One of the most difficult parts of understanding market cycles is the lack of counterfactuals.
You can’t test the real world in a Monte Carlo simulation with thousands of potential paths. There is only one way and that’s really what it is.
For example, my argument is that no matter how bad things were during the pandemic, they could have been much worse for the economy. Our businesses closed, people stayed home for long periods of time, remote work was established, and people lost their jobs, effectively shutting down the economy for about a month.
It’s truly surprising how quickly the economy rebounded. Of course, we had high inflation, but this outcome was much better than some had predicted (which Something I wrote in 2020). If you run the pandemic simulation 100 times, are things likely to get much worse than they did 90 times?
Maybe the government didn’t need to spend so much money. Maybe the Fed didn’t need to hit its bazookas to keep the markets afloat. The problem with counterfactual information is that we may never know.
The reason most investors don’t dwell on counterfactuals is that things that don’t happen aren’t headline-worthy.
These are not the headlines you’ll read in the financial media:
THERE WAS NO REcession AGAIN TODAY
THE STOCK MARKET HAS NOT CRASHED AGAIN
NO FINANCIAL CRISIS FOR ONE MORE MONTH
However, it may be useful to look back at some of the outcomes that people at the time were sure would never occur.
During the Great Financial Crisis, the Federal Reserve took drastic measures to shore up a financial system that was on the brink of collapse.
They reduced interest rates to 0 percent. They implemented quantitative easing, which essentially involved buying assets from banks to shore up their balance sheets.
Many experts, investors, and economists worried that these actions would lead to much higher inflation (some called hyperinflation), a collapse in the dollar, and a potential financial crisis down the road.
In fact, many respected people wrote Open letter to Ben Bernanke They express concern about the Fed’s actions.
The Fed has kept interest rates on the ground for much longer than anyone could have imagined:
Short-term interest rates were pegged at 0% for most of the 2010s and for several years in the early 2020s. In the end, it was something like 8 or 9 years with a 0% rate.
And yet… we have not had another financial crisis. Zero percent interest rates did not lead to another recession. The economy was slow and sluggish, but that’s what happened after the banking crisis.
As people talk coinage Inflation remained low in the 2010s.
One of the main reasons for this was that the Fed did not actually print money and send it to households. They were buying assets from banks and holding these assets. Banks were not lending more to businesses and consumers, so asset swaps propped up the banking system.
Inflation finally reared its ugly head in the 2020s as government I did Send money to homes and businesses. But this wasn’t the Fed.
Despite many complaints over the years, the Fed’s actions did not lead to a financial crisis. Yes, it has had an impact on financial markets because interest rates can change people’s risk appetite.
But there was no hyperinflation.
The dollar has strengthened.
There was no financial crisis caused by monetary policy.
There has been no recession (other than a brief 2-month slowdown caused by the pandemic).
Actually we just experienced longest economic boom in history And One of the longest bull markets ever.
Interestingly, I was making comparisons between them. the current bull market and the boom of the 1980s/1990sI decided to look at the inflation occurring in each period.
The cumulative change in the CPI from 1982 to 1999 was roughly 79%. From 2009 to 2026, the consumer price index increased by 56% overall. So even if you include the increase in inflation in 2022, prices increased at a lower rate than in the 1980s and 1990s.
Many people assumed that Fed policy would lead to an even bigger crisis in the future.
Some may say they were wrong early on.
Either way, it’s worth remembering that there are plenty of dire predictions in the financial experts’ prediction graveyard.
Most of the bad things people predict do not happen.
Further Reading:
The Fed Is Less Important Than You Think
