6 speculations on the next financial crashPosted: March 3, 2014
There has been a small spate of articles in the last 3 months or so suggesting that we might be in for another horrible global financial shock this year. I’m in no position to judge these opinions with any certainty, but do note that they are coming from both the right and left flanks of modern political discourse. Recently I have increasingly taken the position that economists, when considered as a singular group, are in general no better at such predictions than almost any other group of people, economics being, chiefly, an ideology masquerading as a science in its common usage (to be clear economic thought could/should be scientifically applied, but in most expositions isn’t). So, when I see the right and the left making similar claims I take notice.
First up we have the Wall Street Journal’s Marketwatch relaying the eery similarities between the movement of the Dow Jones Industrial Average (DIJA) in 1928/29 and the movements of the DIJA today. To my untrained eye it certainly does look very similar, however, of more concern is the evolution of how Wall street traders are commenting. No-one is panicking but, as is noted, the level of concern is rising the longer the similarities continue. The chart was first circulated in November 2013, and wasn’t taken too seriously by seemingly anyone. Now, the rhetoric is more cautious.
One of the market gurus responsible for widely publicizing this chart is hedge-fund manager Doug Kass, of Seabreeze Partners and CNBC fame. In an email earlier this week, Kass wrote of the parallels with 1928-29: “While investment history doesn’t necessarily repeat itself, it does rhyme.”
From the Guardian we have Ha-Joon Chang, currently Reader in the Political Economy of Development at the University of Cambridge and author of “23 Things They Don’t Tell You About Capitalism”.
His point is quite succinct. In the UK and the US we are currently seeing stock markets at record marks, despite the underlying economies performing at levels that have not recovered to 2007 levels. Chang’s key point of reference is the growth in per capita growth in income, a data point that speaks to the underlying real economy (I find it strange that economists of all stripes talk of the real economy as an aside, surely it should be the main focus). More scarily he makes the observation that at this point no-one is offering any kind of narrative to explain these huge performance numbers. This differs starkly from the dot com bubble, explained away by tech innovation, and the 2008 crash, financial innovation leading to better risk management. The commenters were wrong in 2000 and in 2008, as the bubbles burst causing great losses, but at least someone believed in the market movements. This time is seems that no-one does.
David Cay Johnston, writing for Aljazeera, takes a stab at some of the crazy changes in valuation metrics that have become prevalent over the last 15 years or so. In short this is an intelligent and in depth (although very accessible – not too long) look at the tendency to massively value tech stocks that seemingly turn over no profits. Superficially this seems similar to what happened in 2000, however he also shows that there is some deep complicity between the journalistic sector and the speculative elements of today’s trading universe allied to a degradation of traditional measures of value, such as price/earnings ratios being superceded by price to revenue. For example, Facebook’s traditional PE is currently around 113, against a century long S&P500 average of 15, but its PR is 26 ($5bn revenue to market cap of $132bn), which is seemingly more palatable to speculators.
The article makes the point that investors that push money into stocks like Twitter, that has yet to book a red cent in profit are speculators.
Would that we could bring back Benjamin Graham, whose 1949 book, “The Intelligent Investor,” explains how to value stocks. Warren Buffett calls it “by far the best book on investing ever written.”
Graham looked at the profits companies earned, not the promises of what they might someday make. That is, he was an investor.
Markets can benefit from speculators, who take risks that prudent people and institutions should avoid, but speculators should represent the edges, not the core of the market.
Back to the WSJ’s Marketwatch. This post is a little strange, almost an homage to the deep fallibility of the human animal in totality, not just in regard to the prediction of financial crashes. The premise is very straightforward, there are always warnings, there have always been warnings, before the 1929 crash, 2000, 2008 the same. And they were all ignored. All of them. And it will be the same this time. It’s a heartfelt characterisation of a human process that will play out against pre-ordained personal prejudice and bias (naturally a bull, naturally a bear), regardless of what the rational analysis tells us.
Yes, you will read new warnings, like “ Soros doubles a bearish bet on the S&P 500, to the tune of $1.3 billion.” You may double down too. Or do nothing. You may listen to Hulbert, Gross, Gundlach, Ellis, Shilling, Roubini and Schiff. And still do nothing. Or something. You will listen, take it all in, and do what you always do. Your way, based not so much on all the warnings, the facts, evidence, predictions. Rather you’ll make your own decisions based on some inner consensus of voices that always guides you from deep inside your brain.
Talking of George Soros and his $1.3billion Put, here are 2 opinions, first from the WSJ again and secondly from the strange folk at zerohedge (a site that is popular with aggressive opinion. Nearly all columns are written by “Tyler Durden” a nom de plume designed, with a somewhat wicked sense of humour, to enable industry insiders to pontificate anonymously without fear of jeopardising their employment). Both articles are strangely inconclusive actually, it may be a hedge, or it may be a sign that Soros is concerned about China and is anticipating a big fall. Still, an interesting marker to keep an eye on, Soros, after all, has a history of getting big bets right.
Finally a somewhat left field and unscientific historical observation from David Brin.
His suggestion is that 1914 and 1814 were the real starting points of their respective centuries, with the Concert of Vienna 1814 leading to an extended era of peace on the European continent, shattered rudely by the horror of WW1 in 1914. As a thought experiment, and Brin is clear that this whole exercise is almost an amusing aside, we can speculate what might be brought forward from 2014. It could go both ways. Let’s hope common sense prevails.