Modeling Journey

If Avner Mandelman is right in his argument in Saturday's Globe & Mail, then we might well be facing a further drop of some 30% in stock market prices, with the accompanying repercussions for our economy. Another argument for installing a progressive government to replace the slow-reacting Tories.

Mandelman argues that there is a plausible historical link between conflicts and stock market levels:

"End of conflict leads to exuberance, which destroys capital. Capital destruction leads to more conflict, which leads to more capital destruction, until mutual exhaustion sets the stage to a sustained recovery. We are not there yet."

And therefore he concludes that there is a reasonable chance that we are heading for a period of conflict, which could lead to a fall of some 30% in stock market prices. Starting with President Obama, who "was forced to give the U.S. economy a shot of heroin instead, since he had inherited an economic zombie. But the stimulus-heroin has worked, the zombie is now walking, and so the doctor must start the drug-withdrawal program ASAP, before the patient suffers terminal inflation", he moves on to a historical analysis of conflicts and impacts on markets:

"As stated here before, in my view we are now in a 1939-equivalent period, as widening global conflicts are about to lead to a stock market decline. The conflicts/market analogy goes as follows: A major conflict's end (both 1919 and 1991) causes a 10-year irrational exuberance (both 1919-29 and 1991-2001), which destroys capital and ends in a 90-per-cent crash (both 1929-32 and 2001-03), followed by a 5-year echo-exuberance (1932-37 and 2003-07), in turn ending with a 50-per-cent mini-crash (both 1937 and 2008) - followed by a 50-per-cent bounce (1938 and 2009), which leads to the next conflict (1939; 2009?) and a 30-per-cent market fall (1939-40; 2009-10?)."

My best guess would be conflicts in two places: one in the Mideast (where Israel is month by month getting closer to a strike on Iran's nuclear facilities, because the sanctions against Iran are being half-heartedly applied and are really a bust), and one in Pakistan (where the war against Osama Bin Laden's crew is being stepped up by the Obama administration, shrinking the space open to them for free operations, and which might cause Osama to strike back at two vulnerable targets, Pakistan itself, with its nuclear weapons, and the fragile state of Saudi Arabia).

In any case, Mandelman's view contrasts starkly with the Tory government's view that all things will be rosy in the next five years, with a steadily improving economy and stock and capital markets leading to a 'natural' reduction in our huge deficits, without any tax increases or extra steps being required (apart, of course, form the unmentioned Tory program of slashing services to reduce costs).

Time for a change, eh?

Just in case Mandelman's market-conflict relationship proves right …