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2020 reminded us that stock markets drive commentary, not the other way around

21st December, 2020

Published in the Sunday Times on 20th December 2020

A few years ago, I was at an economics festival at which Financial Times columnist Tim Harford told a compelling story about American jazz pianist Keith Jarrett. Jarrett played a concert in Germany in 1975 using a piano that was too small to produce a loud enough sound to fill the Cologne Opera House. It also had worn-out keys in the upper and lower ends of the keyboard. As Jarrett began to play, he limited himself to playing the notes in the middle, avoiding the higher and lower registers. And he pounded on the keys to create enough volume for everyone in the opera house to hear. 

It should have been a musical catastrophe. That I am recounting the story here probably hints otherwise. The concert recording is not only the best-selling solo jazz album in history; it is also the best-selling piano album in history.

Obstacles sometimes unleash creativity

It’s an interesting allegory for life, in terms of how working around frustrating obstacles sometimes unleashes people's creativity. But it’s a small-scale example. The story of the largest volcanic eruption in history. No, not Mount St. Helen’s. This one was 100 times more powerful, is a large-scale example, and possibly more apt for the times we are in today.

I have to admit I only read about this recently from a brilliant piece written by Morgan Housel. The year 1816 is renowned as the year without a summer. It started in 1815 when the volcano Mt. Tambora in Indonesia erupted. The volcanic eruption surged 26 miles into the sky, pushing debris into the higher layers of the atmosphere. Out of a population of 12,000, in the province of Tomboro, only twenty-six individuals survived. 

With the sun blocked by ash, global temperatures fell an average of 1.5 degrees in 1816, marking the coldest year of recorded history. Europe saw snow through July, much of it discoloured with ash. Crops failed throughout the world. Famine followed. Hundreds of thousands are estimated to have perished as a result.

Around the same time, a 13-year-old boy named Justus von Liebig was introduced by his father to industrial chemistry, which he fell in love with. He became a chemist and deeply affected by his experience during the famine of 1816, he would devote his chemistry career to improving agriculture.He was one of the first to understand the mechanics of how important nitrogen was to plant health and crop yield, and how ammonia could be used to supply it artificially. 

Scientists subsequently learned how to manufacture ammonia synthetically – giving rise to the ammonia-based fertilizer industry that still dominates global agriculture. But for his predicament, would he have pursued a career in chemistry, focused on agriculture, and discovered nitrogen-based fertilizer?

Unintentional outcomes from the volcanic eruption

Tambora’s plague set several unintentional paths in motion. Most of which only became obvious decades later. Looking for an alternative to horses after feed prices surged during the famine, German inventor Karl von Drais invented the bicycle. 

Keith Jarrett and Justus von Liebig offer a window into the complexity of the world we inhabit and serve as a reminder of a number of important truths. I can’t say what I have learned, if anything, from the calamity that was 2020; yet. But it has at least reminded me of a number of things.

Reminders from 2020

Where we don’t have direct read through to cause and effect, thinking of second order impacts – the unintended consequences of events - is particularly challenging. Covid was a brutal reminder of this.  The impacts of a lockdown on things like florists or cinemas may be obvious when you stop and think about it. But it’s far from apparent when considering the first order impacts of a global pandemic. Investment markets generally do a superb job in figuring this out. The stock market winners and losers from 2020 were telling a lockdown tale, long before the tale was told. Another reminder that stock markets drive commentary, not the other way around. 

Nassim Taleb uses the concept of Antifragile, to describe things that gain from disorder. Technology and Healthcare proved to be the antifragile sectors in 2020. When we tend to think about protection in an investment sense, we often use the term robust. What assets are robust to downturns. Taleb’s antifragile concept urges us to consider not just what withstands stress, but what can actually benefit from it. Stressors come in many forms, so again there’s no direct read through. But 2020 has been a useful reminder of this concept. 

Not all disasters are opportunities. Sometimes a disaster is simply that. But when motivated or forced to do something completely different it can sometimes lead to creative outcomes. It may well be that upending the lives of several billion people, as Covid has done in 2020, will not provide any fortuitous gain. But that’s a viewpoint that’s stretching credulity.  

And finally, I’m reminded that we know less about the world — and about our reaction to it — than we like to think. The same goes for investment markets. Unpredictability is part of the trade. As if we needed reminding!

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