100 years ago a feisty little Bosnian Serb, Gavrilo Princip, shot and killed the Archduke of Austria, Franz Ferdinand, and his wife Sophie in the city of Sarajevo. It was the ‘shot that rang out across the world’. A week later, the world was at war.
While historians have subsequently shown that the war was a long time coming — the result of rising imperialism of the great powers and the faltering old Austro Hungarian and Ottoman Empires — no one saw it at the time.
Take this contemporary account from Austrian novelist and playwright, Stefan Zweig, recounted in his memoir, The World of Yesterday. In the days following the assassination, Zweig was holidaying in the Belgian seaside resort of Le Coq…
‘The happy vacationists lay under their coloured tents on the beach or went in bathing, children were flying kites, and the young people were dancing in front of the cafes on the digue (a bank or dike). All nationalities were peaceably assembled together, and one heard a good deal of German in particular…The only disturbance came from the newsboy who, to stimulate business, shouted the threatening captions in the Parisian papers: L’Autriche provoque la Russie, L’Allemange prepare la mobilisation. We could see the faces of those who bought copies grow gloomy, but only for a few minutes. After all, we had been familiar with these diplomatic conflicts for years; they were always happily settled at the last minute, before things grew too serious. Why not this time as well? A half hour later, one saw the same people splashing about in the water, the kites soared aloft, the gulls fluttered about and the sun laughed warm and clear over the peaceful land.’
Within a few days, Belgian soldiers arrived on the beach, with machine guns and dogs pulling carts. Then Austria declared war on Serbia. The resort town become deserted. Zweig quickly booked a train back to Austria.
Early in the journey, the train stopped in the middle of an open field. It was dark, but Zweig saw freight trains — open cars covered with tarpaulins — heading in the opposite direction. They were full of German artillery heading for Belgium. The war was underway.
What’s the point of recounting this story? Well, there’s the regional conflict in Ukraine that’s heating up, which I’ll get to in a moment. But the main point is that no one knows what the future holds. In early 1914, the (Western) world had experienced a long period of economic expansion and freedom.
Zweig travelled freely around the world without needing a passport or ‘papers’. Capital and labour mobility were high. There was virtually no income tax (nor was there a welfare state), the Federal Reserve had only just come into existence, and government involvement in all areas of life was minimal.
But that all changed with the Great War. It led to the rise of larger governments, the welfare state, and the unions. It led to greater state control of financial markets and it led to systematic inflation.
The world changed massively in 1914, and no one at the time would have picked the direction it was heading. Even after the war started, the general consensus was that it would be over by Christmas. As it turned out, it endured nearly to Christmas 1918.
These days, people seem pretty certain that the Fed has things under control. That interest rates will stay low for many, many years, stocks won’t have a meaningful decline. They seem confident in China’s ability to manage an historic credit boom, and confident that Australia’s 25 year property bull market will keep on giving. That could well be true. No one knows.
But history tells you that things change…often dramatically. It tells you that bear markets follow bull markets…that cheap prices follow expensive prices. That you can’t see the catalyst doesn’t mean it won’t happen. And just because governments and central banks around the world are trying desperately to levitate markets, doesn’t mean they will succeed.
And who would’ve thought that 100 years after the peak of the British Empire, the Commonwealth Games would still be going, or more unbelievably, that people still care? Seriously, what a strange little tournament it is…
Getting back to the 1914/2014 parallels (which may be a little closer than you think), overnight, the Permanent Court of Arbitration in The Hague awarded former shareholders in Yukos Oil US$50 billion in damages for having their assets taken from them by the Russian state.
Will Russia pay? It’s unlikely. They’ll just see this as a Western attempt to apply further economic sanctions over the standoff in Ukraine. As the Financial Times reported:
‘But if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the West could sour further.
‘One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine. “There is a war coming in Europe,” he said. “Do you really think this matters?”’
Maybe that’s just a bluff. But economic sanctions are often a path to war. Russia is an energy powerhouse and can inflict great damage on Europe if it wants to.
The repercussions for investors — even in Australia — are obvious. It all comes down to confidence. When confidence (the belief that, y’know, everything will be fine) evaporates, so does liquidity. And it can go very quickly.
In 1914, the two largest exchanges in the world — the London and New York Stock Exchanges — closed for the first time in their history on July 31 to stop capital flight. New York remained closed for four months, London five months. At the time, no one thought such an occurrence possible.
That’s the problem. People, even experts, lack imagination during important historical turning points. Following the GFC, the Queen asked a bunch of experts how no one saw this crisis coming. The response was along the lines of, ‘It was a failure of imagination.’
Hubris and overconfidence often inhibit the imagination. And if you look around markets and investors today, well, hubris and overconfidence are leaking out all over the place.
For Markets and Money