History’s edge: Why Niall Ferguson wants us to take the long view

When you spend most of your time with your nose pressed up against a Bloomberg screen, it can be easy to forget that today’s market moves do not occur in a vacuum. Almost everything we see in financial markets has happened before, and being aware of the past can give us an edge in figuring out what might come next. Studying financial history may be a minority pursuit, but it can be a secret weapon for spotting warning signs and making smarter investment decisions.

"...being aware of the past can give us an edge...."

As such, it was an enormous privilege for me to recently welcome financial historian Sir Niall Ferguson to our London office to record a podcast and be interviewed before an audience of our investment associates. The author of 16 books, Ferguson is the Milbank Family Senior Fellow at the Hoover Institution and a senior fellow at the Belfer Center for Science and International Affairs at Harvard University, as well as the founder and managing director of the macro and geopolitical advisory firm Greenmantle. In short, he’s a heavyweight when it comes to understanding the big picture.

Unsurprisingly for a historian, Ferguson favors taking the long perspective. He told us that one big reason so many people were blindsided by the Fed’s moves during the 2008 financial crisis was that they were only looking at a tiny slice of market history. “They used models that typically had just five to 10 years of data,” he said. “But if you’re only working with a decade or less of data, you’re going to have a very skewed sense of plausible scenarios.”

Hunting for hidden clues

Ferguson suggested that had more people been aware that then-Fed Chair Ben Bernanke was an expert on the Great Depression and had been heavily influenced by Milton Friedman and Anna Schwartz’s book, “A Monetary History of the United States,” the Fed’s subsequent actions would have been far less surprising. “Many people trading and managing billions of dollars didn’t really have an inkling of what Bernanke was doing,” he said. “But if they’d read that book, they’d have had a better idea of what was worrying him and how he was likely to respond.”

He also argued that there’s no magic signal for when a market regime is about to change, but it pays to watch for irregular market moves—and the smartest places to look are the currency and bond markets. “Equity markets come and go, and can be driven by cyclical fashions, whether it’s Cisco back in the 1990s or NVIDIA today,” he said. “But if I want to understand whether a country’s financial and monetary regime is stable or some kind of transition is taking place, I look closely at its currency and its bond market.” In other words, if bond prices and the dollar are moving in the same direction—pay attention.

Ferguson brought up the 1956 Suez Crisis as a classic example of how fast things can change. Back then, Britain, France, and Israel invaded Egypt to try to take back the Suez Canal. But under huge international pressure, Britain had to pull out—and that basically signaled the end of its status as a global powerhouse. “What Britain quickly learned was that as soon as you’re no longer a credible great power, people no longer want to hold your bonds or your currency—and that can be very expensive,” he said.

Echoes of empire: Can the U.S. stay on top?

Just as the Suez Crisis marked a turning point for Britain, today’s investors debate whether a similar shift is underway between the U.S. and China. Ferguson has written extensively about how “Chimerica”—the deep and symbiotic economic relationship between the U.S. and China—drove global growth in the 2000s but has since become increasingly unstable amid rising tensions and strategic competition.

Despite this, Ferguson doesn’t buy the idea that the U.S. is destined to lose its top spot to China. While he acknowledges that the U.S. has its own headaches in the form of a deeply polarized political system, ballooning debt, and the decline of its leading universities, he believes that China’s challenges—an aging population, political system limitations, and heavy reliance on debt‑driven growth and state‑owned enterprises—are even greater.

“The U.S.’s debt‑to‑GDP ratio is high, but not particularly high for a superpower by historical standards,” he said. “The U.S. also has enormous military reach, deep and liquid capital markets, the currency of first resort, and political accountability. The main risk to the U.S. in the short term is that it is seen to lose primacy in the Indo‑Pacific, which would have consequences for the dollar and 10‑year Treasury. But when people argue that China will inevitably predominate at some point this century, I’m still inclined to take the opposite side of that bet.”

"...the true secret sauce of U.S. exceptionalism is the strength of U.S. business...."

Ferguson is less upbeat about his native Britain, arguing that the country’s current difficulties—persistent inflation, sluggish growth and political dysfunction—echo the crises of the 1970s. He believes that Britain has a tendency to overlook the hard lessons of its own past, particularly the damage that can result when institutional credibility is undermined. “Britain’s problems aren’t that hard to fix,” he said, “but it needs to return to economic sanity, and that will require competent leadership.” This will mean restoring the strength of Britain’s institutions, without which fiscal and monetary missteps can quickly escalate into existential threats.

Why institutions matter—up to a point

Ferguson believes that strong institutions serve as shock absorbers, enabling adaptation and recovery by maintaining credibility with investors, citizens, and the international community. They provide the necessary framework for innovation and growth, and act as a safeguard against the risks posed by fiscal and monetary excess. However, according to Ferguson the true secret sauce of U.S. exceptionalism is the strength of U.S. business: No matter how bad the headlines are, he says, there seems to be no amount of bad politics that can derail the U.S.’s positive business impulse.

Studying history and looking at market events with a long historical lens help contextualize current events and can be a better guide than short‑term narrative or short‑dated data or models. And there is another, very good, reason for doing it: many people don’t.