A Hard Rain's A-Gonna Fall

Bob Dylan, the poet and singer, often captured economic reality in his metaphors better than thousands of economic analysts. He understood storms of all kinds when he sang:

And it's a hard, and it's a hard, it's a hard, it's a hard,
And it's a hard rain's a-gonna fall.

Here were some of the news headlines from March 2007:

• World stock drop hits second week
• U.S. Stock-Index Futures Slide; GM, Wal-Mart Drop After Asia, Europe Slump U.S. stock-index futures tumbled after shares in Europe and Asia extended a global selloff that wiped out $1.5 trillion in world market value last week
• Mortgage Crisis Spirals, and Casualties Mount

A few weeks after these headlines, the world markets recovered and everyone quickly forgot about their fears of the economy going into free fall. They returned to complacency. But they shouldn’t.

Sooner or later, we will see fierce worldwide economic storms that make the Indonesian Tsunami and Hurricane Katrina seem like small local incidents. At some point in the coming years or decades, stock markets will likely plunge around the world in dismaying amounts. Potentially we could see 20%, 40% or even 60% of equity values wiped out in a very short time. And nobody will know the date or the year of this disaster until afterwards, because that is the way it is with the biggest storms.

This has happened before and it will happen again. My father lived through the Great Depression of the 1930’s and that event was etched into his mental wiring. It is likely that this giant economic storm was also the largest cause of World War II where tens of millions of people died all around the world.

No one can adequately explain the cause of economic calamities. They are partly caused by physical realities, like energy shortage, wars, and other natural disasters. They are also caused by speculative build-up of markets to unhealthy levels, which makes a collapse a near certainty. They are caused by enormous debt loads by consumers, companies and governments that prove unsustainable. Finally, there is a psychological element where euphoria can turn overnight into nightmarish fears.

When I was a student at Harvard, and soon after as a manager on Wall Street, I was told that these economic disasters would never happen again, due to rapid progress in economic knowledge and monetary management by central banks. My teachers and bosses were unfortunately overconfident and mistaken. Several major recessions have occurred throughout my working life, and none of them has been expected by the experts.

It was helpful decades later to hear someone of the stature of Allan Greenspan, the former Chairman of the US Federal Reserve Bank publicly acknowledge that central banks and economists live in the dark like the rest of us when it comes to predicting the economy. At best, they examine trends and potential scenarios to get some sense of the direction of the wind.

So, don’t ever leave yourself vulnerable by betting everything you own on the assumption that markets will always go up. You might be right for a year or two, but dead wrong later. Remember the thousands of technology millionaires that lost everything when the NASDAQ market collapsed by over 75% at the end of the 1990’s. A few cashed out in time, but most believed that this new easy money would last indefinitely.

So I return to Bob Dylan, who describes this well:

And what did you hear, my blue-eyed son?
And what did you hear, my darling young one?
I heard the sound of a thunder, it roared out a warnin',
Heard the roar of a wave that could drown the whole world,
Heard one hundred drummers whose hands were a-blazin',
Heard ten thousand whisperin' and nobody listenin',
Heard one person starve, I heard many people laughin',
Heard the song of a poet who died in the gutter,
Heard the sound of a clown who cried in the alley,
And it's a hard, and it's a hard, it's a hard, it's a hard,
And it's a hard rain's a-gonna fall.