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Recessions and soil – what volcanic eruptions tell us about economic crises

Updated: Jul 1, 2022

Pyroclastic flows, poisonous gases, destroyed villages, and decimated livelihoods - we’ve all sat in a high school Geography class and heard the joyous terms related to a volcanic eruption. A trip through the geological timeline shows infinite instances of the sheer brutality of mother nature and since the year 1500, around 300,000 people have been killed by volcanoes, with most from just 6 eruptions.


However, many of these places share a common theme – they have become some of the most beautiful places on earth, with abundant vegetation, breathtaking landscapes, and a real pride in what the planet brings. How has this happened? The answer is in the soil. The two main by-products of an eruption are molten rock & ash, both rich in key nutrients for plant growth such as phosphorous and potassium. With a fair amount of weathering and passage of time, they eventually bring what most other natural disasters can’t – fertile soil.

Just looking at the tip of the iceberg of examples, we see places like the famous Mt. Krakatoa in Indonesia, which killed 36,000 people during its eruption in 1883, swallowed two-thirds of the island, and caused average global temperatures to drop by 1.2°C. Since then, however, it has brought an abundance of trees and plants, and even neighboring islands such as Rakata are bearing figs!

Mt. Krakatoa (Anak Krakatau) in Indonesia, 2015. Vegetation and overgrowth spread over the molten rock.

Mt. St. Helens in 1980 practically covered all the east of Washington State in ash, claiming the lives of 57 people, as well as damaging vehicles, and buildings, and significantly disrupting everyday life. Nevertheless, this has allowed Washington farmers to grow over 300 different crops ever since due to the talcum powder-like gift from above.


During the colonial period in 1938, Dutch scientist Professor E.C.J Mohr observed that the high population densities in Indonesia are probably due to the rich fertile soil caused by volcanic activity. Several years after the eruption of Mt Galunggung in West Java in 1982, crop productivity in the local area soared, and now supports around 1,100 people per square km.

Not to mention Hawaii, which is essentially borne out of these ticking time bombs; Naples in Italy which, thanks to two large eruptions some 35,000 and 12,000 years ago from Mt. Vesuvius, has abundant plains of vines, vegetables, tomatoes, and flowers; Aokigahara – the huge forest known as the ‘sea of trees’ around the North-western side of Mt. Fuji; and even the moon-like landscape of Lanzarote, where trademark ‘picon’ soil gives the vino Tinto its unique earthy flavour.


So how on earth can anyone relate this at all to the economy and business in general? Well, I give you LIFT – a newly bred South African airline – as a helping hand. In December 2020 – when African airlines’ traffic was still around 80% below pre-pandemic levels – LIFT Airlines launched its first two flights from Johannesburg and Cape Town, just in time for the southern hemispheric summer. What initially seemed a bonkers idea was championed by Co-Founders Gidon Novick and Jonathan Ayache who quoted low oil prices, low aircraft values, and dirt-cheap skills-based labour have all meant that “current cost structures are about 40% lower” than an average airline start-up. What’s more, with all other aviation majors – namely South African Airlines – saddled with debt, it was the perfect time for the new kid on the block to steal a cookie from the jar. With 30,000 tickets sold within the first month of launching, we saw crisis turned opportunity, emblematic of being “greedy when others are fearful.”


The two routes currently operated by LIFT, a new short-haul no-frills airline, 2021.

When we compare this to a volcanic eruption, one might suggest that like a disaster bringing vegetation and ample means of food to a nearby population, the aftermath of an economic recession can produce watershed opportunities for investors/businesspeople. In essence – though seemingly not the case at first glance – the ground can be very fertile for those able to look at the facts, ignore the fear-driven hubris, and take risks.


An example closer to home is Escape to Freight Island, a large street food market and entertainment complex in the Mayfield district in Manchester City Centre, an area currently undergoing a £1.6bn revival project. Launched and financed by Gareth Cooper early last year, this was originally a depot, occasionally co-opted for nightclub events but essentially derelict. Here is another case where, as the rest of the bar/nightclub industry crumbles under a pandemic-induced standstill, a little guy decides to open up shop in fearless, opportunistic fashion. What also helped was the sheer space, meaning it could still hold around 600 people at once even in a socially distanced environment. Its Safe + Social Manifesto enabled it to operate at a much lower than normal capacity and remain afloat. Just a few months after launch, Cooper announced a further £2m investment for expansion amid staggering success.


Escape to Freight Island, dubbed “Platform 15” as a wave to the nearby Piccadilly Train Station, August 2020.

And who could forget ALDI, the German family-owned discount supermarket that, with its supply-chain advantages and ultra-competitive high-value product line, made a killing during and after the 2007/8 credit crunch? This little blast from the past is still making a burgeoning impact on the UK supermarket space today.


Since landing on British shores in the early 90s, ALDI had struggled to make inroads. Over the period of the GFC in 2008-2009, however, they claimed more dominance as they catered perfectly to the tighter budgets of UK households and were able to operate effectively under a period of double-digit food-price inflation. Total sales for 2008 rose 25% YoY to £2.15 billion, which included the increase in store count from 416 to 457 across the UK and Ireland. Tesco had to release their own discount brands just to keep up, sabotaging their already thin margins!


UK supermarket market share for each major shop. Orange: 2008; Red: 2020.

Other discount retailers have a similar story to tell, with the likes of Lidl and Iceland having made significant headway relative to the Big Four (Tesco, Sainsbury’s, Asda, Morrison’s). And the fairy-tale doesn’t end there – store numbers have been increasing at breakneck pace ever since. Akin to our agricultural towns in East Washington, Aldi continues to reap the benefits of the economic compost laid before them some 12 years ago, while the larger incumbents still suffer.


Lidl & Aldi store count from the 2008 GFC to 2020. Blue: Lidl; Orange: Aldi.

Ocado is another case in point, though it is perhaps too early to determine their fate as we are still watching their success play out in real-time. They saw a 40% increase in sales in the first few months of 2021 alone, with the COVID-19 stay-at-home order as the catalyst, forcing customers to look online for weekly supplies. New warehouses are being laid out for extra capacity, with one in Bristol capable of filling 30,000 orders per week, run by robots!


Of course, financial-economic eruptions don’t explain everything. Low interest rates and tax cuts, for instance, also help seedlings sprout. Many would argue the doubling in major stock market indices such as S&P 500 on March 2020 lows is attributable to the colossal amount of money in circulation, courtesy of bond-buying sprees of Central Banks. Not to mention the housing boom of this year and last – albeit a breakthrough for those trying to get on the property ladder, it was artificially brought about by the stamp duty holiday.


Without connecting too many dots, there exists one final similarity between our economy and geology: neither windows of opportunity nor soil fertility last forever. It is doubtful that LIFT or Escape to Freight Island would have prospered had they sat on their hands for an extra 12-18 months, as these ideas would have collected dust and the market returned to normal conditions; we are seeing this now with the former - oil prices have since risen by 50%, accompanied by a labour shortage which has caused rampant wage inflation. Success for someone trying to open another ALDI these days is rather improbable as well. Such big breaks have a shelf life. Similarly, with agricultural land, it is natural for the ground to become less productive in growing plants over consecutive periods of cultivation, as there are fewer nutrients left in the soil for further seasons.


In one sense, crises are necessary and are as natural as the grass growing beneath us. For creativity and initiative to take foot, there must be some level of disruption, normally accompanied by difficult and restrictive times. It is these relatively short periods that bring some of the most successful contrarian ideas and make way for the new entrepreneur. Economic fertility will always exist, and when looking at different themes around the world, we realise perhaps what goes on in our own system is not too dissimilar to the ebbs and flows of others.


Disclaimer


This post is not intended as investment or financial advice, and should be used for recreational purposes only. Any financial actions taken using the content of this post are done so at your own risk, and I am not liable for any gains or losses incurred.


I hold no shares in any of the companies mentioned in this post.

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