The Structural Crisis That Nobody Talks About

It's pretty bad, no? I don't want to rub any salt into the wounds but I'm quite surprised that all talk of the current crisis misses out on one critical component of it.

The structural crisis. All by itself, it's not that scary. It often goes on unnoticed. Actually, since World War II we live in a permanent structural crisis. Just look at how many new industries emerged and how many old ones died or changed completely. Basically, how completely life has changed in the last 60 years. And it was the time of the fastest economy growth in known history. But bad things happened when the structural crisis coincided with a financial one.

There are only two crises in US history which could be compared with the current one. The Great Depression of the1930s and maybe even greater depression of 1873-1876. And both of those two crises had two things in common: structural crisis combined with financial one. In 1873 the structural crisis was caused by the railroad build up, which changed business radically, overextended the credit markets of the country and also overbuilt railroads. But it probably wouldn't be that bad without the Coinage Act of 1873 which essentially introduced the gold standard to the country and caused a severe deflation.

The Great Depression is closer to our era and there are a lot of books written about it, but not many people point to the structural crisis behind it. Yes, there was a huge financial crisis, caused by credit destruction and some political errors. But the structural crisis was there as well, caused by a shift from horse to automobile in transportation and to the tractor in agriculture. This crisis was bigger than that of 1873, because the structural change behind it literally changed everybody's life in the developed world.

Our current structural crisis is a little bit different. It has two causes: the internet and globalization. And they should be taken together, because some aspects of globalization are impossible without the internet. As with the previous structural crises, you can't undo its causes. It's impossible to shut down the internet, and it's equally impossible to stop globalization. Those who think that protectionism is possible now just don't understand how tightly our world is interconnected. Take apart any piece of more or less complex machinery made anywhere in the world, and you'll find parts from at least five countries in it. Railroads were here to stay in 1873, cars and tractors were here to stay in 1929, the internet and globalization are here to stay now.

The lesson from previous structural crises is simple: it takes time to get through it. No matter what measures anybody is taking, we need time to work it out. Political decisions can make crisis longer or shorter, they can make it much worse or soften its effects, but they can't magically make it go away. In time we will get through.

From an investment perspective, structural crises can create huge opportunities. So far not that many businesses take full advantage of the internet. We have very successful ones, like Google (GOOG) and Amazon (AMZN), not very successful but viable Yahoo (YHOO) and very promising Netflix (NFLX). There are some travel and niche retail businesses, but I expect many more to emerge soon. Our task as investors is to find winners.


Full disclosure: At the time of publication author had a long position in GOOG and no positions in other stocks mentioned, considering buying AMZN and NFLX on weakness. Positions can change any time.