Latest / How Canadian Markets Work / Episode 32: Anatomy of a Recession

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Episode 32: Anatomy of a Recession · How Canadian Markets Work

• 0:00
  I want you to just take a second and think back
• 0:01
  to... the two major economic shocks of the 21st
• 0:06
  century, 2008 and 2020. We casually drew them
• 0:08
  together, you know? We comfortably just call
• 0:11
  both of them recessions. Yeah, we really do.
• 0:13
  And because we use that single word, we tend
• 0:15
  to assume they are the exact same type of event,
• 0:19
  that they cause the same kind of damage, require
• 0:20
  the same kind of response. Right. It's a really
• 0:23
  easy illusion to fall into. It is. But the reality
• 0:25
  is far more complicated. When you actually look
• 0:28
  under the hood at the mechanics of these two
• 0:30
  crises, they have like almost nothing in common.
• 0:33
  Nothing at all. I mean, we hear the word recession
• 0:35
  on the news and our minds immediately jump to
• 0:38
  a very specific set of assumptions. You know,
• 0:41
  market crashes, job losses. Exactly. But looking
• 0:43
  at 2008 and 2020 side by side, it's sort of like
• 0:47
  comparing a long slow drought to a sudden violent
• 0:50
  earthquake. They're entirely different phenomena.
• 0:54
  And that is our mission for this deep dive. We
• 0:56
  are going to carefully dissect the anatomy of
• 0:59
  a recession by comparing the 2008 great financial
• 1:02
  crisis with to 2020 pandemic shock. It's going
• 1:05
  to be really fascinating. Yeah, we have a great
• 1:07
  stack of sources to guide us, and we're going
• 1:10
  to explore their completely different triggers,
• 1:13
  the wildly different shapes of their recoveries,
• 1:15
  and that famous Canadian exception of 2008. Yes,
• 1:18
  the Canadian exception. Always a great topic.
• 1:20
  Right. We'll also uncover how the burden of financial
• 1:23
  pain is unequally distributed. And finally, we
• 1:26
  will reveal the ultimate behavioral trap that
• 1:28
  catches investors in almost every downturn. OK,
• 1:32
  let's unpack this. To truly understand this,
• 1:35
  I think we first have to recognize that the word
• 1:37
  recession itself is incredibly misleading. How
• 1:41
  so? Well, it's merely a symptom. It just describes
• 1:45
  a sustained period of falling economic output.
• 1:48
  So it's like saying a patient has a severe fever.
• 1:50
  OK. A fever is a symptom, right? And it tells
• 1:53
  you absolutely nothing about the underlying disease.
• 1:55
  Right. And in our global economic system, there
• 1:57
  are broadly three different types of diseases
• 2:00
  or structural triggers that actually cause this
• 2:04
  fever. So if a recession is just the fever, what
• 2:06
  are the actual diseases we are dealing with here?
• 2:09
  Broadly speaking, there are three. First, you
• 2:12
  have financial crises, and these originate deep
• 2:15
  within the credit system itself, the actual plumbing
• 2:16
  of the economy. The plumbing. Second, you have
• 2:19
  real shocks. These are external events hitting
• 2:21
  supplier demand from entirely outside the financial
• 2:24
  system. And third, You have policy induced contractions
• 2:28
  where central bank deliberately slows the economy
• 2:30
  down by raising interest rates to control runaway
• 2:34
  inflation. I want to look at 2008 through that
• 2:38
  lens because if I remember the era correctly,
• 2:40
  that wasn't an external shock. The call was coming
• 2:42
  from inside the house, so to speak. It absolutely
• 2:45
  was. So how does a problem in one specific sector
• 2:48
  like the U .S. housing market metastasize into
• 2:51
  a disease that brings down the entire global
• 2:54
  economy? It became a global disease because it
• 2:57
  fundamentally corrupted the credit system. The
• 2:59
  origins were they were rooted in deteriorating
• 3:02
  lending standards. Mortgages were being given
• 3:04
  to borrowers who simply could not repay them.
• 3:07
  But the real structural flaw, the mechanism that
• 3:10
  caused the global crash, was how those bad loans
• 3:13
  were handled. They were bundled together into
• 3:15
  complex financial products called mortgage -backed
• 3:18
  securities. Let's just pause on that term, mortgage
• 3:21
  -backed securities, because it gets thrown around
• 3:23
  a lot. It does. To clarify for you listening,
• 3:25
  this is basically when Wall Street takes thousands
• 3:28
  of individual home loans, packs them into one
• 3:31
  giant box, and sells shares of that box to investors,
• 3:36
  right? That is precisely how it works. And in
• 3:38
  theory, it spreads the risk out. Right, in theory.
• 3:41
  But the critical failure in 2008 was that the
• 3:45
  ratings agencies the organizations whose entire
• 3:47
  job is to tell investors how safe a product is.
• 3:50
  They looked at these boxes filled with highly
• 3:52
  risky toxic laws. And they slapped a triple A
• 3:56
  rating on them. Exactly. They label them as safe
• 3:58
  as government bonds. So pension funds, international
• 4:01
  banks, massive institutions all over the world
• 4:03
  bought them genuinely believing they were holding
• 4:05
  safe assets. Oh, wow. And when the housing market
• 4:08
  finally cracked and borrowers started defaulting
• 4:11
  on those underlying mortgages, those triple A
• 4:13
  boxes suddenly just became worthless. Yes. And
• 4:16
  because these toxic assets were sitting on the
• 4:19
  balance sheets of almost every major financial
• 4:21
  institution globally, massive gaping holes were
• 4:25
  blown into their finances. Just everywhere. Everywhere.
• 4:28
  It was a slow -moving systemic disease that just
• 4:32
  quietly ate away at the foundation of the global
• 4:34
  economy. Which brings us to the contrast with
• 4:37
  2020 because in February of 2020, the banks were
• 4:40
  heavily regulated. The housing market was relatively
• 4:43
  stable. There was no deep -seated rot in the
• 4:46
  credit markets. None at all. 2020 was a pure
• 4:49
  real shock. It was a public health emergency
• 4:51
  that arrived from outside the financial system
• 4:53
  entirely. Right. The system was functioning perfectly
• 4:56
  normally until a global mandate essentially ordered
• 4:58
  commerce to stop. What's fascinating here is
• 5:01
  how directly the underlying cause dictates the
• 5:04
  speed of the crisis, both the speed of the fall
• 5:06
  and the speed of the recovery. Let's think about
• 5:08
  the mechanics of a slow recovery for a second.
• 5:11
  Why did 2008 drag on for years and years? Well,
• 5:14
  because repairing broken balance sheets is a
• 5:17
  grueling, cyclical process. When a bank loses
• 5:20
  billions, it stops lending. Makes sense. When
• 5:22
  businesses can't get loans, they stop expanding
• 5:25
  and start firing people. When people lose their
• 5:27
  jobs, they stop spending money and start defaulting
• 5:30
  on their own debts. Which just causes the banks
• 5:32
  to lose even more money. It's a vicious cycle.
• 5:35
  Exactly. And to fix that, everyone has to spend
• 5:38
  years paying down debt instead of growing. We
• 5:41
  call it deleveraging. It's like a house with
• 5:43
  a rotting foundation. You don't just snap your
• 5:45
  fingers and fix it. You have to bring in temporary
• 5:47
  supports, carefully jack the house up, meticulously
• 5:51
  clear out all the rot, you know? Yes, pour new
• 5:54
  concrete, wait for it to cure. Exactly. It is
• 5:57
  exhausting multi -year work. But 2020 was completely
• 6:01
  different in its mechanics. Output fell more
• 6:04
  in a matter of weeks than it did in years during
• 6:06
  2008. It was violently fast. Right. But because
• 6:11
  it was an external shock, the recovery was also
• 6:13
  astonishingly fast. The underlying balance sheets
• 6:16
  of the banks and most consumers were actually
• 6:18
  largely intact. When the external health restrictions
• 6:21
  eventually lifted, economic activity didn't need
• 6:24
  to be rebuilt from scratch. It just simply resumed.
• 6:26
  It was like someone walking into your basement
• 6:28
  and just flipping the main breaker switch off.
• 6:31
  The house goes dark instantly. Right. But the
• 6:34
  wiring inside the walls is completely fine. Once
• 6:36
  you're allowed to flip the switch back on, the
• 6:38
  lights come right back. Exactly. But you know,
• 6:41
  understanding this makes me wonder about our
• 6:43
  own expectations. If the cause so clearly dictates
• 6:46
  the shape of the recovery, why investors always
• 6:49
  seem to expect a rapid V -shaped recovery every
• 6:53
  single time the market takes a dip today. I think
• 6:55
  it's because human memory is heavily biased by
• 6:58
  recency. We remember the last rescue. We remember
• 7:02
  the stimulus checks of 2020 and the immediate
• 7:05
  roaring rebound of the stock market. So we just
• 7:08
  expect that again. Yeah. We subconsciously map
• 7:10
  that recent experience onto the future, forgetting
• 7:12
  that the underlying mechanics of the next crisis
• 7:15
  might look a lot more like the slow grind of
• 7:17
  2008. Let's dig a bit deeper into that 2008 grind
• 7:21
  because earlier you mentioned that banks stopped
• 7:23
  lending. Why does that actually happen? If a
• 7:26
  bank still has physical cash in the vault, why
• 7:29
  does the velocity of money just drop to zero?
• 7:31
  It really comes down to counterparty risk, which
• 7:34
  is kind of a sterile term for a complete collapse
• 7:38
  of trust. A collapse of trust. Yeah. In a healthy
• 7:41
  economy, banks constantly lend massive amounts
• 7:43
  of money to each other overnight just to balance
• 7:46
  their books. It is the invisible plumbing of
• 7:48
  the financial world. Right. But in 2008, because
• 7:52
  those toxic mortgage -backed securities were
• 7:54
  hidden everywhere, no bank knew if the bank across
• 7:57
  the street was secretly bankrupt. So it's like
• 7:59
  a terrifying game of musical chairs. If I lend
• 8:02
  you $50 million overnight and you collapse before
• 8:05
  morning because of toxic assets I can't see,
• 8:07
  my bank goes down with you. Exactly. So the rational
• 8:10
  choice is to just hoard your cash and lend to
• 8:13
  absolutely no one. Wow. And when that interbank
• 8:16
  transfer machinery stops, the entire economy
• 8:18
  freezes solid. The savers still have their savings.
• 8:21
  The borrowers still desperately need money to
• 8:23
  make payroll. But the connection between them
• 8:26
  is severed. And that loss of trust is what makes
• 8:29
  a financial crisis drag on for a decade. The
• 8:31
  system itself has to slowly relearn how to trust
• 8:34
  its own shadow. Beautifully put. Now, sitting
• 8:37
  in Canada, we have a very specific, almost mythological
• 8:40
  narrative about that 2008 freeze, the famous
• 8:43
  Canadian exception. Right, yes. The prideful
• 8:46
  headline is always that not a single Canadian
• 8:48
  bank failed or required a direct taxpayer bailout
• 8:53
  during the worst financial crisis of our lifetimes.
• 8:56
  If we connect this to the bigger picture, we
• 8:59
  have to ask a difficult question. Was the Canadian
• 9:01
  system actually superior in its design, or is
• 9:05
  the reality significantly more complicated? Let's
• 9:08
  lay out the flattering story first, because it's
• 9:10
  the one we are all taught in economics classes.
• 9:12
  Well, the flattering story credits brilliant
• 9:14
  conservative regulation. It highlights that Canadian
• 9:17
  regulators enforced much stricter capital requirements.
• 9:20
  Let's clarify capital requirements for you for
• 9:22
  a moment. That basically just means regulators
• 9:24
  forced banks to keep a much larger pile of physical
• 9:26
  cash in reserve for a rainy day, right? Yes,
• 9:29
  rather than lending every single cent out. it
• 9:31
  creates a larger shock absorber. Makes sense.
• 9:34
  The flattering story also points out that Canada
• 9:36
  had much tighter restrictions on those dangerous
• 9:39
  subprime mortgage products that caused so much
• 9:42
  havoc in the U .S. Right. Furthermore, the Canadian
• 9:45
  banking sector is a highly concentrated oligopoly,
• 9:48
  just a handful of massive institutions, which
• 9:51
  makes them much easier for government regulators
• 9:54
  to monitor and supervise closely. It sounds incredibly
• 9:57
  pristine. You know, like a triumph of careful
• 10:00
  policy. But our sources highlight a very compelling
• 10:04
  counter narrative. I want to push back on this
• 10:06
  flattering story. Is it possible we're just taking
• 10:10
  credit for the weather? The counter argument
• 10:12
  heavily suggests exactly that. You have to look
• 10:15
  at what else was happening globally between 2006
• 10:17
  and 2010. OK. Canada has a massive resource sector.
• 10:21
  Oil. minerals, copper. And during the exact period
• 10:24
  the U .S. housing market was imploding, Canada's
• 10:27
  resource sector was experiencing a massive boom.
• 10:29
  Driven by like voracious demand from a rapidly
• 10:32
  industrializing China and other parts of Asia.
• 10:34
  Exactly. So while the U .S. was suffocating under
• 10:36
  bad mortgages, Canada was being kept afloat by
• 10:39
  a massive influx of foreign money buying up our
• 10:41
  natural resources. That influx of cash kept employment
• 10:45
  relatively stable. which meant Canadians kept
• 10:47
  paying their mortgages, which meant the Canadian
• 10:50
  banks didn't face the same wave of defaults.
• 10:52
  That is the crux of the counter narrative. It
• 10:55
  asks how much of the banking stability was due
• 10:58
  to brilliant regulation and how much was simply
• 11:01
  incredible macroeconomic timing. Wow. There is
• 11:05
  also a structural pushback regarding that oligopoly
• 11:07
  we just praised. Right. Having only five or six
• 11:10
  massive banks, we call that stability because
• 11:13
  they are heavily supervised, but Couldn't you
• 11:15
  easily reframe that? Absolutely. Having all your
• 11:18
  nation's wealth concentrated in just a few institutions
• 11:21
  isn't necessarily a master class instability.
• 11:24
  It could just be a massive undetonated systemic
• 11:27
  bomb that simply happened not to go off this
• 11:29
  time around. It is entirely a double -edged sword.
• 11:31
  If one of those major Canadian banks had made
• 11:33
  a catastrophic miscalculation, the systemic risk
• 11:37
  to the country would have been absolute. Terrifying
• 11:39
  to think about. So the confident single -cause
• 11:41
  narrative... that Canada's regulators were simply
• 11:44
  smarter than everyone else. It kind of ignores
• 11:47
  the messy, incredibly lucky reality of global
• 11:51
  commodity cycles. I really love exploring those
• 11:53
  contrarian angles. It makes you realize how much
• 11:56
  of economic history is just assigning genius
• 11:58
  to good timing. It really is. So we have 2008
• 12:02
  established as this slow moving, grinding crisis
• 12:05
  of trust that spread everywhere like a thick
• 12:08
  fog. Let's fast forward to February 2020. OK.
• 12:12
  If a loss of trust is what makes a credit crisis
• 12:14
  drag on, what What happens when a crisis has
• 12:17
  absolutely nothing to do with trust in the financial
• 12:19
  plumbing? What happens is that the plumbing almost
• 12:21
  shatters anyway, but for completely different
• 12:23
  reasons. The early days of March 2020 were genuinely
• 12:26
  terrifying for central bankers. Why? Because
• 12:29
  while the origin was a physical health crisis,
• 12:31
  the financial system became the transmission
• 12:33
  channel for the panic. I really want to understand
• 12:35
  the mechanics here, because our sources point
• 12:37
  out that in March 2020, the market for government
• 12:40
  bonds began to seize up. Yes, it did. And government
• 12:42
  bonds are universally considered the safest,
• 12:45
  most liquid asset on Earth. Why would they suddenly
• 12:48
  have no buyers? Because of a phenomenon called
• 12:50
  a dash for cash or a severe liquidity crisis.
• 12:54
  In a moment of absolute blinding panic, investors
• 12:58
  do not want safe assets. They want physical,
• 13:01
  usable cash. Right, of course. Hedge funds were
• 13:04
  getting margin calls. Corporations were drawing
• 13:07
  down their credit lines just to survive the lockdowns.
• 13:10
  Everyone rushed to sell their assets, even their
• 13:12
  safest government bonds, even their gold, to
• 13:14
  convert them into cash at the exact same second.
• 13:17
  And when every single participant in a market
• 13:19
  hits the sell button at the same time and nobody
• 13:22
  is hitting buy, the market simply breaks down.
• 13:25
  The pipes clog. The bottleneck was unprecedented.
• 13:28
  Sellers just couldn't find buyers at any rational
• 13:30
  price. This is vital to understand because it
• 13:33
  explains why central banks worldwide stepped
• 13:36
  in with such overwhelming force in those early
• 13:38
  weeks. Their initial interventions weren't actually
• 13:41
  about stimulating the economy, were they? No,
• 13:43
  not at all. They were just playing plumber. They
• 13:45
  stepped in as the buyer of last resort simply
• 13:47
  to provide the cash everyone was screaming for.
• 13:49
  So the fundamental architecture of the financial
• 13:51
  world wouldn't collapse under the pressure of
• 13:53
  the bottleneck. Exactly. And once they secured
• 13:56
  the plumbing, the real economy began to feel
• 13:59
  the impact of the lockdowns. And here we saw
• 14:03
  an entirely different distribution of economic
• 14:05
  pain compared to 2008. This is a contrast I find
• 14:08
  so striking. In 2008, the economic damage was
• 14:12
  broad and grinding. It slowly eroded manufacturing,
• 14:16
  construction, finance, retail. The suffering
• 14:19
  was relatively widespread. But in 2020, the pain
• 14:22
  was violently concentrated by sector. The dividing
• 14:24
  line was brutal. If you worked in hospitality,
• 14:27
  travel, live entertainment, or personal services,
• 14:31
  your income simply vanished overnight. Just gone.
• 14:33
  Gone. Through absolutely no fault of your own,
• 14:36
  the micro economy you lived in ceased to exist
• 14:39
  by government decree. But if you worked in an
• 14:41
  office, if you were a knowledge worker, you simply
• 14:44
  packed up your laptop on a Thursday, set it up
• 14:46
  on your kitchen table on a Friday and kept earning
• 14:48
  your full salary. And because you were no longer
• 14:51
  commuting or traveling or going out to restaurants,
• 14:54
  your savings rate actually skyrocketed. So what
• 14:57
  does this all mean for you? It means 2020 created
• 15:01
  a surreal tale of two economies. It really did.
• 15:04
  Your entire economic reality and your level of
• 15:06
  suffering was dictated almost exclusively by
• 15:09
  whether your job required physical proximity
• 15:11
  to other humans. It was an incredibly surgical
• 15:15
  unequal shock. And because the pain was so severe
• 15:18
  for those affected, the policy response had to
• 15:21
  match it. We saw a massive rapid deployment of
• 15:25
  both fiscal stimulus, meaning government sending
• 15:27
  checks directly to citizens and monetary policy.
• 15:30
  And monetary policy in this context heavily involved
• 15:33
  quantitative using. Right. For you listening,
• 15:35
  quantitative using is basically when a central
• 15:37
  bank creates new digital money out of thin air
• 15:39
  and uses it to buy government bonds, effectively
• 15:41
  injecting massive amounts of cash directly into
• 15:44
  the banking system to keep interest rates low
• 15:46
  and encourage lending. That is the mechanic,
• 15:49
  yes. The scale and speed of both the fiscal checks
• 15:51
  and the quantitative easing completely dwarfed
• 15:54
  the response to 2008. Which naturally leads to
• 15:57
  the great debate we are still living with today,
• 15:59
  the massive wave of inflation that followed.
• 16:01
  Oh, yes. And I want to be incredibly clear to
• 16:03
  you listening right now. We are absolutely not
• 16:07
  taking a side on the politics or the policies
• 16:09
  of that debate. Our goal here is to just softly
• 16:12
  look at the mechanics. From a purely mechanical
• 16:15
  standpoint, The causes of that post -2020 inflation
• 16:19
  are still fiercely debated by serious Nobel -winning
• 16:22
  economists. There's no consensus. No consensus
• 16:25
  at all. Some experts point heavily to the shattered
• 16:28
  global supply chains. Factories shutting down
• 16:31
  meant fewer goods were available. Right. Others
• 16:33
  point to the unprecedented demand support. Governments
• 16:35
  handing out trillions in fiscal stimulus meant
• 16:38
  people had more money to spend on those fewer
• 16:40
  goods. And some emphasize the geopolitical spike
• 16:43
  in energy prices. And others focus squarely on
• 16:46
  the central banks and that massive quantitative
• 16:48
  easing we just talked about, arguing they left
• 16:50
  the money printer running for far too long. The
• 16:52
  important takeaway for you is simply knowing
• 16:54
  that the narrative is not settled. The underlying
• 16:57
  mechanisms of inflation are wildly complex and
• 17:00
  interconnected. They are. Which brings us to
• 17:02
  a fascinating contradiction. Yes. Let's look
• 17:05
  at the human element. We have spent this deep
• 17:08
  dive establishing how completely opposite these
• 17:11
  two recessions were. 2008 was a slow, systemic
• 17:14
  credit rot. 2020 was a lightning -fast physical
• 17:18
  health shock. They required different solutions,
• 17:21
  they hurt different sectors, they moved at entirely
• 17:23
  different speeds, and yet human beings reacted
• 17:26
  in the exact same disastrous way to both of them.
• 17:30
  This raises an important question. Why do intelligent
• 17:33
  investors repeatedly fall into the exact same
• 17:36
  behavioral trap, even when the macroeconomic
• 17:39
  environment changes so drastically? Let's talk
• 17:41
  about the trap, because our sources show that
• 17:43
  the investors who suffered the most permanent
• 17:45
  wealth destruction in both 2008 and 2020 were
• 17:48
  the exact same type of people, the ones who sold
• 17:51
  partway down the market decline. It is the ultimate
• 17:53
  tragedy of investing psychology. They endure
• 17:57
  the immense emotional pain of the market falling,
• 18:00
  but by selling, they completely deny themselves
• 18:02
  the mathematical certainty of the eventual recovery.
• 18:05
  It's heartbreaking. It is. And what is truly
• 18:07
  remarkable is how they managed to make this identical
• 18:10
  mistake under completely opposite market dynamics.
• 18:13
  Walk us through the psychology of that. Let's
• 18:15
  start with 2008. How did the trap catch people
• 18:18
  during a slow crisis? Well, in 2008, the market
• 18:21
  decline was a long grinding bleed. Investors
• 18:24
  watched their portfolios drop month after month.
• 18:27
  Agonizing. Eventually the psychological pain
• 18:30
  of uncertainty became too much and they capitulated.
• 18:32
  They sold just to stop the bleeding. But here
• 18:35
  is the catch. They told themselves they would
• 18:37
  buy back in when the news got better. But the
• 18:40
  news didn't get better. We had bank failures,
• 18:43
  high unemployment and sluggish growth for years.
• 18:45
  Exactly. The economic headlines remain terrifying
• 18:48
  through 2009, 2010, even 2011. So they waited.
• 18:51
  And while they waited for the headlines to feel
• 18:54
  safe, they completely missed the slow, steady
• 18:57
  rebuild of the stock market, which had already
• 19:00
  begun looking forward. OK, so that is the danger
• 19:02
  of a slow market. What about the flash crash
• 19:05
  of 2020? The dynamic was the exact opposite.
• 19:09
  But it resulted in the same fatal error. In 2020,
• 19:12
  the drop was terrifyingly steep. Yeah. The market
• 19:16
  plunged over 30 percent in a matter of weeks.
• 19:19
  People panicked in mid -March and sold thinking
• 19:21
  the global economy was entering a multi -year
• 19:23
  depression. Right. But because the underlying
• 19:26
  balance sheets were intact, the market recovery
• 19:28
  was blindingly fast. The market ripped upward
• 19:30
  so quickly in April and May that retail investors
• 19:33
  barely had time to process what was happening.
• 19:35
  They really didn't. If you sold in March, the
• 19:38
  market was already 10 % higher by the time you
• 19:40
  thought about getting back in. And nobody wants
• 19:42
  to buy back in at a higher price than they just
• 19:44
  sold for. Never. So they stayed in cash waiting
• 19:46
  for a second crash that never came. Opposite
• 19:49
  dynamics. Same exact mistake. This is why human
• 19:52
  psychology is often the single greatest risk
• 19:55
  to wealth accumulation. You know, people often
• 19:58
  try to outsmart their own psychology using tools
• 20:01
  like stop loss orders. They set an automated
• 20:03
  rule with their broker that says if this stock
• 20:06
  drops 15 percent, sell it immediately. Right.
• 20:09
  It feels like buying insurance. It feels responsible.
• 20:12
  It feels responsible, but it is often catastrophic
• 20:15
  in practice. Here's where it gets really interesting.
• 20:18
  You know, a stop loss isn't a magical floor.
• 20:20
  It doesn't actually protect you from a gap down
• 20:23
  in the market. No, it doesn't. If terrible news
• 20:25
  breaks overnight, the market doesn't smoothly
• 20:28
  trade down through your 15 percent trigger. It
• 20:31
  opens the next morning down 25 percent and your
• 20:34
  broker automatically sells your shares at that
• 20:36
  deeply depressed price. And in doing so, It takes
• 20:39
  a temporary on paper fluctuation and forces it
• 20:42
  to become a permanent realized loss. Yeah. Usually
• 20:46
  the exact worst possible moment, the point of
• 20:49
  maximum market panic, which historically is often
• 20:52
  the very bottom of the dip. Exactly. The behavior
• 20:54
  becomes the return. The long term performance
• 20:56
  of the stock market is irrelevant if your own
• 20:59
  panic mechanically removes you from it. So what
• 21:01
  is the solution for you, the listener? If the
• 21:04
  market drops tomorrow, how do you avoid this
• 21:07
  quiet, devastating trap? The solution is what
• 21:10
  behavioral economists call a commitment device.
• 21:13
  And the most crucial element is that it requires
• 21:15
  action before the crisis arrives. Before it arrives.
• 21:19
  Yes. You must write down, physically write down
• 21:21
  on a piece of paper in advance what you own,
• 21:25
  why you hold it for the long term, and exactly
• 21:28
  what you will do if the market falls by 30 percent.
• 21:31
  And for most long -term diversified investors,
• 21:34
  the answer written on that paper should simply
• 21:36
  be Nothing. I will do absolutely nothing except
• 21:39
  perhaps rebalance my portfolio to buy more at
• 21:42
  lower prices. The power of the commitment device
• 21:44
  isn't that the answer is highly complex or clever.
• 21:47
  The power is that the decision exists before
• 21:49
  you actually need it. Because reading a decision
• 21:52
  that you made calmly on a quiet Sunday morning
• 21:54
  when the sun is shining is a completely different
• 21:56
  cognitive experience than trying to invent a
• 21:58
  rational strategy while you are terrified. While
• 22:02
  you're watching cable news scream that the financial
• 22:04
  system is collapsing, when the crash comes, you
• 22:07
  aren't evaluating a collapsing market anymore.
• 22:10
  You are simply consulting a binding commitment
• 22:13
  you made to your future self. Your plan acts
• 22:16
  as the ultimate defense against your own inevitable
• 22:18
  panic. that consistently works across different
• 22:21
  types of recessions. Because the alternative
• 22:24
  relies on you being perfectly sensible and emotionless
• 22:27
  during an unprecedented crisis. And history shows
• 22:30
  us, quite clearly in 2008 and in 2020, that human
• 22:34
  beings simply are not built for that. It is deeply
• 22:37
  human to want to act when we feel threatened.
• 22:40
  But in investing, sitting perfectly still is
• 22:42
  often the hardest and most mathematically rewarding
• 22:45
  action you can possibly take. A profoundly difficult
• 22:48
  stillness to master. but a necessary one. So
• 22:51
  as we bring this deep dive to a close, let's
• 22:53
  synthesize everything we've unpacked today. Recessions
• 22:56
  are not a monolith. The word itself is just a
• 22:58
  fever on a chart. The underlying diseases driving
• 23:01
  them are vastly different. 2008 was a slow, agonizing
• 23:05
  rot in the credit foundation caused by toxic
• 23:08
  assets and counterparty risk, requiring years
• 23:12
  of painful deleveraging. 2020 was a sudden external
• 23:15
  breaker switch being flipped off, causing a liquidity
• 23:18
  crisis and concentrating severe pain on anyone
• 23:20
  relying on physical proximity, but ultimately
• 23:23
  allowing a blindingly fast recovery. We must
• 23:25
  also remember that the Canadian exception teaches
• 23:28
  us to look past flattering regulatory narratives
• 23:31
  and recognize the massive role of timing and
• 23:34
  global commodity cycles. Absolutely. And ultimately,
• 23:36
  the behavioral trap of selling part way down
• 23:39
  reminds us that regardless of the trigger, our
• 23:41
  own psychology remains the most consistent variable
• 23:43
  in any crisis. Which leaves us with one final
• 23:46
  provocative thought for you to carry with you.
• 23:49
  Every single time a new recession looms on the
• 23:51
  horizon, the financial headlines will inevitably
• 23:53
  try to compare it to the last one. They will
• 23:55
  look for the ghost of the 2020 lockdowns or they
• 23:59
  will search for the shadow of the 2008 housing
• 24:01
  collapse. But given everything we just learned
• 24:04
  about how fundamentally different those two beasts
• 24:06
  were in their triggers, their timelines and their
• 24:09
  recoveries, assuming the next crisis will look
• 24:11
  or feel or behave anything like the previous
• 24:14
  one is a profound historical trap. It is the
• 24:18
  classic military blunder of always fighting the
• 24:21
  last war. instead of preparing for the next one.
• 24:24
  Exactly. So the question to mull over tonight
• 24:25
  is this. What completely different external shock
• 24:28
  or what deeply hidden structural flaw in today's
• 24:31
  economy might define the next downturn, the one
• 24:34
  that everyone is currently ignoring because they're
• 24:36
  too busy looking backwards? A fascinating, if
• 24:39
  slightly unsettling question to end on. Thank
• 24:42
  you for sharing your time with us and for joining
• 24:43
  us on this deep dive. Until next time, take care
• 24:46
  and stay curious.