K2 CIO Investment Note July 2022 "Choosing wisely from the archives"
By David Poppenbeek July 2022
“History doesn’t repeat itself, but it often rhymes.” Mark Twain.
Sometimes market conditions are beyond one’s own experiences. It is during these times that market participants need to go back into the archives and investigate similar historic phases and try to understand the causes and effects. It’s a bit like trawling through the streaming libraries during COVID lockdowns to find an appropriate movie to watch. It is difficult to simply scroll through the movie titles that were produced forty years ago and identify something that is worth viewing today.
Unfortunately, I must admit that I have some experience with movies from the 1970’s and ‘80’s. As a kid, I vividly remember being dragged along to the local movie theatre by my older cousin to watch “Grizzly”. It was released in May 1976 and had all the traits that were popular at the time; gut-crunching terror. I didn’t judge the actors, I didn’t rate the director, I just went along with the crowd. Imagine if I had of done a similar thing with investing? If I had of bought into the S&P500 in May 1976, I would have experienced a +3%pa total return over the next three years. Unfortunately, those meagre gains would have been more than chewed up by inflation which grew by +8%pa; the -5%pa real return would have been truly gut-crunching. Interestingly, my cousin did not coerce me into viewing “Raging Bull” when it was released in November 1980. It was directed by the up-and-coming Martin Scorcese and starred a youthful Robert De Niro. Some research at the time would have revealed that “Raging Bull” had all the traits required to be an enduring feature film. Likewise, an investment in the S&P500 in November 1980 would have yielded a +14%pa total return over the next three years which would have been partially offset by inflation of +6%pa; an attractive +8%pa real return would have been a far more palatable outcome.
Today, most market participants are grappling with a global inflation impost that was last seen in the 1970’s and ‘80’s. However, simply looking what happened forty years ago is no guarantee that a viable roadmap can be created for today’s investment journey. But it can certainly help to frame a rough guide. The message that I am trying to deliver is that when investigating the past, it is often worth looking beyond the headlines. The devil is in the details, and the details are often owned by those that needed to make decisions during the period in question. Hence, when trying to understand what a high inflation environment is like, I found that trawling through sixty years of US central banker speeches and meeting minutes was quite instructive. I believe that it is important to appreciate what central bankers needed to contend with 2 during three phases; the Great Inflation phase between 1966 and 1982, the Great Moderation phase from 1982 to 2001, and the Great Intervention phase since 2001. Ultimately, these phases will provide the foundations needed for equity investors to avoid the “Grizzly” bear plots and instead pivot more towards the “Raging Bull” opportunities.
For the full Annual CIO Note "Choosing wisely from the archives", click here
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