“A large stampede typically eliminates everything in its path.”
- Mar 19, 2020
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No one has seen anything like it. It will live in our financial lore. They’ll be some bright 19-year-old kid writing a thesis on it in 2036 for graduate school. He may win a Nobel Prize in economics for inventing a new Game Theory about it. His theory will get coded into the next generation of trading programs.
There were many elements to what happened. First among them was the length of the bull market. At ten years it was the longest bull market in history. That means we’ve watched the longest bull market in history unwind in just four weeks. 3,650 trading days unwound in just the past 30 days. It’s been a stampede.
From Wikipedia: “A stampede is uncontrolled concerted running as an act of mass impulse among herd animals or a crowd of people in which the group collectively begins running, often in an attempt to escape a perceived threat. A large stampede typically eliminates everything in its path.”
And that’s where the volatility has come from. Experienced investors knew the 2008-2009 financial crisis was coming. It was becoming clear as early as 2006. That gave them plenty of time to sell stocks or securities in assets they thought most exposed to the risk. It also gave them time to short assets like mortgage bonds. In other words, the market had time to prepare itself. There was a full panic. And it was a stampede. But it didn’t have the volatility this one does. Investors had two years to place their bets.
The Panic of 2020 is different. Investors didn’t have time to prepare. One day it’s being called fake news. The next day we’re asked to stay in our homes. That’s why the volatility has been so severe. These whipsaw swings are investors getting blown out of large positions at every level down. Banks keep calling in loans on hedge-funds and other investors at every major price level down. Many are going bankrupt. You will hear about them in the not-too-distant future.
How do you see past the stampede? It’s hard when you’re looking at the news every day. Or logging in to see that your retirement account is back to where it was in 2017.
I remember Warren Buffet once talking about recessions. He said it was like being a farmer. And every farmer has two drought years every decade. That’s just a fact of life for a farmer. And recessions are just a fact of life for a businessman or an investor.
Here’s how I explained a recession to my 11-year old daughter, Lila. I told her to imagine that the US generated $100 every month in GDP. When she didn’t seem surprised by this (whew!), I told her to imagine that a few of those months would be interrupted.
2020 – US GDP by Month
January – $100
February – $100
March – $85
April – $85
May – $90
June – $95
July – $100
August – $100
September – $100
October – $100
November – $100
December – $100
2021 – US GDP by Month
January – $100
February – $100
March – $100
April – $100
May – $100
June – $100
July – $100
August – $100
September – $100
October – $100
November – $100
December – $100
She seemed to get it.
“The Buck Stops Here,”
Dylan Jovine