Maybe it’s time to take stock. Stand back from all the recent hullabaloo, and take an objective look at what has been going on during the last few months.
We keep hearing that we are experiencing a crisis made in America, and it is down to reckless subprime lending, but is that really the problem? Today we try to look beneath the surface and attempt to put the mass of news and data and speculation that has done the rounds of late into context.
But before we get going consider this: When London’s mayor Ken Livingstone was in New York a couple of years ago he was asked why London was enjoying such a boom. He replied two words, Sarbanes Oxley. In the wake of the collapse of Enron and WorldCom, regulators in the US overreacted. They imposed an absurdly tight regime of regulations and New York suffered.
The economy is a hugely complex beast. Economic history has been littered with crises but they have never been the same. Some believe we can understand the present and predict the future by examining the past, but that is just not true.The future is unpredictable, change the only constant.
Well, actually, there is an exception to that rule. Mark Twain once said,History doesn’t repeat itself, but it rhymes. Maybe be the rhyming is provided by the one thing that never changes, and that is human nature. Travel back into the past, travel to the other side of the world look at people from the world’s religions, and there is one thing that is the same, human nature.
And one aspect of this constant known as human nature, is our tendency to overreact. We always have done, we always will.
During the down point of the Russian crisis in 1998, the entire Russian stock market was valued less then Sainsbury’s. Markets had overreacted.
Take as another example, the dotcom crash. One moment, companies were jumping over each other to move into the dotcom world, the next moment, Internet investing had become a dirty word. During the early years of this decade, dotcom business became a joke. Online shopping was dismissed by many as a no-hoper,online advertising, as a non-starter. Yet we now know, the negative sentiment of the early noughties was just as inappropriate as the hype of the late 90s.
Earlier this decade, stock market indices plunged. The FTSE 100 went close to 3000 points and new solvency rules forced pension funds to sell their investments in equities just as the market appeared to be nearing bottom, and in the process created a new bottom.
Fortunes were made during this period. Google’s early backers made a mint, Russian oligarchs were fashioned when the Russian economy was in chaos. Investors who thought ahead and put money into mainstream stock markets three years or so ago, made a fortune.
Conversely, investors who refused to run with the pack when the overreaction was in the direction of hope, also made it big. Joseph Kennedy, the father of the late president ensured fame for life when he sold his stocks in 1929 after a taxi driver asked for his advice on what shares to buy. The father of the United State’s most famous political dynasty reasoned that if taxi drivers had entered the buying-frenzy market, then it was clear things had gone too far.
Yet history is also littered with individuals who just could not see the inevitable fate awaiting a bull market.The most spectacular example is Sir Isaac Newton, who got caught up in the investment bubble of his day. He had invested heavily into the South Sea craze of that time, reasoned the market had risen too much and bravely sold. He then watched in horror as the market continued to rise and he bought back in, only to then see the bubble burst. Sir Isaac had forgotten that what goes up, comes down, and lost £20,000 in the process a fortune for those days.
If you can be sure of one thing in the current economic panic, it is this. The panic will go too far. It will overcorrect. And that’s where opportunity sits.
© Investment & Business News 2013