|All of a sudden, it feels like 2008, but with different trigger events|
Monday, August 24, 2015
Is This 2008 All Over Again?
Is there another financial crisis looming over the horizon, a crisis that could wreak economic havoc and cause us to sink into a debilitating recession? Is this the same? Or different? Yes and no.
Yes, it feels like 2008. When market indices for every equity market around the world sink into a cellar in a matter of days (and hours), 2008 comes to mind. Investors get confused, and they scramble to make rash decisions about their investment portfolios, no matter how much the old-time asset managers admonish all to take a long-term perspective. Investors seek comfort and solace from financial advisers. Uncertainty abounds.
Financial institutions all over summon their risk-management units to the board room to gather data to determine where the big risks are and to devise a swift game plan to manage risks that seem uncontrollable.
But no, it's not 2008. It's different this time. There is a different set of trigger events. In 2008, the whole mess was ignited by rumblings in mortgage markets, which triggered losses in mortgage-backed securities, which led to losses in hedge funds and financial institutions, who had been forced to sell assets in fire-sales to generate cash to pay off panicking lenders. And on and on, until the Great Recession swarmed in.
This time there is a different trigger event from markets a half-globe away: China. Earlier this summer, we watched from a distance as its stock markets crumbled. The earlier declines over there had not yet had much impact over here, while our markets continued to engage in Fed-watching, trying to figure out precisely when interest rates will turn upward. But after the Chinese decided to devalue its currency, global markets began to swirl and descend, slowly, then quickly. The devaluation proved to be the signal that the dampening or shrinking of its economy was no longer a conjecture. It was perhaps real.
Equity markets don't wait for economists to figure out the global impact of China's struggling economy. And they don't wait for government officials to provide guidance (or issue out blame). Stock markets react, and they watch each other to determine how to behave and react. If they over-react, well, they'll correct that in ensuing sessions.
Financial institutions, this time, should be in much better shape--thanks in part to regulatory reform that (a) requires that they have more capital cushion for times like this, (b) requires that have more liquidity if lenders and depositors flee en masse, (c) requires they pass stress tests to prepare for these awful scenarios, and (d) requires they maintain balance sheets with limited (if any) amounts of risky trading assets.
In 2008, the financial system was in danger, at least for a few weeks in late fall. In 2015, the financial system, at least in the U.S., should be sturdier, more sound.
We knew it, and we've seen it, but global turmoil, circa 2015, proves once again how interconnected the economies of large economic powerhouses are and how interconnected their financial markets have become and will be. What happens over there seeps into the equation variables that explain what happens over here.
This also becomes the time to pinch ourselves to peek at market history for guidance and a little bit of comfort. History and technical analysis show that eventually equity markets eventually bounce back, sometimes after a little bit of tweaking, sometimes when hysteria recedes. They may not be useful now to tell us when.
Now could also be the time to reach for the security blankets of wisdom from the consistent perspectives of the best long-term investors (the world in which Warren Buffett resides). During market strife, they cling even harder to their Graham-Dodd investing principles and refuse to lose sleep when market indices suggest that days of doom lie ahead.