08 November 2024

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Financial Markets and the Titanic

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The Belle Époque was a historical period characterized by economic growth, technological and scientific advancements, and significant improvements in living conditions, particularly for the wealthier classes. With widespread optimism for the future, Europe seemed to have moved past an era of wars, entering a period of peace and economic prosperity:

• Advances in medicine led to a reduction in epidemics and infant mortality, as well as significant population growth.
• Unprecedented technological innovations spurred an increase in industrial production and global trade.
• The British pound was the "currency" of the world, and England was the economic center par excellence.

One symbol of the Belle Époque was the Titanic, and while the period officially ended with the outbreak of World War I, the sinking of the Titanic ideally symbolizes the shattered dream. In many ways, the great optimism and confidence in human capabilities led people to underestimate the multiple risks that proved fatal for the Titanic on the night of April 15, 1912:

• April 1912 was unusually mild, and the high temperatures caused more iceberg formation than the seasonal average.
• An unexpected transfer led the second officer to forget to return the key to the locker that held binoculars for the lookouts.
• The Titanic was built with a type of steel (common at the time) containing high levels of phosphorus and sulfur, which made the steel more brittle.
• The rivets used to join the bow and stern bulkheads were of lower-quality steel and were hammered by hand instead of with an automatic riveting machine.
• There were only 20 lifeboats instead of the 48 planned (for “aesthetic” reasons).
• Rivalry between two transatlantic companies to set the record for the fastest Atlantic crossing led Captain Smith to proceed at maximum speed to reach New York early and surpass the record held by competitor Cunard Line.

Comparisons to today are natural, as there are many uncertainties that investors must face:

• Inflation;
• Interest rates;
• Geopolitical issues;
• Recession;
• Energy transition;
• Deglobalization;
• Low birth rates;
• Aging population;
• Sustainability of pension systems;
• “Various and sundry” other concerns.

To prevent one or more of these risks from becoming an iceberg that sinks our ship, we must implement a series of defensive strategies:

• Diversification. The only true tool to spread out risks.
• Balanced portfolio. Neither too cautious (as inflation may be more resilient than expected) nor too aggressive, which would expose one to extreme market volatility.
• Avoid overconfidence in one’s ability to assess the situation.
• Healthy and positive optimism toward the future is advisable: confidence allows us to see things from a positive angle and live better.