Cover story
[ MARKET CRASHES ]
12 / 13
The dotcom bubble The financial crisis
You are likely to already be well
acquainted with the dotcom
bubble and its causes – mainly greed
and a severe dislocation between
prices and reality. A UK-based investor
who stuck their money in the MSCI
World index at its peak in 2000 would
have had to have waited until 2010 to
break even. Hale says it may be the
bear market that is closest to the one
we are currently experiencing.
“Bear in mind the bust started
in 2000 and went through 2003,
because in 2001 we had 9/11 which was
completely out of the blue,” he says.
“Translate that to today where we’ve
had a mega rally led by the FAANGs
and then out of the blue we had
Covid-19. So there are similarities
there in terms of cause and effect.
“Remember that bear markets don’t
just last a month, this one could go
on for some time, particularly if the
lockdown gets extended for longer.”
Yet Hale notes it was possible to
make money through much of this
bear market by avoiding the tech hype
and keeping an eye on fundamentals.
“Value stocks outperformed quite
significantly after the bust,” he adds.
“It was a fairly short-lived affair,
though. You get one opportunity with
value, but it tends to work very well.” Again, you are likely to be well
acquainted with what happened
in the run-up to 2008 – mortgages
were handed out in the US to people
with no hope of paying them off,
these loans were bundled together
with hundreds of others and sold
on. Then, when the housing market
eventually went south, the banks
didn’t know how much exposure
everyone else had to these toxic
loans and stopped lending.
Yet Merian’s head of global asset
allocation John Ricciardi says the
lessons learned after the Great
Depression should have stopped
these conditions building up in
the first place.
“Lending at that time was
related mostly to housing. Then
you had a liquidity crisis when
the banks couldn’t lend and you
had forced sales of collateral,
which meant housing,” he notes.
“It was the Banking Act in
1933 which said banks can
only lend a certain percentage
of their reserves, it limited it to
about eight times capital, and it
separated commercial banking
from investment banking.
“The third thing was, it forced
them to diversify. Before, if
TRUSTNET
there were a GE [General Electric]
factory near a bank, 90 per cent
of its mortgages would be to GE
employees. Then if GE got in
trouble, that was it.”
Ricciardi says the reason why this
all blew up in the financial crisis
can be attributed to the removal of
these protections in the late 1990s.
“They said: ‘We don’t have to keep
it at eight times capital anymore.
We can use our own financial
models, which will allow us to go
to, guess what, 30 times. We don’t
need to have diversification away
from the housing market because it
has never fallen.’
“They just let it all come back
exactly the way it was. And guess
what? It only took one cycle for the
whole thing to come back again.
It all went into effect in 2000. By
2004 the whole thing was back
and by 2006 the whole thing was
crashing again, exactly as before.”
Commentators warn that every
crash is different and it would
be unwise to draw too many
conclusions about the direction
of the current crisis from previous
bear markets. Yet as Mark Twain
once said: “History doesn’t repeat
itself, but it often rhymes.”
trustnet.com