Market crashes, what we know and what we think we know, and a hint to what we don't know. An exercise in humility.
30/10/2018/08:00CET
Today I want to stray from my normal micro market analysis and news to a broader view on things and the way main street perceives them as a mass.
Our financialised world is like an impossibly huge monolith. And when anything very large falls, we, at our scale of view tend to overestimate how quickly it falls. Like a huge building being demolished, even though falling at almost free fall speed, it still seems to take excruciatingly long for such a massive structures to fall.
The same effect is happening with societal structures, and the gorilla in the room is the financialised world. Large is always going to understate its enormity. The FIRE sector of our economies (Finance, Insurance and Real Estate) for example in assets on balance sheet as a measure of size, are gi-fucking-normous.
Just one of the institutions in this sector, Deutsche Bank, as I stated in my previous post, has a derivative book value that rivals the that of world GDP!
The point I want to make is that such structure take time to fall!
2008
I want to show you a chart. This is the DJI monthly chart and I want to zoom into the 2008/9 GFC
Some facts:
- It took 17 months top to bottom. Almost one and a half years.
- The drop from top to bottom was almost a 55% retracement in notional value.
- It took 64 months to reach the all time high value again. Almost five and a half years.
Some more interesting things to see in this chart...
- It took 12 months to reach the technical definition of bear market. A 20% retracement from all time highs
- But it only took 3 months to reach the 10% retracement level. But on closer inspection of the chart we almost hit the 10% drop in the first candle but rallied back.
The point I am getting at is that we have exceedingly sparse experience on what happens during these crashes. We know they happen, we know that each time they look different and this difference is affected by a myriad of things like interconnectedness, technology, communications speed, legal structures, and government oversight or lack there of, just to name the ones that are on the top of my head.
Most importantly we overestimate how long it takes for events to play out. Especially for people like us who look at this daily. Most of the population will feel the effects of this crash when they lose their jobs, or face increased mortgage repayments because of sharp interest rate changes, or they face a dramatic, hard to ignore repricing of living stapes like bread, milk, rent, electricity, etc... Some may first feel it when their bank collapses.
I think you get the gist of it. So if you are reading this and, like me, looking at it with gruesome, almost schadenfreude attention, then we are the lucky ones,.... if we have the sense to react.
Just because you see the building falling on you, does not mean you have the good sense to run out of the way, and you may even choose the wrong direction to run in, and get flattened, when, if you had stayed put, you'd be ok.
If you permit me to run with my metaphor a little more, when large things fall and crash, there is often much debris flying about, remember we will most probably be knocked about in the melee of the aftermath.
But the biggest challenge for us is the likelihood that we misstime things. This is the purpose of my post. The perception of change vs the reality of it. We will have no reliable datums to compare thing to when everything is in flux.
Just keep in mind how insidiously translucent inflation appears to us when it unfolds in slow motion. 2% inflation is the same as a 2% tax skimmed of the top , but instead of affecting our notional sense of wealth, it erodes what our wealth can do.I expect inflation and deflation to jerk into violent action in the coming months and years as governments, companies and individuals jocky to reallocate capital to preserve or profit from new, yet unimagined economic paradigms.
Interesting side point. When I talk to people about the GFC, their perception is that it happened in 2008/9. Now this is impossible to confirm since it is just that a perception of normal people, but it seemingly corroborates my thesis that on the ground, we see such monstrous economic events when the debris thrown up by them comes crashing around our personal ears. We do not realise that the signs were around us for some months to a year beforehand.
Today
DJI monthly...