DataTrek Opines on Lehman Collapse and Equities – 10 Years Later
Traders Magazine Online News, September 11, 2018
Nicolas Colas
A lot can happen in a decade.
Traders Magazine was sold. The first African American President was elected. Social Media exploded and became a part of everyday life. And of course, the financial crisis.
Nicholas Colas,Co-founder of DataTrek Research, in a recent daily note, wrote that with the 10th anniversary of Lehman Brothers coming up, he got to thinking about what that event really taught him about how markets function. As he put it, work on Wall Street long enough and you start to feel a little like Forest Gump, unwittingly inserted into random bits of history. Lehman and the Financial Crisis wasn’t his (or Traders Magazine’s) first rodeo but it was certainly the most memorable.
What follows are Colas’ thoughts as originally shared in his research note:
#1. Financial market turbulence is inevitable. History is clear enough on that point. There have been speculative bubbles for hundreds of years and countless bear (and bull) markets in financial and commodity markets in just the last century. Until humans and computers reach some sort of singularity, human nature guarantees many more.
“Any rational investment approach incorporates that reality, either by diversification or unwavering commitment to stocks. The former is, of course, much easier to stomach.”
#2. Modern finance remains too myopic about what really drives monetary policy, economic growth, and asset prices. To my thinking, geopolitical events matter at least as much (and in many ways far more). For example, the 1973 Middle East war and its effects on oil prices did as much to spur US inflation later in the decade as loose monetary policy. The Federal Reserve’s response to the 9/11 terror attacks may have cemented the notion of a “Fed Put”, but what choice did they really have?
"The reality about 2008 is that the US was on track to see a recession regardless of what happened with Lehman. Oil prices had doubled from June 2007 to the same month in 2008 and sat at $140/barrel. That’s exactly the sort of spike that always drives a US (and usually global) economic slowdown. Ten years on, however, the Financial Crisis is the only thing most market participants remember. The truth is that the global economy was already on very shaky ground."
#3. Stock market lows get made when investors give up; what they “give up on” determines how low they go. About a year after the March 2009 lows a money management client told me “My customers didn’t sell the S&P at 700 because they had given up on stocks – they sold because they had given up on America.”
“In reality, I think it was because those investors had given up on the US financial system, but my client’s sentiment was much more right than wrong. That is an important point just now, if only because the political/social climate feels rather more fragile than usual at the moment.”
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