This Stock Market Will Eat You

Captain George Pollard Jr. was hungry.  Actually, he was starving.  He’d been drifting aboard a small whaleboat with some of his crew in the South Pacific for over two months.

The sun was ravaging.  The thirst was unquenchable.  The meagre food rations had taken their toll.  Thus, Pollard did what he had to do to survive.  He took a deep breath, said a prayer…then he devoured his 18-year-old cousin, Owen Coffin.

The grim action was taken on honest terms.  Mr. Coffin’s full commitment to the meal was decided fair and square.  After nine week’s adrift at sea, with nothing but saltwater saturated bread that dehydrated the men as they ate, the starving crew practiced an ancient custom of the sea.  They drew lots to determine who would be eaten.  Coffin lost.

The trouble for Pollard and his crew began weeks earlier.  In November 1820, they’d been harpooning a pod of sperm whales when something awful happened.  An angry 85-foot-long whale smashed head-on into the captain’s ship, The Essex of Nantucket, sinking it to the ocean’s bottom.  This distressing shipwreck inspired Herman Melville’s, Moby-Dick.

The U.S. economy, like The Essex, has been smashed head-on by a massive whale of government lockdown orders.  Halting the spread of coronavirus has achieved varied results.  Though the economic devastation has been unequivocal.

At the same time, fiscal and monetary stimulus – composed of brrr money – in response to the economic smashup has been extraordinarily bullish for stocks.  But what comes next seems to be of little concern to investors.  And what comes next, we believe, is a stock market calamity.  Here’s why…

Grisliness

What happened after The Essex sank was far more terrifying than the wreck.  What happened, you see, is a bone chilling story of the survivor’s gradual descent into starvation, madness, and cannibalism.

When The Essex sank, all the initial survivors could do was scramble into three small whaleboats.  They had little time to salvage their stockpile of food and fresh water.  They also had little idea of the extent of their deplorable situation.

Pollard calculated that the closest land was the Marquesas Islands.  Yet the islands were rumored to be inhabited by cannibals.  Thus, in what must be one of the most ironic decisions in nautical history, a longer route to the south and east to Chile was selected.  The decision to avoid island cannibals, however, had the sardonic effect of turning the men onboard the small whaleboats into cannibals.

First the sailors starved.  Then they went mad.  After that, as they perished one by one, their bodies were cooked and eaten.  Here’s an account of the grisliness that followed:

“One man went mad, stood up and demanded a dinner napkin and water, then fell into ‘most horrid and frightful convulsions’ before perishing the next morning.  ‘Humanity must shudder at the dreadful recital’ of what came next […].  The crew ‘separated limbs from his body, and cut all the flesh from the bones; after which, we opened the body, took out the heart, and then closed it again—sewed it up as decently as we could, and committed it to the sea.’  They then roasted the man’s organs on a flat stone and ate them.”

But the rations of human flesh did not last.  Nor did they satisfy.  The more the survivors ate, the hungrier they felt.

This Stock Market Will Eat You

When the American ship, Dauphin, rescued Pollard and his remaining crew member, the two did not rejoice at their rescue.  They simply turned to the bottom of their boat and stuffed human bones into their pockets.  Once aboard the Dauphin, the two delirious men were seen “sucking the bones of their dead mess mates, which they were loath to part with.”

Somehow Pollard scrounged up the nerve to sail again.  Somehow he also persuaded his financial backers to give him another ship.  Regrettably, Pollard sailed the ship for a little more than a year before it wrecked on a coral reef.  He was ruined, and ended his days as a night watchman.

Many simple lessons can be garnered from Pollard’s epic catastrophes.  Don’t be a fool.  Don’t be stupid.  Don’t make the same mistake twice.  But applying these lessons to attain beneficial results is much more difficult.

For example, not long after famed hedge fund manager Victor Niederhoffer’s leveraged bets on Thai bank stocks and U.S. futures markets during the Asian financial crisis and contagion in 1997 blew up, he hung a large painting of The Essex on the wall across from his desk.  The painting was to be a personal warning for Niederhoffer against recklessness, and a reminder of the precariousness of his success.

Like Pollard, Niederhoffer persuaded his financial backers to give him another chance.  He dusted himself off and achieved something of his former glory with his Matador Fund.  In 2005, the value of Matador increased fifty-six per cent—a performance that earned Niederhoffer an industry award.

But, alas, the Fund did very well until just the moment it didn’t.  Niederhoffer’s predilections for risk and leverage got the best of him.  He blew up again in 2007.

At the moment, we struggle to find a time when the outlook for future stock market returns has ever been shoddier.  Make of it what you will.  Do what you want.  Chase shares of Tesla higher, if that’s what makes you happy.

Just recognize you’re merely drawing lots.  This stock market will eat you soon enough.

Sincerely,

MN Gordon
for Economic Prism

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