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2020 and Beyond

Written by Peter Siks | 5 minutes
MON 06-01-2020
A group of scientists conducted an experiment in 1987. They made a pile of sand with computer precision grain by grain. With the research they wanted to look for the grain that would lead to an avalanche. What turned out to be? They did not find that grain, but found that all kinds of different grain could lead to avalanches.

Just like in that experiment, over the past 100 years there have been all sorts of "grains" with very different effects on the stock exchange (and more widely in the world). Although it is tempting to look back and to see the logic of those events, the course of the fair mainly shows how difficult it is to understand those events without the "power of hindsight".

Save the overview
That is why I am convinced that it helps if we keep an overview. This way we can understand things in a broader perspective and not lean too much on our retrospective. Although we may only really understand important events afterwards, we can study the underlying dynamics in advance.

In the long term, for example, we always see underlying wave movements, or rather feedback loops, which we discussed earlier. It is striking that, due to the interaction between all parts of the economic system (eg debt, income, profit, interest, etc.) and other issues such as politics, regulation and psychology, the economy actually rarely moves according to a few modeling rules.

That insight helps not to fall too fast for simple conclusions that seem to fit in well with the data. As Edward Lorenz said: "the present can predict the future, but with the present we don't predict the future." The long term teaches us that we should be careful when our image of the future starts to look too much like our own expectations.

Distinctive return
What the past 100 years have also shown is that the various investment categories each have their own conditions for performing well. It sounds like an open door, but that distinction makes it possible, when we zoom out and look at the circumstances, to make optimum use of the power of the various investments at our disposal.

For example, good stock performance went hand in hand with higher growth, the bond investor mainly benefited from the trend of disinflation that has been raging since the 1970s, and investors in gold managed to protect themselves well against shocks of inflation and deflation.

Even the completely passive investor could have obtained a good position among all the different circumstances and trends that made every decade unique by applying a spread outside of shares and bonds.

The policy maker's doubt
Because of the unique characteristics of each period, it is very difficult for policy makers to turn the knobs in the right way. Moreover, at various times during the past 100 years, it became apparent that measures that previously worked well were suddenly no longer valid. One result was the high inflation in the 1970s.

In addition, policy is often only delayed and the effects are only visible after a delay. For politicians, who often rule in the relatively short term, this delay can be disastrous.

Moreover, this can lead to political wave movements that work no different than economic wave movements. We have often seen that policy is on the strict side shortly after a crisis, where it has often been too flexible just before a crisis.

The current trend
With those lessons from the past we can ask different questions about the current trend. Before that I would like to share the other conclusion from the experiment with the sand heap. Because there was not one apparent grain of sand, there was no critical point for an avalanche. For comparison, if water did not have its critical point, there would be no specific temperature that will make it boil.

So there was not one point, but people found so-called "self-organizing criticality". In other words: as the heap of sand grew larger, hope brought itself into a critical condition. In that condition, every extra grain on the heap could have infinite effects, from a huge avalanche to nothing at all.

Looking at the current trend, the economy may be in a similar situation. For example, the debt mountain is now higher than ever, the central bank has a historically generous interest rate policy, there is an aging population and we see that all sorts of countries adopt a more critical attitude towards international trade than before. However, we also see issues such as huge technological innovation and a growing climate awareness.

A possible scenario is therefore that the next crisis is more difficult to combat with the tools that we have. On the other hand, we may have new tools to get us started.

That is the beauty of such a critical situation, it is not inherently positive or negative. It only says that a phase transition may be approaching. The next 10 years and beyond will undoubtedly also include wave movements, and I very much hope that the lessons from the last 100 years can help you to successfully move on those waves.

Author

Peter Siks

With more than 30 years of experience, Peter Siks has now been tried and tested in investing. Among other things, Peter is interested in the psychological aspects of investing and since 2010 he has been working at BinckBank as an investor trainer.

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