Browsing asset managers' notes for the fourth quarter of 2018, it was unsurprising to find many attempts to reassure investors spooked by the whipsawing markets at the end of the year. More interesting were a couple of very detailed pieces of research discussing reasons to be pessimistic. The overriding issue, discussed at length in the new e-book by Ray Dalio of Bridgewater Associates, Principles for Navigating Big Debt Crises, is the world being in the late stages of a debt super-cycle. Such phenomena have occurred throughout history and Niels Clemen Jensen, author of The Absolute Return Letter, cites allusions to the economic effects in The Old Testament. Ominously, the last debt super-cycle ended with World War II.
Before readers reach for the whisky and valium, a silver lining is found in the work of Elroy Dimson, Paul Marsh and Mike Staunton of London Business School. As first shown in their seminal book, Triumph of the Optimists, the annualised rate of real total return on world equities between 1940 and 1950 was just positive at 0.3 per cent. Neither we nor the reports we have read are predicting a catastrophic war but the fact last time such a devastating event occurred stock markets weren’t destroyed provides valuable perspective. To cheer investors further, it is worth pointing out that by 1960, thanks to the post-war boom, the annualised real rate of return on an investment in world equities in 1940 had risen to 7.9 per cent.