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Stepan Lavrouk
Stepan Lavrouk
Articles (382) 

Is It Really 'Different This Time?'

History would suggest that it isn’t

January 31, 2020

On Oct. 16, 1929, leading economist Irving Fisher famously declared that “stocks have reached what seems to be a permanently high plateau.” Nine days later, the stock market crash of 1929 began, marking the start of the Great Depression. In retrospect, of course, such a statement looks like hubris, but at the time it must have been a credible statement. But we’ve learned our lesson, right? No one would say such a thing today, right?

Well, you would think that. But according to Bob Prince, the co-chief investment officer of Bridgewater - an investment management firm that manages more than $160 billion - the boom-bust cycle is over. Now admittedly, Prince’s statement wasn’t exactly that there won’t be any booms or busts ever again, or that policymakers had "solved" crises - rather, he was saying that central banks would no longer be able to create tighter monetary conditions that would continue the natural cycle that we have experienced in the past.

But it essentially comes down to the same idea - that we are in a totally different system today than we have ever been in before - that today "it’s different." Similar claims were made during the dotcom bubble of the late 1990s, as well as during the run-up to the great financial crisis of 2007-08. Is it really different this time?

It’s certainly true that central banks have played a key role in fueling this latest bubble. By keeping interest rates low and providing easy credit to investors, stock prices have been bid up to historically high levels. In this Prince is right, but I think it’s a mistake to suggest that this flood of cheap money has fundamentally changed the rules of the game forever. I think it’s much more likely that at a certain point, these policies of credit-creation and easy money will trickle down into higher inflation and the erosion of fiat money.

But even if you don’t subscribe to what is admittedly a rather bleak view of the future, I think it’s likely there will be some kind of bust crisis coming. So rather than suggesting we are actually living in a totally new investing paradigm, I think it’s more likely that investors have convinced themselves they are in a new paradigm. Extraordinarily high valuations require extraordinary arguments to rationalize them.

Equity investors have two choices: either admit that everything is overvalued and that it might be a good time to rotate to cash (as Warren Buffett (Trades, Portfolio) seems to have done), or to invent even more elaborate explanations for why stocks are actually well-priced right now. The latter may be more attractive as an option, but there is no substitute for the truth. Tread lightly and invest carefully.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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