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It’s Different this Time. Really?

Updated: May 17, 2022

Just before the 1929 Wall Street crash, celebrated Yale economist Irving Fisher claimed that the stock market had reached “a permanently high plateau”. This is just one example of the tendency of human beings to post-rationalise booming markets and economies, though perhaps it is the best known. Sir John Templeton famously said: “The four most expensive words in the English language are, ‘This time is different’.”

"Our brains are the same as those that sat in the skulls of our ancestors 300,000 years ago"

Recently I have come across three examples of what I think is the same human behaviour at work. Two of them are somewhat related but the third is distinct. It has been suggested recently that value investing, the meaning of the yield curve, and the Phillips curve have met an untimely demise (it is the last two that are related). Is it possible that those supporting these ideas are falling into the same trap as Fisher and others did before them?

Let us take each in turn.

Respected and highly successful fund manager Nick Train suggested recently that value investing was a 20th century phenomenon. His premise is that digital disruption will continue to drive company performance, widening the gap between those that benefit from or embrace digital disruption and those that do not. Many of those in the former group are growing fast and thus are trading on high valuation multiples.

Conversely, those in the latter group are growing more slowly and as a result trade on low multiples. Since Train believes that digital disruption will dominate the 21st century, he suggests that the gap will widen for a very long time, which is another way of saying that value investing was a 20th century phenomenon.

First, value investing has never been about buying stocks that trade on low multiples. If that were what it was, it would have been easy! No, value investing is about buying stocks that trade below their intrinsic value.

Second, there is nothing fundamentally different between the internet that is the driver of digital disruption and other major innovations in the last three centuries such as the steam engine, the internal combustion engine and the computer. They are related in that they have all caused major change, whether among companies or in the way we lead our lives.

As for the yield curve, former Fed chief Ben Bernanke warned in a recent panel discussion against reading the wrong thing into the flattening yield curve. Despite an inverted curve having preceded every economic downturn of the last 50 years, Bernanke said that this time may be different. Why? Because “regulatory changes and quantitative easing in other jurisdictions” have distorted normal market signals such as the yield curve.

Bernanke appears to be saying is that it is not clear there is going to be a recession. In the panel discussion he referred to the fact that the near-term outlook for the economy is quite strong. However, that is always the case when yield curves invert. If it was clear to all there was going to be a recession it would be upon us already!

As for the Phillips curve, former Treasury secretary Larry Summers has argued that the relationship between employment and wage growth appears to have broken down. He points to recent data, which do indeed suggest that the curve has flattened.

But to suggest that the relationship has broken down is brave indeed. It is possible that the internet and cheap labour in emerging economies have kept inflation pressures subdued, either directly or by changing the mix of the labour force in the developed world. However, it is also likely that these factors are temporary, and once advanced economies adjust to them the relationship will kick in again. After all, how can competition for labour not have an impact on the price of labour? It is like saying the law of supply and demand is dead!

The danger with suggesting that things are different this time is that the fundamental mechanism that drives our decisions and thoughts, namely human nature, never changes. Physiologically, our brains are the same as those that sat in the skulls of our ancestors 300,000 years ago. We remain riddled with the same cognitive biases and emotions, whether fear, greed, or the need to feel that the party ain’t ever gonna end.

Published in Trustnet

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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