We’re in a moment in world history when a lot of big global paradigms are dying. For decades, Europe was basically peaceful. That paradigm has gone up in smoke. For decades, the relationship between the U.S. and China was one of mutual dependency and growth. That paradigm, I think, is changing rapidly, as the U.S. moves toward a new industrial policy and China shrinks inside a shell of authoritarianism. And for decades, low interest rates shaped the world—the companies that got started, the growth of the Internet, and the ability of governments to run massive deficits. And that paradigm is going away.
So, global markets are a mess right now. And I wanted to bring back one of my favorite writers to talk about it. He is Morgan Housel, a partner at Collaborative Fund and the author of the bestselling book The Psychology of Money. We talk about what happened to the markets in the last 18 months, the legacy of zero-bound interest rates, and inflation—but that’s just maybe the first 10 minutes. The bulk of this episode is about deeper questions. Something like: What’s investing for? Does making more money really make us happy? And why do so many rich people seem so miserable? If you like this episode, please leave us a rating on Spotify or a five-star review on Apple Podcasts. If you don’t like this episode: Tell us why at PlainEnglish@Spotify.com.
In the following excerpt, Derek and Morgan Housel examine the causes—and consequences—of an up-and-down two-plus years in the stock market and the economy writ large.
Derek Thompson: Stocks have obviously been a mess this year. The S&P 500 is down 20 percent, NASDAQ is down 30 percent. It is amazing to me how obvious everything looks in retrospect. You go back, 18 months ago, the U.S. approved a record-high amount of government spending in an economy that was supply-constrained because of the pandemic. The result was inflation. The medicine, as everyone knows for inflation, is higher interest rates. We know this for a fact. You get inflation, you get higher interest rates. We also know for a fact that higher interest rates tend to increase the cost of borrowing, and make it harder for companies that have less cash flow to thrive.
That means companies that relied on growth narratives, like Netflix and high-multiple tech stocks, were punished the most when interest rates increased. That’s what’s happened. You go back and you look at all the falling dominoes tipping into each other and it’s like, “Holy crap.” It’s so easy to see all of this now. It’s so predictable because it happened. I have lately become obsessed with this paradox that the future always feels so unknowable, and yet the past always seems so obvious. So you’re a wonderful thinker at the intersection of investing and psychology. How do you reconcile that paradox?
Morgan Housel: Well, you’re right that it’s always felt like that, that the future is unknowable and the past is so obvious. My wife has brought up this point several times. In 2020, COVID completely shredded the global economy, broke everything. From the investing standpoint, in the stock market, there was no price to pay. The stock market fell for a month. But then, if you look at 2020 in the United States, stocks rose like 20 percent that year. When people try to say, “Make sense of this market decline this year. How do you explain it?” My response is like, “No. How do you make sense of that? How do you make sense of the fact that, in the craziest, most insane year, maybe in the history of this country, the stock market went up 20 percent? Explain that to me.”
So in some ways, I think what we’re dealing with now is maybe just, there is a price to pay for the consequences of what happened, both the pandemic and the policy responses that came after that. To your point, though, about it being so obvious that this would occur, I would push back a little bit and I would say, if you remember what happened after 2008, during the financial crisis, when we had massive stimulus packages, and the Fed was printing trillions of dollars, so many people—including myself by the way—were warning in 2008, 2009, that hyperinflation is right around the corner. It is unavoidable. It is with 100 percent certainty that interest rates are going to spike and inflation is going to surge.
It didn’t. It did not come. We went years, and years, and years with people warning, warning, and it never happened. I think that is actually a big reason why, in 2020, we did 10 trillion some-odd dollars of stimulus, and a lot of people, including maybe myself, said, “Hey, it’s probably not that big a deal.” We were so conditioned, after 2008, to assume that we could have our cake and eat it too. So even though it’s obvious in hindsight, there are recent examples of when it did not play out like we thought it would.
Thompson: That’s a really good point, and I’m already ready to concede a bit on my original thesis that the past always seems so obvious, because you’ve just pointed it out that sometimes when we’re trying to explain the past, it’s almost as if we’re predicting the past the same way that we predict the future. We’re trying to inscribe explanations on that which is somewhat inherently mysterious. Why did stocks absolutely plummet in March 2020? Just totally cratered for two weeks, and then the global investor community was like, “Oh, nope. We’re actually fine.”
My answer to that question, and I’m going to see what you think about this theory—again, it’s just a theory—is that it has to do with basically two data points: fiscal response and monetary response. When the world fell off a cliff in March 2020, the Federal Reserve, and the federal government, and lots of fiscal policy makers all over the world said, “We foresee a massive crunch to both supply and demand because of this global pandemic. As a result, we are going to kitchen-sink this shit. We are going to throw everything that we possibly can at this pandemic.”
As a result, investors, recognizing that this relatively unprecedented moment in world history was getting a relatively unprecedented monetary and fiscal response, said, “I think we have more faith that we can muddle through economically than we did before, that we might have a flash-freeze recession rather than a global depression.” Whereas, you look at the paradigm shift that’s happened in the last year and a half, we’re going from 20 years of ZIRP—zero interest rate policy—to a foreseeable future that is non-ZIRP. It is 2, 3, 4, 5 percent federal funds rates, which is an entirely different paradigmatic climate for the future of business. That would be my big-picture explanation for WTF March 2020 versus WTF right now.
Housel: I agree with everything you just said, but I think it’s maybe 80 percent of the story. The other data points that I would give to you is, if you go back to the late 1990s, interest rates were 7 percent. The budget deficit was in surplus. There was no deficit, it was literally negative stimulus, and the market was as insane and bubblicious as it has ever been. So when people say, “We had a market bubble because of interest rates,” I think that’s inarguable. But, it’s not black and white like that. You can have a market bubble with the opposite of massive stimulus, with negative stimulus, a budget surplus, and it was crazier in 1999 than it was in 2021.
So I just think that there’s always just this psychological, animal-spirit side to what the market is doing that you cannot explain with data. Maybe some of that in 2020 and 2021 was people were locked in their homes. They weren’t going to school. They weren’t going to work. They weren’t going to concerts with their friends. What did they do? A lot of people, literally tens of millions of people, opened up a Robinhood account and started day trading.
That was not a small portion of it, that was literally tens of millions of new investors. Most of them are small dollar amounts, but so much new participation pushing up the meme stocks, and the SPAC stocks. What we look back on as the crazy bubble of 2021, I think that’s the right word for it now, was probably due to some sense of boredom. That was, in many ways, I think displaced from the monetary and fiscal policy that was happening, even if that did, of course, play a role.
This excerpt was edited for clarity. Listen to the full episode here, and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guest: Morgan Housel
Producer: Devon Manze