But what if we’re wrong?
I am on record for expressing absolute confidence in our collective ability as the human race to overcome the gravest challenges we face – this time, it’s a global pandemic. Therefore, when we do, the capital market, which has suffered a setback recently, will resume its upward, permanent trajectory of growth. I have no doubt about this.
But I read an article recently where the author suggests that the equity market might never bounce back. So, I decided to indulge in a little thought experiment. I asked myself ‘What if we’re wrong this time? What if this challenge defeats us? What if we don’t come back from this one? What if the capital markets never recover? Like, ever?’
Often when people suggest that some sort of permanent irrecoverable decline in global capital markets is imminent, I don’t think they know what they’re talking about. I know what they mean however, permanent capital losses for equity investors, but they ignore the fact that the pain and agony associated with this loss is borne by real people – employees and families who depend on these companies for their livelihood, governments who depend on them for taxes and subsequently, the society that depends on governments.
So, what if the global equity market never bounces back from this decline?
Well, that’d imply that we’ve failed as a human race to find a solution to this global pandemic. The collective intelligence of our scientists and medical experts to find a cure to this deadly disease, has all but yielded nothing. The efforts of governments around the world have been all but in vain.
Capitalism, the greatest wealth creation engine, would have failed. The 53,886 domestic and international publicly listed companies globally, with a combined market capitalisation of $80 trillion, as at the start of April 2020, would have failed to turn this current global challenge around. The 53,886 CEOs and their army of employees who wake up every day during this crisis, fight relentlessly to keep their businesses afloat and act in the best interest of their shareholders – the investors, that is you and I – have all but failed. They’d be out of a job. I’d be out of a job. You, dear reader, would be out of a job and sadly, our author friend who posited this very idea of permanent, irrecoverable, global equity market decline would no doubt be out of a job.
‘What if the global equity market never bounces back? That would mean 53,886 publicly listed companies globally, with a combined capitalisation of ~ $80 tril, would have failed to turn this current global challenge around. Then…
I’m reminded of a fascinating tale told by Bill Bernstein in his book Deep Risk: How History Informs Portfolio Design
‘During the Cuban Missile Crisis of 1962, when an apocalypse seemed more than possible, an apocryphal story has a young derivatives trader asking an older one whether to go long or short equity options. The immediate reply, “Long, of course. If things turn out all right, we’ll make a ton of money.” Quivered the younger trader, “And if they don’t?” To which the older trader cheerfully replied, “Well, then, there won’t be anyone on the other side of the trade to collect from us!”
This story sums up my attitude to the question, what if we’re wrong about the inevitable recovery of the global economy and the equity market? To me, it’s not even worth wasting our breath to contemplate this option. If we’re wrong, we’ll all be dead. It won’t matter much that our portfolios never recovered.