Research

Pessimism Is Popular

An explosion rocks the Syrian city of Kobane during a reported suicide car bombing by the Islamic State, as seen from the Turkey-Syria border, on Oct. 20, 2014. The small picture is very bad, but the big picture of violence around the world is about as good as it’s ever been.  Photo by Gokhan Sahin/Getty Images

 

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It is a popular time to be a pessimist and there’s plenty of bad news going around. ISIS, Crimea, Donetsk, Gaza, Burma, Ebola, school shootings, campus rapes, wife-beating athletes, lethal cops;—who can avoid the feeling that things are falling apart? Last year Martin Dempsey, chairman of the Joint Chiefs of Staff, testified before a Senate committee that the world is “more dangerous than it has ever been.” This past fall, Harvard Professor Michael Ignatieff wrote of “the tectonic plates of a world order that are being pushed apart by the volcanic upward pressure of violence and hatred.” Two months ago, the New York Times columnist Roger Cohen lamented, “Many people I talk to, and not only over dinner, have never previously felt so uneasy about the state of the world. … The search is on for someone to dispel foreboding and embody, again, the hope of the world.”

Based on social media and television news reports, multitudes perceive that the world is growing worse. You can hear it in the checkout lines, sports stadiums, and in the pews of our local churches. Multitudes are

convinced that the world is presently in “freefall” and it’s only a matter of time before everything falls apart. Is this true? Is evil actually growing throughout the earth? Is humanity descending into greater chaos, violence, and destruction?

There is absolutely no evidence of this. By every measurable standard, life is improving around the globe. War and violence are fading and peace is truly taking root. This statement isn’t just a matter of opinion, but a reflection of verifiable statistics.

War and Violence

One way that the world is improving is through the diminishment of violence and brutality. Despite what is suggested by the media, violent deaths and bloodshed are currently the lowest ever recorded. Dr. Steven Pinker, Pulitzer prize-winning author and Harvard psychology professor noted that “Today we may be living in the most peaceful era in our species’ existence.” [1]2graph-annual-war-battle 

Prior to the Second World War, nations were continually in bloody conflict. Many Western European nations initiated war every two to three years. However, since the peak of the Cold War in the 1980s, civil wars, genocides, and terrorist attacks—have significantly diminished throughout the world.

Pinker declares:

“By any standard, the world is nowhere near as genocidal as it was during its peak in the 1940s, when Nazi, Soviet, and Japanese mass murders, together with the targeting of civilians by all sides in World War II, resulted in a civilian death rate in the vicinity of 350 per 100,000 per year…The trend lines for genocide and other civilian killings, fortunately, point sharply downward. After a steady rise during the Cold War until 1992, the proportion of states perpetrating or enabling mass killings of civilians has plummeted.” [2]

We’re not just seeing a reduction in war and civil conflict, there is also a remarkable drop in homicides and violent crimes around the globe. Pinker writes,

“England, Canada, and most other industrialized countries have also seen their homicide rates fall in the past decade. Among the 88 countries with reliable data, 67 have seen a decline in the past 15 years…Rates of rape or sexual assault and of violence against intimate partners have been sinking for decades, and are now a quarter or less of their peaks in the past.” [3]

3graph-mass-killing

Archeologists and anthropologists have surmised that over 15% of society died violently in previous centuries. More recently this number has dropped down to 3%. In the Twenty-First Century less than 1% have died a violent or war-related death. [4]

With these surprising developments in mind, Pinker argues that;

“Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species.” [5]

Pinker acknowledges that many are inclined to dismiss his observations. It contradicts what the news anchors and talking heads have presented. This leads us to believe that there is no more “news” reported today, only someone’s agenda of what they want to express and advance as news. Nevertheless, the data actually reveals that the world is becoming a much safer place. Summarizing his findings, Pinker writes:

“The world is not falling apart. The kinds of violence to which most people are vulnerable—homicide, rape, battering, child abuse—have been in steady decline throughout most of the world. Autocracy is giving way to democracy. Wars between states—by far the most destructive of all conflicts—are all but obsolete. The increase in the number and deadliness of civil wars since 2010 is circumscribed, puny in comparison with the decline that preceded it, and unlikely to escalate.” [6]

Sadly, violence and bloodshed remain a part of our world, but it is much less pronounced than it was in previous eras. The world is clearly getting better. While many Americans are busy yelling and screaming about their perception of violence, amazing advancements in peace are quietly being established around the world. Even Mexico with all of the much publicized drug cartels, is advancing this trend. The chart below, which has a gap due to data collection issues, demonstrates this.

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Investing

But the KnowRisk Commentary is about investing! Yes and this report of the misconception about world violence is a metaphor for what goes on in the investment markets every day. Recent headlines in financial “news” give the impression that another recession is “looming” and even “inevitable.” Are the headlines right? Or is this another case of pessimism gaining popularity?

The Ibbotson graph below shows a 90 year trend that many people forget when media pessimism erupts and misconceived fear takes over.

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In terms of emerging markets, where this crisis began, the Shanghai index has fallen from its peak of 5166 to 3293 as of October 13th (a 36% fall.) However, the index is still positive 39% from the previous year to date. For the broader MSCI Emerging Market Index, the P/E ratio (the measure of how “expensive” the market is in terms of what the underlying companies earn) has fallen to 12.5x earnings. With lower values being cheaper, the market is much more attractive now than it was last time the Shanghai index was at this level was in 2009 with a P/E of over 20.

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Back at home, if you remove the negative impact from the temporary over-supply of oil, the investment landscape in the US is overwhelmingly positive. The below chart from Deutsche Bank shows that the non-oil linked companies in the S&P have not only held their own, but have grown 9-13%! Thus the 3rd quarter is far from being a signal of an approaching recession. The non-energy sectors appear stronger than ever.

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Most investors cannot see through the misconception and react the opposite way that smart investors like Warren Buffet react. Buffet felt 2008 was a wonderful year to buy stocks at terrific prices. He was right.

[1] CJ Werleman. “We’re living through the “most peaceful era” in human history — with one big exception.” Salon, Wednesday January 15, 2014.
[2] Steven Pinker and Andrew Mack. “The World Is Not Falling Apart: Never mind the headlines. We’ve never lived in such peaceful times.” Slate, December 2014.
[3] Steven Pinker and Andrew Mack. “The World Is Not Falling Apart: Never mind the headlines. We’ve never lived in such peaceful times.” Slate, December 2014.
[4] Steven Pinker. “Violence Vanquished: We believe our world is riddled with terror and war, but we may be living in the most peaceable era in human existence. Why brutality is declining and empathy is on the rise.” The Wall Street Journal, September 24, 2011.
[5] Steven Pinker. “Violence Vanquished: We believe our world is riddled with terror and war, but we may be living in the most peaceable era in human existence. Why brutality is declining and empathy is on the rise.” The Wall Street Journal, September 24, 2011.
[6] Steven Pinker and Andrew Mack. “The World Is Not Falling Apart: Never mind the headlines. We’ve never lived in such peaceful times.” Slate, December 2014.
[7] Ibbotson / Morningstar research