File image: IOL
File image: IOL

OPINION: More of the same but different

By Ryk de Klerk Time of article published May 18, 2020

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JOHANNESBURG - One of the famous quotes of the legendary Sir John Templeton, one of the great and most respected investors, is: “The four most expensive words in the English language are ‘this time it’s different’.”

That is in stark contrast to the very popular narrative today that the global economic fallout of the coronavirus crisis is unprecedented, and probably worse than any other crisis in many decades. Travel came to a halt, trade vanished; borders are closed and people are forced into quarantine and self-isolation.

These are, however, the true characteristics of a full-scale war between superpowers. Not so?

A major event leading up to World War II was when Japanese and Chinese troops clashed in July 1937, which led to a full-scale invasion of China by Japan, also known as the Second Sino-Japanese War that lasted until 1945. Yes, Japan’s invasion was similar to the coronavirus that invaded China at the end of last year, and snowballed throughout the globe.

Remember that the financial markets and economies in 1937 were less sophisticated than today and data flows and communications were still very basic to say the least.

Despite that, Japan’s invasion of China in 1937 had a massive impact on global economic output and financial markets, especially equity markets.

I was astounded when I compared the behaviour of the US economy and US equity market, with the S&P Composite Index as proxy since January, with their behaviour during the first few months after Japanese and Chinese troops clashed in 1937.


The downtrend in industrial production in the first four months are virtually identical.

The rolling two-month percentage changes were exactly the same over the four months after Japan’s invasion started in 1937, and the coronavirus that escalated at the end of last year.

The behaviour of the US equity market over the first five months since Japan’s invasion started in 1937 and the coronavirus at the end of last year, are strikingly similar.

The rolling two-month percentage changes indicate that the pain in the US stock market during the coronavirus pandemic is less severe than during Japan’s invasion in 1937.


At the time of the initial engagement of fire between the Japanese and Chinese troops, the US unemployment rate was close to a seven-year low, as the US emerged from the Great Depression in the first half of the 1930s. In the first four months, the unemployment rate jumped to nearly 14percent from an already high 11percent at the time of the skirmish.

At the time of the coronavirus outbreak, the US economy was effectively in full employment, but hit nearly 15percent unemployment when the virus struck in April In line with the 1937/38 invasion in month four.

The latest weekly claims for unemployment suggest that the US unemployment for May could come in at 15 to 16percent. That would be in line with what was recorded in the fifth month after Japan’s invasion.

The major difference between the coronavirus crisis and the Japanese invasion of China is that the US consumer price index in May, after four months, could already be in negative territory based on the growth rate over the same period last year, specifically as a result of the slump in oil prices.

In comparison, the CPI growth rate turned negative on a year-on-year basis seven months after Japan’s invasion started. Deflation - where the prices of fixed assets and goods and services fall - came earlier than what history would have suggested.


Yes, history repeats itself. And this time is no different.

The initial stages of the Second Sino-Japanese War also hold a clue with regard to timing the US equity market.

The US market remained under downside pressure while the US unemployment rate kept rising and only bottomed when the unemployment rate started to recede 11 months after the Japanese invasion of China.


As things stand, it’s clear that the war of resistance against Covid-19 will be protracted but that the intensity is wearing off, with the major economic zones gradually opening up again. China has already turned the corner. I will not be surprised if May heralds the worst unemployment number in other major economic zones, especially the US and Europe.

Green shoots of consumer confidence have already appeared in the US confidence data for May, released on Friday. With the amount of money thrown at economies, employment is likely to improve and so too will investor sentiment.

Yes, more of the same but in a different way.

Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. You should consult your broker and/or investment adviser for advice.

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