experiencing a deep and nasty recession. The world will emerge out of this downturn sometime next year and investors should be positioned in anticipation of a recovery.


The importance of a historical perspective
When people react to difficult events, their immediate reaction is to reach for parallels from their own experience. This is problematical in this current bear market. For a portfolio manager with ten years of working life, his bear market experience consists of the post-NASDAQ bubble crash. Twenty years gets you the post-NASDAQ bubble and the bear market of 1990. Both of those occasions involved fairly mild recessions.

I was personally involved in the market during the peak in 1980 and the subsequent bear of 1982. I apprenticed mostly under people who lived through the recession and bear of 1974. Those were inventory recessions, caused by the central bank putting on the brakes on an overheated economy. Those recessions, while deeper than the downturns of 1990 and 2000-2, were not good parallels to today.

Grizzled veterans like Warren Buffett lived through the Go-Go years of the 1960s and their collapse in 1968, as well as some of the markets in the 1950s. Even those markets were not good parallels to this current period of macroeconomic stress. To analyze today’s conditions we need to delve deeper into market history.


Looking for parallels in Non-US economies
Many American investors make the mistake of thinking that market history start and stop at the US border. I can remember a lot of silly analysis that went on after 9/11. Analysts cited the market’s reaction after Pearl Harbor as to the probable market reaction after the start of a war. Did World War II start in December 1941? It did for America, but was that true for the rest of the world, or more importantly, Mr. Market? Ask the Europeans. Did the German blitzkrieg invasion of Poland in 1939 mean nothing? What about the fall of France in 1940? Did Mr. Market think that Operation Barbarossa, the massive German invasion of the Soviet Union in the summer of 1941, mean that the war was “well-contained” like the sub-prime crisis? Meanwhile over in Asia, the Japanese occupation of Manchuria began in 1931 and well pre-dated the German invasion of Poland. Was that just a historical blip?

If we look at non-US markets for parallels, many analysts cite Japan’s Lost Decade as a parallel. I have also suggested that the case of German re-unification could give us some historical perspective. While both those periods do give some insights, they are less than fully satisfying models for today as those downturns were localized. This time, it’s global.


The Great Depression as a model
Many others have sounded alarms about another Great Depression (see examples here and here). To be sure, parallels exist. Too much leverage and speculative excess were seen in the boom that pre-dated 1929. After the Crash, we saw de-leveraging in the subsequent bust.