We are bombarded seemingly on an hourly basis by the press and punters alike who seem convinced that this time it is different. The argument goes something like "what is happening in Europe is just a taste of what is going to happen globally" and "governments globally are too indebted and are going to have to cut back on spending radically which will push the world economy into recession". Yes, there is also the proverbial "Greece is the next Lehman" argument as well. Now I am not going to be critical of this sort of commentary, everyone is entitled to their point of view.
I started investing professionally (managing high net worth client funds) in early 1997 and have been managing money ever since. Thinking about the latest drama unfolding in Europe and all the commentary that has gone with it, I've been having "flashbacks" to various crises that have happened ever since I became involved in a professional sense with the market:
- The Asian Tiger crisis of 1997
The Long Term Capital (LTCM) of 1998
The TMT bubble and collapse 99-02
9/11 or the WTC crisis of 2001
The market collapse/Enron thing in 2002
The start of the Iraq conflict in 2003
The Israel Hamas "rocket" crisis of 2006
The GFC in 2008/09
The "Flash crash" of 2010
While it may appear that the current "debt" crisis in Europe is insurmountable, I can assure you that during each and every crisis that I have experienced since 1997, the problems then seemed insurmountable as well. You may say "but the 9/11 attack was just localized to a physical attack on the U.S.", that the LTCM crisis was "just the stupidity of a heavily leveraged hedge fund", etc. But you have the benefit of hindsight. Believe me, sentiment back then was as toxic as it is today and every reason in the book was conjured up that "this time it is different".
Early last week I looked at the 12 week Rate of Change of the MSCI World Index. I was surprised to see how the magnitude of the current sell-off compared to other sell-offs that occurred since 1970. If we exclude the 2008 GFC, then the current sell-off is more or less as bad as any sell-off has been over the last 40 years!
MSCI World Index 12 Week Rate of Change (Click to enlarge)
My point? If my experience is anything to go by then whenever the press throws up the proverbial "this time it is different" argument, it is a sign that all the bad news is fully priced into the market. The other thing I have found is that adversity forces change and this change strengthens the financial system. It happened with South East Asian economies in 1997, with Russia in 1998, corporate America in 2008, and history would suggest that the Greek debt crisis will actually strengthen the Eurozone (eventually at least).
Disclosure: I am long DIA.