S&P 500, log scale. Source: Bloomberg
In October 2007 the stock market was reaching new highs – levels it did not reach again for another six years. We had begun to hear troubling news about foreign hedge funds and sub-prime mortgages, but those noises seemed like distant thunder on a summer day: of concern to those caught in the downpour, but local, isolated problems. Little did we know that the rumbling was actually the heavy artillery of the financial crisis, and that battle would sweep across the economic landscape, impacting everyone.
We learned, for the second time in ten years, that the stock market can fall 50% inside of two years. We learned that regulators can be captured: SEC lawyers can and will become legal counsel to large listed corporations; bank regulators become compliance officers; Interior Department officials can later work for offshore drilling firms. It’s tough to get tough on a violation if you think you’ll be interviewing with that same firm, later.
We saw that markets climb a wall of worry, that panic is an investor’s worst enemy, and that what seems obvious in hindsight isn’t clear at all at the time. That when someone says interest rates have to move higher and can’t get any lower, that the great bond bull market of the last three decades is over – well, it probably isn’t. Even if the person making the bear market call on bonds is a “Bond King” with billions in the bank. Just because you’re rich doesn’t make you right.
10-year US Treasury Note yield. Source: Bloomberg
We learned that Europe is more resilient than the naysayers think, that it can survive a Euro crisis and Brexit and Islamic terrorism and waves of refugees. Indeed, Europe itself was a source of refugees within living memory, that many of the core countries of the Euro-zone needed IMF bailouts at one time. We learned that when the European Central Bank vows to do “whatever it takes” to save the Euro, they mean it.
We learned – again – that technology is disruptive. That when big tech companies use new approaches to sharing information it can exert powerful changes on our economy, our institutions, our politics, and just about everything else. The only think new technology doesn’t change is human nature. We’re distracted by our phones now, we were distracted by our Walkmans and newspapers and books before.
There’s power in reflection. It’s how we learn from our experiences, widening our perspective to appreciate that life has all manner of ebbs and flows. Hindsight may be 20/20 – but only if you look.
Monet, “Water Lilies, 1919.” Source: Metropolitan Museum of Art
Douglas R. Tengdin, CFA