The Indomitable Investor by Steven M. Sears

Author:Steven M. Sears
Language: eng
Format: epub, mobi
Publisher: John Wiley & Sons, Ltd.
Published: 2012-02-27T16:00:00+00:00

800 Years of Crisis

The concept of black-swanning investment portfolios is in the nascent stages of mainstream acceptance, even though the idea has been adopted by the upper echelon of the financial market.

The credit crisis, the first black swan event of the twenty-first century, makes clear that the old ideas of managing money, and limiting risk, need to evolve because the future is likely filled with even more financial calamities.

“We know we have crises every five or ten years,” Jamie Dimon, J.P. Morgan’s chairman and chief executive, said during congressional testimony in January 2010.”6 The pattern has, by some measures, existed for 800 years. Since 1980, the financial markets have repeatedly been leveled by financial crises. Each new crisis seems more intense than the one that came before. In 1982, Mexico defaulted on its bonds, sparking an international debt crisis. In 1987, the Dow Jones Industrial Average dropped 22.6 percent in one day. In 1989, the markets contended with the U.S. savings and loan crises and the Latin American debt crisis. This led to a European monetary system crisis in 1992 and 1993, and a Mexican peso crisis, requiring a $50 billion U.S. guarantee in 1994 and 1995. In 1997 and 1998, Asia experienced a financial crisis that required a $40 billion rescue organized by the International Monetary Fund. In 1998, Russia defaulted on its debt, and Long Term Capital Management, the U.S. hedge fund, nearly toppled the global markets. In 2001 and 2002, Argentina defaulted on its debt, the Internet bubble burst, and terrorists toppled the World Trade Towers. In 2007, after years of low interest rates in the United States, the world became embroiled in a global financial crisis that began in the U.S. housing market.

“With globalization increasing, you’ll see more crises,” John Meriwether, the former LTCM hedge fund manager, prophetically said in August 2000.7 Seven years later the world learned just what he meant when the subprime credit crisis started in the United States, and then wrapped its way around the globe. Mark Mobius, the executive chairman of Templeton Asset Management’s emerging markets group, believed another financial crisis is inevitable. “There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” says Mobius, who oversees investment portfolios exceeding $50 billion. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”8

By his tally, the total value of global derivatives exceeds total global GDP by 10 times. With that volume of bets in different directions, volatility and equity market crises will inevitably occur yet again.

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