The Possibility of Civilizational Breakdown

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Sent to Client Note List members Wednesday 3/18/20 at 8:35pm PST:

14 months ago (Jan 2019) in my Client Note “The Everything Bubble And The Second Great Depression” (, I laid out my case for what I saw as an impending depression. The analogy I had in mind was the Great Depression in the United States in the 1930s and I called for a 2/3 to 3/4 drop from peak to trough. However, the arrival of the coronavirus has thrown a monkey wrench into the equation.

While we don’t know how long it will take to contain, the coronavirus is already and will continue to cause significant economic damage. Many places are already Sheltering At Home – including San Mateo County, where I live – meaning that people in all but “essential” businesses cannot go into work and people can only leave their homes for certain authorized activities. This is causing both a supply and a demand shock. While some people and companies can work from home, many cannot. Even for those who can work from home, it will take time to get up to speed and reach previous levels of productivity. On the demand side, with consumers staying home, all brick and mortar retail businesses will see their sales decline dramaticially.

Adding the coronavirus to an 11 year asset bubble and structural imbalances in the economy that I discussed in Part II of “The Everything Bubble And The Second Great Depression” raises the possibility that this bear market will be WORSE than The Great Depression. For the first time, early this morning before the market opened (Wed 3/18) as the SPY suggested the possibility of hitting the first circuit breaker (-7%, ~2352) which coincided with a significant level of support from the December 2018 lows ~2350, my mind turned to Weimar Germany in the early 1920s.

In The United States over the last 100 years, we have had many bear markets corresponding with recessions and one bear market corresponding with a depression. In Weimar Germany in the early 1920s, in the wake of their loss in WWI and the reparations imposed on them by The Versailles Treaty, they experienced something worse: Civilizational Breakdown. In other words, the downturn went beyond the economic realm, destroying the ability of society to function.

Economically, hyperinflation caused by massive money printing to meet the reparation payments destroyed the Mark as a medium of exchange resulting in a reversion to a barter economy. This greatly complicated economic life, enormously reducing economic activity and causing mass unemployment.

But it went beyond economics. Crime soared, women turned to prostitution to feed their families. It also almost certainly played a role in the rise of Nazism and Hitler in the 1930s which led to WWII. I don’t remember all the details but you can find them in Adam Fergusson’s outstanding history When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany (1975). (I read the book many years ago and have it in storage. But since San Mateo County instituted Shelter At Home starting Monday at 12:01am, I cannot retrieve it. I ordered another copy from Amazon this morning before the market opened (Wed 3/18)).

Combining the coronavirus with a massive asset bubble and the structural imbalances in our economy could result in something similar happening again. Briefly, the structural imbalance I refer to is the enormous inequality in our society, dividing us into The Top 10% and the rest working in the service and gig economy who primarily service the wealthy. As the asset bubble implodes, a negative wealth effect will kick in, causing the Top 10% to spend less on things like eating out, vacations, and all sorts of discretionary purchases. This will hit the service and gig economy, reducing incomes and causing unemployment. It could become so bad that hungry, unemployed, armed men roam the streets looking for people and businesses to rob and women turn to prostitution in order to survive – the same sorts of things that happened in Weimar Germany in the early 1920s.

While a depression would result in a 2/3 to 3/4 drawdown in the S&P 500 peak to trough in my opinion implying a bottom between 850 and 1133, as I wrote in “The Everything Bubble And The Second Great Depression”, civilizational breakdown would be worse. We could see a peak to trough drawdown of 80% to 90%, which would mean the S&P bottoming between 340 and 680. I know this sounds almost unimaginable, but it happened once before and the arrival of the coronavirus puts this scenario on the table again in my opinion. I believe the odds of a Second Great Depression to be 50% and the odds of Civilizational Breakdown similar to Germany in the early 1920s to be 50% [updated from 77.5% Second Great Depression/22.5% Civilization Breakdown to reflect my views as of Friday 3/20/20].

The market will not go straight down. Things will take time to play out and there will be countertrend rallies, maybe some as big as +20-30%, especially once the coronavirus looks to be contained. But while these will be tradable, they will ultimately be bull traps. Use them to sell into strength and position yourself for years of economic dysfunction or worse.

Americans must start to take the coronavirus seriously by sheltering at home, practicing social distancing, washing your hands almost obsessively, etc… We stand on the precipice of a great cliff that could completely derail our country and Western Civilization. It is time for each of us to be the best version of ourselves, to do the right things, to be compassionate towards others. So much depends on it.

Wishing you all the best in this time of crisis,

Greg Feirman
Founder & CEO
Top Gun Financial (
A Registered Investment Advisor
825 San Antonio Road #205, Palo Alto CA 94303
(916) 224-0113

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