Market History 101

Apparently according to Kevin Rudd, Ken Henry the now departed Chairman of NAB whose put up a stellar performance at the Royal Commission into banking where he suggested that anyone could overlook charging $100 million in fees for no service is a great bloke and a genius who helped Rudd avoid another great depression following the GFC.

People seem to have forgotten that the stock market crash of 2008 was worse than the one that triggered the Great Depression back in 1929

Ahhhhh…..no it wasn’t. The stockmarket crash of 1929 saw an eventual 89% wiped off the value of equities over the next few years. The major part of the fall took 49% off the index in 61 days. The GFC saw the market lose a total of 54% in 513 days before beginning the recent bull run. The initial phase of the 1929 crash was much more severe in that it took less than two months and the resultant further collapse devastated the market to such an extent that the Dow took 36 years to recover. So, wrong in a simple interpretation of history but it does make any role you played sound spectacularly dramatic as if you rushed to the rescue when the planet needed you most.

Also, as a further point of further debate the 1929 crash did not strictly cause the Great Depression – this was caused by the reaction of central banks to the crash. Banks squeezed credit out of the system, and this ground everything to a halt and precipitated the Great Depression.

Henry’s advice was clear cut: he said that unless the government provided a sovereign guarantee for the inter-bank lending needs of Australian financial institutions, there was a grave risk they would fail. We then had a long debate in cabinet about the content and scope of the guarantee that would be necessary. At that stage the question of confidence in the system was fundamental. We agreed on providing the most comprehensive guarantee possible so that we could quickly re-open the lines of credit. It worked.

I can’t say anyone I knew was in fear of the system collapsing, nor were there any rumoured runs on the banks. This merely an attempt to socialise any losses but still allow the privatisation of any gains that followed when the system recovered as it did.This is something business in Australia seem to specialise in. The mechanism for dealing with crashes was well established as was seen in 1987. The lessons regarding squeezing credit and turning off the tap had been learnt and would never be repeated, except by dopey Europeans who thought austerity as a condition of bailouts was a good thing, but this seemed to be more of a cultural/class war issue than a financial one. Anyone who had read anything about the Great Depression would have offered exactly the same advice without the apparent narcissistic need to inject themselves as a hero into a fairly staid narrative.

However, I digress. The central point of this is that history matters and yet so few people involved in markets seem to take any interest in it despite its capacity to tell you a great deal. Markets do not operate in isolation of their own history, each point in time represents part of a continuum of events that repeat endlessly. Whilst, there are not many universal laws in investing there is one that is obvious – all booms end in busts. But this lesson is not learned simply because traders/investors are lazy, and they suffer from recency bias. That is my today looks like my yesterday, therefore my tomorrow will look the same as my today. What is missing from this is an understanding that there were an infinite number of yesterdays that occurred before your time and these yesterdays have an impact upon your today. The most recent example of this can be found in two extremes, residential property and cryptocurrencies. Residential property would seem to be a fairly bland investment, tried tested and the dream of seemingly every Australian. If you had asked anyone involved in property either from the wholesale or retail side what the future of property was, they would have told you it was brilliant because property never goes down. In part they were correct, but they needed to add a qualifier. The correct statement is in their time in the property market they had never seen property go down but because of recency bias they had assumed that just because in their time in the market prices had only ever gone up that this was the way it had always been and would always be.

Unfortunately, for heavily geared property investors this is not true, without knowing it all property investors are actually leveraged investors who prime asset has at any moment zero value. It has zero value because value is conferred by a bidder and 99.999% of all houses have at any given time no bidder. You have to go and attract them.  The same ode of bust follows boom also played out for for those who traded crypto and have witness enormous destruction of wealth. They failed to understand that the trading world and wiser heads had seen this all before and if they had looked at history they would have seen it too. I made a video some two years ago whilst in London having listened to endless spivs touting cryptos. My view was that is was going to crash not because I have any super psychic power but rather that I have seen it before because I am a student of history and I let history guide me.

Market history is one of the more reliable tools we have simply because it repeats, and it repeats because the functional unit of the market is people and people as a group cannot change. Individuals may be able to affect change in their lives, but crowds cannot, they are all governed by the same endless dynamic of fear and greed. This repeats over and over again yet despite this most do not take the time to look at the history of markets much to their own detriment.