The Breakdown - 8 Historical Analogies That Help Explain the Madness of 2020

Episode Date: September 5, 2020

Inspired by Michael Batnik’s “All Wrapped In One,” this episode examines eight moments from history that can help us make sense of one of the most chaotic years of our lives.  Income inequality of the Gilded Age The election of 1896 The pandemic of 1918 The economy of 1929 The social movements of the 1960s The stock market of 1987 The speculation of 1999 The housing market of 2006

During the pandemic, Jeff Bezos became the first person to have a net worth exceed $200 billion personally. Meanwhile, we're cheering at an August jobs report that shows an 8.4% unemployment rate with 10 million people unemployed. The scariest part of that jobs report to me was the number of permanent job losses, which rose 500,000 last month to 3.41 million. That means of the people who lost their jobs in the wake of course, COVID-19, 3.41 million of them have had those jobs become permanent losses.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The breakdown is sponsored by Crypto.com, BitStamp, and Nexo.io, and produced and distributed by CoinDess. What's going on, guys? It is Friday, September 4th. the beginning of the long Labor Day weekend that transitions us from summer to fall. And I'm so excited to share this fun little episode today. So I was looking for something to read for Long Read Sunday. And I ran across an article by Michael Batnik, who is the director of research

at Ritt Holt's Wealth Management. He writes a blog called The Irrelevant Investor that tons of you guys know. And he wrote this great post this week called All Rapped in One. And basically, he uses eight historical analogies to describe altogether 2020. He kicks off the piece and says, 2020 is unlike anything we've ever experienced. This year includes some versions of the following. The income inequality of the Gilded Age, the election of 1896, the pandemic of 1918, the economy of 1929, the social movements of the 1960s, the stock market of 1987, the speculation of 1999 and the housing market of 2006. I'm not going to read this piece. I have a piece by David Graber who unfortunately just passed away this week for Sunday. Instead, I'm going to actually use

this as a guide and go through the arguments and how this all comes together. And the goal is to basically pull from this history to help better understand where we are. Those of you who are regular listeners might know that I was a history major and always take the chance to grab some historical analogy when I can. Now, because this is one of those episodes where we're talking about a really wide swath of the economy, I'm not going to do a brief today, but we will talk about some of the topics that I would have had in the brief like the recent jobs report. So without any further ado, let's talk about the madness of 2020 explained with eight historical analogies. The first one is in many ways the most relevant, and that is the income inequality of the gilded age.

I saw recently an argument that the letter shape of this recovery is not a V or an L, but is in fact a K-shaped recovery, where the better have profited in some really good ways, and the worst off have gotten even harder up. I think it's a powerful visual as much as I hate these letter analogies, and so let's look at some of the comparison stats between income inequality in the Gilded Age and now. In 1897, the richest 4,000 families who combined made up far less than 1% of the population had as much wealth as everyone else combined. Today we see wealth inequality show up in different ways. It has been on the rise for decades. In 1980, the top 10%'s share of national income was about 35%. By 2020, it was greater than 50%.

This has obviously gotten worse in the context of the asset bubble. In 2009, for example, the top 10% of earners owned 82.4% of stocks, while in 2020, that is up to 87%. And of course, the bottom 50% owns a totally negligible amount. Now, if the asset bubble, however, is part of the inequality that we see play out today, it's also embodied in even more dramatic symbols. During the pandemic, Jeff Bezos became the first person to have a net worth exceed $200 billion personally.

Meanwhile, we're cheering at an August jobs report that shows an 8.4% unemployment rate with 10 million people unemployed. The scariest part of that jobs report to me was the number of permanent job losses, which rose 500,000 last month to 3.41 million. That means of the people who lost their jobs in the wake of COVID-19, 3.41 million of them have had those jobs become permanent losses. There are basically an endless number of statistics about income inequality that we would draw from, and there is a major debate about the role of our monetary policy in aiding and abetting and accelerating that inequality. I believe it will be one of the key.

key political battles of the next 10 years as well to figure out how to address it. But I don't believe not addressing it will be a choice very much longer. Now let's turn to the election of 1896, which pitted William Jennings Bryant against William McKinley. Michael chose this one for its characterization of populism and contentiousness. He quoted Ohio State University who had written about the campaign, Brian's campaign was conceived by opponents as being sectional and regional, pitting the rural, the poor, and the immigrant against the urban, native, and middle class slash rich. Interestingly, however, I think there is a larger dimension that is especially relevant in the context of Jerome Powell's speech. In many ways, William Jennings Bryan was campaigning for inflation.

He was campaigning for an increase in the monetary supply. The speech that catapulted him to national recognition became known as the cross of gold speech and is still considered one of the great speeches in American political history. Brian argued that the U.S. needed a bimetal standard, not just a gold standard. He thought that the money supply was too low,

and this was a key plank of the populist platform at the time. This was taking place in the context of a depression that had begun in 1893 and continued through to 1893, where estimates of unemployment were as high as 25%. Brian cited gold, which was a decision that had to do much with international trade, trade with the UK in particular, as hurting regular people. In that cross-of-gold speech, he said this. There are two ideas of government.

There are those who believe that if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The democratic idea, however, has been that if you legislate to make the mass is prosperous, their prosperity will find its way up through every class which rests upon them. You come to us and tell us that great cities are in favor of the gold standard. We reply that the great cities rest upon our broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic, but destroy our farms and the grass will grow in the streets of every city in the country. Now there are some obvious differences to this

moment. At this time, Grover Cleveland had chosen not to run for a second term as Democratic president, and the Democratic Party was itself at war between the populace side and a more conservative side. In this case, Brian, who represented that populace side won, but didn't ultimately win the election. In the case of today, obviously Biden represents the opposite side of the Democratic Party, and we'll see what happens in November. Still, it's a super fascinating moment and certainly something that is in the context of this sound money debate even more relevant to today. It's hard not to see a little bit of the MMTers in Brian, right? What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is

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Get started at nexo.io. The next historical analogy is perhaps the most obvious, and that's the pandemic of 1918. Because we have talked about this so much, I even have an episode with Jamie Catherwood about economic history similarities to previous pandemics, I think I wanted to focus on one key psychological difference. Mike Solana from Founders Fund tweeted this week, One chapter into Yuval Noah Harris's 2015 smash hit Homo Deuce, and am pleased to inform you,

I've just learned pandemics are a thing of the past. The point, of course, is that we didn't realize we were this vulnerable. We didn't realize that this type of thing could bring us to our knees so quickly. This new fear, this new recognition of our non-invincibility, I think is spilling over into geopolitics, it's spilling over into things like our sense of supply chains, and of course, at least in that context, that's not necessarily a bad thing, but there is a psychological reset and sense of vulnerability that I don't know if it was the same in 1918 because we weren't yet masters over nature in quite the same way we fancied ourselves to be now.

Here's another analogy which has been made over and over, the economy of 1929 at the beginning of the Great Depression. Here are Batnik's comparison points. In the Great Depression, industrial production fell 52%. More than 40% of mortgages were in default. Federal revenue fell by 50%. U.S. Steel, the first company to reach a billion in market cap, cut 75% of its workforce to part-time hours, and unemployment hit 25%. Meanwhile, in 2020, we saw second quarter GDP fall 9. from a year earlier, industrial production fell 16% year over year, non-farm payrolls fell by 20.8 million in April, and nearly 15% of the workforce was without a job that month. Now, of course, when it comes to differences, the point that everyone is hoping for, obviously, is a fast return to some normalcy that's not this sort of deep depression. At the same time, many have a sense that we're

trying to outrun something structural. Go back and listen to my episode with Luke Grumman from earlier this week about what happens when the debt to GDP ratio gets this high. All right, next up, it's the social movements of the 60s, another comparison that in the context of Black Lives Matter has seemed obvious in some ways. Although, of course, there's not a convergence between that civil rights movement and an anti-war movement like there was in the 1960s. For this one, I'm actually just going to preview Long Read Sunday this week because for LRS, I'm reading a selection from the sadly just passed away David Graber about revolutions. In the piece that I'm reading, he makes an argument from Emmanuel Wallerstein

that says that true revolutions are actually global. He also argues that the popular perception of the 1960s social movements as failures is quite wrong. Moreover, when looking at revolutions, he says that one of the most important points has to do with the intent of action and how that has shifted over time. Way back in the day, revolutions were about overthrowing the system of government and taking power entirely. In the 20th century, it was more about influencing the common wisdom and the common sensibility. Today, I think the fascinating thing is that there is a new option which is actually opting out of the system in a more significant way. In effect, the internet breaks physical constraints, and for the first time, in the context of something like Bitcoin,

we have an option to opt out of some part of the system, in this case the money part of the system, that is really powerful and profound. The next historical analogy that Michael makes is the stock market of 1987, and I think here the connection point has to do with volatility. The February to March 2020 drawdown, the 30% drawdown, was the fastest in history. It happened in just 22 days, which was a day faster than 1934 and two days faster than in 1931. However, the weird moment that we're in is one in which stocks are rising at the same time as measures of volatility. Jesse Felder wrote on his blog, The VIX is raising a red flag for the rally. Basically, the VIX is expected to move

in the opposite direction of stocks, and several significant tops and bottoms have been identified or could have been identified by a divergence in the S&P 500 and the VIX. For example, the 2007 stock market top saw the VIX going up even as stocks were going up as well. Feldor concluded his piece, in short, the options market is sending a message that volatility going forward is likely to be greater than the stock market currently implies. And history shows the options market is usually the one who wins this sort of argument. All right, guys, just two more analogies that help understand 2020, and this one is another big one, the speculative mania of 1999. This, of course, has been a major theme on this show. We've talked a lot about the Robin Hood Rally

and the sort of Davy Day Trader Army, and there's numbers that show that this is a real thing. First of all, you have this crazy all-time high in the total market cap to GDP ratio. The total capitalization of all stocks on the U.S. markets is about 190% of G.S. That is the highest by a lot, and the previous high was, you guessed it, March 2000, at the peak of dot-com mania when it was 167%. And even if you switch to a pre-pandemic GDP to try to have a slightly more rational sense of what the valuations are, we're at 170%. So still above that March 2000 previous all-time high.

We've also seen a major jump in the percentage of equities trading volume that comes from individuals. It's moved from about 10% in 2010 to nearly 20% today, and that's up 5% this year from 15% last year. So while you may not be seeing the same sort of cab drivers, or now I guess Uber drivers giving you stock tips that you saw in 1999, you certainly are seeing a lot of folks get into these markets even with the crazy COVID backdrop. You have to think that that increases the incentive for politicians to turn the stock market into a political scoreboard. The last analogy that Michael makes is the housing market of 2006, and I think in some ways to me, this is a nice parallel to where we started, which was inequality. The housing market, despite

this crisis, has absolutely exploded around cities, particularly New York City, and has exploded for people who have the option to work remotely. Now, I do believe some of this is a short-term reaction, I simply don't believe that people are going to abandon New York City long term. I think it provides something that you can't get elsewhere. At the same time, I do think that the monopoly of in-person work is likely broken forever and that companies are going to have to adapt to some meaningful portion of the talent that they want to come into their companies, being unwilling to join them physically in meat space. Because of that, you're going to see a lot of weirdness in the housing market for a while as that

all shakes out. But I think that the more significant point about this housing boom is the fact that you have a big part of this country who's seeing their jobs evaporate, not just in the short term, but forever, while at the same time there's another part of the country that is being able to be mobile, that's being able to optimize for their family. And I certainly don't begrudge that half. This is a decision that we made for our family a couple years ago to move into the country away from cities. What I want to point out, though, is that it's hard to see something that's a more stark example of just how divided this country is in terms of economic opportunity, that there could be a housing boom at the same time that there is this unbelievable challenge as it relates

to people with jobs and in industries that have been totally destroyed this year. Anyways, guys, like I said, I thought this was a fascinating way to try to pull from the threads of history to understand this moment we're living in. I would love for you to let me know what other historical analogies help you make sense of what's happening now. Hit me up on Twitter at NLW and let me know what other history moments we should be looking at. But for now, I appreciate you listening. I hope that you are about to have a really great Labor Day weekend. And until tomorrow, be safe and take care of each other. Peace.