The Market Ends a Round Trip, What Next?

I've spent a lot of time reading about what went wrong in the financial markets in the past year. A lot of the best stuff has come in the form of letters and presentations from hedge fund managers who have been at the front lines in this crisis. Most of that stuff is highly confidential and not bloggable. But there is one chart that I keep thinking about that I wanted to share with you.

I saw this chart in a presentation by a leading hedge fund manager. This is a Bloomberg chart that anyone with access to a Bloomberg terminal can recreate and I apologize for the grainy quality and somewhat out of date nature of this.

This is a chart that goes back to January 1994 and charts the S&P vs the rest of the world (minus Japan). Apparently taking out Japan doesn't change this chart much but it's cleaner without it.

This shows that for seven years from 1994 to 9/11, the US outperformed the rest of the world by a lot. And from 9/11 to the end of last year, the rest of the world outperformed the US by the exact same amount. It was one big round trip. And that round trip ended in a mess.

I am not going to try to explain why this round trip ended in a global financial meltdown, but it mostly has to do with massive leverage and liquidity and we finally hit the breaking point.

You'll notice that in the past several months, the US has started to outperform again. This is probably due to positions around the world being unwound and dollars coming home (or something like that). I don't know if you can make too much of the recent time period.

But the big question is where do we go from here? As we start think about how to position ourselves collectively for the next move up (whenever that comes and it could be a long while), I think this chart is worth paying attention to.

And if you haven't read it yet, I suggest everyone read Fareed Zakaria's The Post-American World. It gives an interesting context to this whole issue. Here's my blog post that I wrote this summer after I finished it.

Comments

[DollarTalk:]

I am very thankful for the blessings that I have in my life. Now, regarding the market, the power of optimism never ceases to amaze me. In fact, we are missing a very large component of our view on the market and the economy in larger view when we discount the role of perception. Most of this market volatility was brought on by increased uncertainty and the perception that our credit crisis and financial difficulties were beyond our ability to solve as a free market. This, of course, was exacerbated by the media and capitalized on by the media in order to accomplish the election of now President-elect Obama. Now, the media has their man and would do well to continue to promote positive, uplifting views on the future direction of the economy and the solutions and people proposed by President-elect Obama. Otherwise, they will find themselves in the company of the Republican party when the public develops a pessimistic or negative perception of the new President and his leadership team. That's all for now. More on my blog.

2008 Nov 27 01:53 AM

[peterthepai...:]

what an odd comment... ...

2008 Nov 27 04:45 AM

[jeandit75:]

I am not sure I understand your point but trying to call the next move I would say that the "decoupling" effect is definitely not going to happen and so I would say that the U.S. should emerge first out of this recession. This means there should be room for further US market to outperform the rest of the world. The only caveat to this story is what happens to the USD and its role as the world sole reserve currency. In the event that China switches its growth plan from export to promoting domestic consumption, there is the possibility that the USD ends-up losing its role. Then, your guess is as good as mine but this would not bode well for US stocks.

2008 Nov 27 08:20 AM