Maps drawn over 500 years ago marked their uncharted territory with the words, "beyond this place, there be dragons." Positioning a portfolio in this economy feels a little like traveling must have before Columbus set sail and made cartography a rather more respectable profession.
I recently finished reading "Tragedy and Hope: A History of the World in Our Time," by Carroll Quigley. Given recent discussion about a possible "double dip" recession, I was particularly struck by the following that appears in a chapter titled "Reflation and Inflation 1933-1947:”
In most countries the recovery was associated with rising wholesale prices, with abandonment of the gold standard or at least devaluation and with easy credit. It resulted everywhere in increased demand, rising production and decreasing unemployment. By the middle of 1932, recovery was discernable among the member of the sterling bloc; by the middle of 1933 it was general except for the members of the gold bloc. This recovery was halting and uncertain. Insofar as it was caused by government actions, these actions were aimed at treatment of the symptoms rather than the causes of the depression and these actions, by running contrary to orthodox economic ideas, served to slow up recovery by reducing confidence. Insofar as the recovery was by the normal working out of the business cycle, the recovery was slowed up by the continuation of emergency measures — such as controls over commerce and finance and by the fact that the economic disequilibriums which the depression had made were frequently intensified by the first feeble movements toward recovery. Finally, the recovery was slowed up by the drastic increase in political insecurity as a result of the aggressions of Japan, of Italy and of Germany. [Emphasis added]
It is not difficult to draw parallels between actions taken by the U.S. since 2008 and the actions taken during the depression. A case can be made that in seeking to avoid financial Armageddon, policy prescriptions masked the true disease by treating only the symptoms. Business confidence has risen since the 2008 crash, but remains low. Is any of this attributable to "actions running contrary to orthodox economic ideas?" Perhaps, or perhaps it is a culmination of policy insecurity, capital insecurity and political insecurity with Washington more binary than ever. Next, replace Japan, Italy and Germany in the above excerpt with al-Qaeda, oil shocks and other geopolitical tensions and it recalls the adage attributed to Mark Twain that history does not repeat itself, but it does rhyme. So what happened next? Quigley goes on:
In most countries the latter half of 1937 and the early part of 1938 experienced a sharp "recession." It was caused by several factors: (1) much of the price rise before 1937 had been caused by speculative buying and by the efforts of "panic money" seeking refuge in commodities, rather than by demand from either consumers or investors; (2) several international commodity cartels created in the period of depression and early recovery broke down with a resulting fall in prices; (3) there was a curtailment of public deficit spending in several countries, especially the United States and France...[Emphasis added]
And so in parallels to the present we have gold trading at eye-watering prices and non-discretionary spending forecasts that seem to insist that any further deficit spending (assuming Congress raises the debt ceiling), will not go towards items stimulative to the overall economy. Do the historical parallels mean a double dip is inevitable? No. But they do suggest that positioning portfolios for the possibility is wise. The terrain remains unknown and for now, beyond this place, there be dragons.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.