What just happened? State of the financial markets in 1H 2022. Two interesting lessons from history.

A. Lessons from Spanish Flu

1. Spanish flu of 1918 was the most severe pandemic with estimated 50 million deaths world wide

2. The "Roaring Twenties" refers to decade of 1920s, which was period of economic prosperity. US stock market quadrupled between 1920 and 1929

3. "The Great depression" started in 1929, US stock market crashed 89% from its peak. The contagion spread world wide, lasted for a decade

4. "The Hyperinflation": Germany experienced hyper inflation in 1920's which led to social tension and ultimately to the rise of the Nazi party

5. "The World War II": The dictators took advantage of the anarchy and started WWII

What took 30 years in 1900's is happening within 3 years in 2020's.

Pandemic in 2020, stock market boom in 2021, Russia and Ukraine war followed by high inflation in 2022. US stock market has lost $10T market cap in 1H 2022 .

We experience more uncertainty and volatility these days because we are subject to 10x more information and experience.

Living 70 years today equals 700 years of lived experience of a comparable human 100 years ago. Watch out for your mental health, evolution does not work at the same pace as technology.


B. "Cantillon effect" lessons

18th century French banker and philosopher named Richard Cantillon authored - “Essai sur la Nature du Commerce en Général”.

Cantillon effect describes impact of new money introduced in the system. Two metaphors illustrates his economic theory

1. "Those who are closest to the kings benefit the most when there is new money in the system"

In olden times, when new gold mine was discovered those who were closest to the king benefitted the most.

In modern times, when central bank introduces new money in the system through quantitative easing, Institutions and individual investors with higher credit ratings benefit the most than every day wage earners.

The credit worthy investors have the ability to borrow money at a lower rate, invest and reap huge returns over a longer term.

For e.g. Apple issued 40 year bond in 2021 at c.1.15% in 2021, unimaginable borrowing cost for common wage earner.

2. "The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled"

The speed at which the new money reaches wage earner is not proportional to the magnitude of money supply. Unfortunately, inflation impacts common folks before the new money reaches their pocket.

Every time central bank intervenes with monetary policy to stimulate economy, rich get richer albeit as an unintended consequence.

It is important to proactively manage the imbalance to maintain stability in the society in the near future.

We live in interesting times, keep your seat belt fastened.

Views are personal and certainly not an investment advice.

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