November 16th, 2009
Over the next few weeks, I will be writing a series of pieces on trends in the global economic landscape, and what the implications of these trends are for investors. In this edition, we take a look at what might be the biggest bubble in recent memory: The financial crisis of 2008.
Please, click the following link for part I of our piece on asset bubbles.
Please, click the following link for part II of our piece on asset bubbles.
What goes up must come down
– Sir Isaac Newton (1642-1727)
Because the global financial system is heavily levered and dependent on debt, a prolonged downturn in growth can have devastating consequences for the economy. Policymakers are cognisant of this, which is why they attempt to buoy the real economy via expansionary monetary policy (i.e. more debt). The result of this is that the economy begins each cycle from a higher level of leverage and the lack of purging of prior excesses leads to even greater vulnerability and thus a greater necessity to continuously limit the downside of the economy. This phenomenon is commonly referred to as the debt “supercycle”.
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Tags: 2008 financial crisis, asset bubbles, housing bubble
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October 29th, 2009
Over the next few weeks, I will be writing a series of pieces on trends in the global economic landscape, and what the implications of these trends are for investors. In this edition, we continue our examination of prior well-known asset bubbles in order to better establish a context and an investment philosophy for the coming years.
Please, click the following link for part I of our piece on asset bubbles.
What goes up must come down
– Sir Isaac Newton (1642-1727)
Inflation across the world surged in the 1970s following rampant increases in commodity prices and over-spending by government in response to the baby boom in the preceding decade. The major developed economies, led by the United States, unable to maintain the gold standard due to persistent trade and current account imbalances, call on the IMF to create a new synthetic currency, which essentially severed the ties between these countries’ currencies and gold. Investors flocked to commodity markets en masse following this decision out of fear that the ability of governments to print money without retribution would cause inflation to spiral out of control. Gold enjoyed a spectacular run, rising tenfold from 1973 before peaking intraday in February 1980 at $850/oz.
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Tags: asset bubbles, gold, NASDAQ, Nikkei 225
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October 19th, 2009
Over the next few weeks, I will be writing a series of pieces on trends in the global economic landscape, and what the implications of these trends are for investors. Before we begin, however, a brief history lesson is in order…
What goes up must come down
– Sir Isaac Newton (1642-1727)
Gravity is a conceptually simple, but mathematically complex physical phenomenon where in its presence, what goes up eventually must come down. Financial markets are no different, and our world is chock full of examples of speculative frenzies. While it is never fun to be involved when asset bubbles burst, history may provide some insight as to the conditions under which asset prices bubbles can develop, grow, and disappear. What I present below is a mere sketch of selected well-known asset bubbles. For more in-depth reading on the subject, I would recommend starting with Charles Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises.
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Tags: asset bubbles, DJIA, October 1929, South Seas Trading Company, tulip prices
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