There is something about a market crash that makes me wants to write. I guess it is a cathartic way to deal with loss.
Given the huge drop in Japan and London, we might expect the US market to drop substantially this morning. Though I weep for the NIKKEI, I fear for the DOW.
I think it is easy to lose track of the BIG picture…the long-term view. This may seem ironic, given my obsession with speed and urgency, but I don’t confuse urgency with short-sightedness. Rather, I think small improvements implemented urgently can have huge impacts on the long-term outcome.
I guess you could say my long-term view increases my urgency. Furthermore, a long-term view needs to be long…maybe 10 years, maybe 100 years, maybe even 1,000 years? 1,000 years really puts things in perspective. Let’s look at these long-term views:
The 10 Year View:
Because growth compounds, decisions today impact the future in non-linear ways. If, for example, you have a start-up that is growing 10% a quarter and you decide to invest $10,000, in 10 years your investment will have become $411,000. If you decided to delay that investment for 180 days, however, you would only accumulate $340,000. That lack of urgency would have cost you $71,000.
The 100 Year View:
Stock Markets fluctuate, but overall they have done fairly well over the last 100 years. Despite my belief that the stock market in 2009 – 2010 will struggle due to massive debt and population demographic shifts (baby boomers are moving out of peak earning and spending), pulling out of the market does not make “cents” (bad puns for bad times). Multiple examples prove that history is on our side… over the long term, including:
- In January of 1970, a bear market started that lasted until May of 1970, during which the market fell 35.4%. In May, a bull market began that lasted until January 1973 and brought a 124% gain in stock values.
- In April 1981, another bear market commenced that lasted nearly a year and brought a 24.7% decline. Then, in March of 1982, the market began to rise and continued doing so until June 1983, bringing an overall gain of 71.7%.
- July 1990 brought a downward market that lasted three months, until October 1990, at which point equity prices had fallen 22.4%. Then, in the same month, a new, now legendary, bull market took hold and lasted nearly eight years, until July 1998, delivering a 330.7% gain for the market.
- Since 1975, 8 of the last 15 bull markets have started in the autumn months of September, October, and November.
- Since 1957 there have been 15 bear markets, as measured from peak to trough, and on average they have lasted 10 months and brought an average decline of 29.4%.
- The duration and degree of these bear markets were significantly less than the duration and magnitude of bull markets. During the same period, there were also 15 bull markets, which lasted, on average, 30 months and brought average gains of 112.5%.
Markets could only drop to ZERO, but they have unlimited upside (the cup is not only half full, but it could overflow).
The 1,000 Year View
Given my long-term view of opportunities, you can imagine how pleased I was this morning to find an 800-year economic data set.
Here’s the summary of from the study:
In a recent paper co-authored with Kenneth Rogoff, we introduce a comprehensive new historical database for studying debt and banking crises, inflation, currency crashes and debasements.3 The database covers sixty-six countries across all regions. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, going back to the date of independence or well into the colonial period for some countries.
In what follows, I sketch some of the highlights of the dataset, with special reference to the current conjuncture. We note that policymakers should not be overly cheered by the absence of major external defaults from 2003 to 2007, after the wave of defaults in the preceding two decades. Serial default remains the norm; major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors. We also find that high inflation, currency crashes, and debasements often go hand-in-hand with default. Last, but not least, we find that historically, significant waves of increased capital mobility are often followed by a string of domestic banking crises.
The big picture
What are some basic insights one gains from this panoramic view of the history of financial crises? We begin by discussing sovereign default on external debt.
Default cycles
For the world as a whole (or at least the more than 90 percent of global GDP represented by our dataset), the current period can be seen as a typical lull that follows large global financial crises. Figure 1 plots for the years 1800 to 2006 the percentage of all independent countries in a state of default or restructuring during any given year. Aside from the current lull, one element that jumps out from the figure is the long periods where a high percentage of all countries are in a state of default or restructuring. Indeed, there are five pronounced peaks or default cycles in the figure. The first is during the Napoleonic War while the most recent cycle encompasses the emerging market debt crises of the 1980s and 1990s.
Serial default on external debt—that is, repeated sovereign default—is the norm throughout nearly every region in the world, including Asia and Europe.
Our dataset also confirms the prevailing view among economists that global economic factors, including commodity prices and centre country interest rates, play a major role in precipitating sovereign debt crises.
The Study goes on:
Another regularity found in the literature on modern financial crises is that countries experiencing large capital inflows are at high risk of having a debt crisis. Default is likely to be accompanied by a currency crash and a spurt of inflation. The evidence here suggests the same to be true over a much broader sweep of history, with surges in capital inflows often preceding external debt crises at the country, regional, and global level since 1800, if not before.
In the past few years, there have been massive capital flows as the US borrowed billions from abroad while simultaneously sending billions for oil and imports. These old data sets provide useful insights into the likelihood of inflation.
So in conclusion:
1. Looking at markets/business from a 10, 100, and 1,000 year perspective can be helpful to reduce the panic over today’s markets.
2. Urgency and an obsession with speed are complementary, not mutually exclusive, to a long-term view.
