We are continuously told that the state of today’s post-crisis markets is unprecedented, but is it really? Emma Cusworth finds out.
“We are here because of QE. We wouldn’t typically expect valuations to be where they are given where interest rates are. We have not had this historically.”
David Vickers
The four most expensive words in the history of finance are ‘it’s different this time.’” So says Yoram Lustig, head of multi- asset investments UK at Axa Investment Managers.
Yet, the word ‘unprecedented’ has been consistently used by many market players in recent years to describe the state of the world markets today. So who’s right? Are we in uncharted territory, or are we somewhere we’ve been before, but have just forgotten how it feels?
WHAT IS GENUINELY NEW?
“History doesn’t repeat itself precisely,” Lustig says, “but things are not different in the sense that the business cycle is not dead. We tend to have bubbles, credit crises, currency displacement and extremes in financial markets, all of which eventually comes crashing down.”
Many of the factors underlying the 2008 financial crisis had been experienced before. Financial engineering and the growth of programme trading were significant causes of the 1987 crash, which saw nearly 23% wiped off the Dow Jones Industrial Average (DJIA) on Black Monday. As they were through the increasingly complex web of derivatives and the rapid unwinding of quant strategies in 2007.
The 1920s crash was caused by the shared belief the world had changed – there would be no more world wars, equities would continue increasing in value, which lead to a housing bubble and subsequently the Great Depression.
“It is in human nature,” Lustig says. “ People get euphoric and inflate bubbles, which then explode in our faces.”
However, there are some notable differences in todays’ environment, not least the prolonged recovery period following the ‘Great Recession’ of the late 2000s, which is taking far longer to return to ‘normal’ than it did in the 1930s, for example.
The scale of quantitative easing (QE) deployed to address the financial crisis has been unprecedented. The cumulative rise in central bank balance sheets is pressing towards $5trn over the last five years, according to Blackrock.
The result of quantitative easing has been to throw markets out of synch. “QE reflates asset prices not the economy,” says Ewen Cameron Watt, Blackrock managing director and chief investment strategist of the Blackrock Investment Institute. “It is an insurance policy against short-term forced liquidation amongst asset owners and has simply inflated the financial market cycle way beyond the business cycle.”
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