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  • Writer's pictureRobert Baharian

Dealing With Speculation

Updated: Mar 19, 2021

Hence, if it requires, say, a thousand years to fit for easy flight a bird which started with rudimentary wings, or ten thousand for one with started with no wings at all and had to sprout them ab initio, it might be assumed that the flying machine which will really fly might be evolved by the combined and continuous efforts of mathematicians and mechanicians in from one million to ten million years — provided, of course, we can meanwhile eliminate such little drawbacks and embarrassments as the existing relation between weight and strength in inorganic materials. - The New York Times, 1903

This is an extract from an editorial on airplanes publish by The New York Times on 9 October 1903. It was predicted by the paper that it would take between one million and ten millions years before aircraft could be developed.

At 10:35, he released the restraining wire. The flyer moved down the rail as Wilbur steadied the wings. Just as Orville left the ground, John Daniels from the lifesaving station snapped the shutter on a preset camera, capturing the historic image of the airborne aircraft with Wilbur running alongside. (, 17 December 1903

Two months and eight days following the publishing of The New York Times article, the Wright brothers flew - literally within weeks, not 1 million years later, weeks. And yet, 120 years on, investors grasp to every word that is published in the media and by the so called experts whose job is to peddle a narrative.

What insight does this person posses? What edge do they hold? These are two simple yet imperative questions to ask either yourself or the individual manufacturing the narrative. I make up stories to my children all the time. I have no doubt that in a few years they will have grown up and worked out I have no insight, I hold no edge. However investors continue to act as innocently as my two children.

The word on everyone's lips these days is "inflation" (insert dramatic sound effect here). The conventional wisdom is pretty straightforward, and it goes something like this:

+ Central banks are printing endless money

+ This will lead to inflation

+ Inflation is bad

The bottom line is that it's pretty obvious and everyone knows that inflation is about to rear it's ugly head. There are two key issues here:

1) Conventional wisdom doesn't always turn out to be correct - who knew, right? Just look back over the last 12 months, and

2) Beyond all the fear and headlines, what does a rise in inflation even mean for the markets?

If you missed my last two pieces on this, you can check it out here, and here.

In today's chart we take a look at how the stock market performed when rates were rising in the US. The chart plots the performance of the US stock market beginning from 100, which is when rates bottom out and begin to rise. The chart plots the performance of the stock market during this time until rates peak.

For example, from 1941 when rates bottomed out at 1.95% to reach a peak in 1953 at 3.11%, the stock market actually rose 234% during this time. This is clearly an outlier. In the 16 series in this chart only two series ended the period lower - 1971 to 1981, the stock market was down 2.5% excluding dividends, and 1893 to 1984, down 8% excluding dividends. And the period from 1900 to 1921 - yes, rates rose for some 21 years, the stock market had a pretty wild ride ending the period slightly higher than when it started. From the above chart, the stock market ended it's period higher 87% of the time, with an average gain of 28%.

Granted, we haven't been here before at precisely these rate levels. And for this reason stories of horror and what could go wrong are super powerful. They grab your attention twice as quickly. Our connection to money and the prospect of loss is twice as powerful, psychologically, as gains.

If you say something for long enough, one day, you will be right. Identifying something that can't last forever doesn't mean it can't last for a really long time. Between now and then a lot of money could be lost, and a lot of money could be made. In fact, more money has been lost in trying to predict a crisis than the crisis itself.

If you haven't worked it out by now, most people are wrong most of the time.


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