Winter or Summer?

The recent sudden drop in crude oil prices and the evolution of the covid-19 pandemic have resulted in a significant fall in global share prices. While last week’s piece on mean reversions offered a technical understanding, it failed to capture the emotional trauma attached to such sudden dislocations. Risk managers pay huge attention to operational risks and so-called black-swan events that defy accurate identification. However, it is clear from the reactions in almost all securities’ markets, that nobody had stitched a truly global pandemic into the risk calculations.

In the immediate short term, a global recession is now inevitable; leaving certain sectors, such as retail, entertainment/leisure and travel reeling in response. Upfront, it will undoubtedly immiserate hundreds of millions worldwide.  But it is important to remember that the world economy was in reasonably good shape in recent times. Buoyant consumer and business confidence – together with growing order books – augured well for robust economic performance. Yes, we accept the stock markets looked very frothy, but this happens from time to time. What is different on this occasion is that investor confidence has now been strafed to its core.

Catastrophic events create uncertainty in all disciplines of life. Is my job safe? Have I enough saved for my pension? What about my children’s education? These are legitimate concerns for worried individuals. However, uncertainty also creates vacuous gaps in our thinking. We panic unnecessarily. We become despondent. We forego our previous good disciplines. We confect exaggerated and worrying outcomes.

In these sad times it seems uncaring to talk about finance. But finance is one of the fundamental elements that will allow us climb back to the crest of our wave. Did you ever ponder to think why it is, in these weeks and months of lockdown, that the only retail units kept open are banks, grocers, chemists and fuel stations? It is because these are the four indispensable supply chains in the economy. The need for food, medicines and energy is obvious but our inability to access the finance to secure these goods would leave us haplessly stranded.

MMPI is repeatedly compelled to intone the phrase “past performance is not a guide to future performance”. This is unfortunate because history can teach us so much. Philosophy demonstrates that those who cannot learn from history are condemned to repeat it. MMPI believes we can all learn from history. Previous market calamities have been overcome. Previous market downturns have resulted in significant innovations. Previous times of anguish have unearthed beacons of hope.

It would be foolish to make obtuse predictions – but history teaches that the recovery will be swift (V-shaped) or ponderous (U-shaped). It also points to very positive responses to dramatic interventions from governments and central banks. But, most of all, history illustrates the ingenuity and cunning of humankind to overcome adversity and to find a way through.

MMPI convokes all like-minded thinkers to follow the words of Seamus Heaney.

If we winter this one out; we can summer anywhere!

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