Don’t Panic

Rethinking the Financial Crisis

Keep of the Grass, by Thomas Hawk, with Creative Commons licence (Attribution-Noncommercial 2.0 Generic)Writing in his very aptly named Unwritten Laws of Business, W.J. King implored his readers to “distinguish between isolated cases and real epidemics”, which is always a handy knack to master. “Most crises”, he explained, “aren’t half as bad as they appear at first”. That’s certainly food for thought these days, and it brings the psychology of market downturns to the fore. I’ve previously written about the extent of the world’s financial travails, and it’s easy to imagine that the worst is yet to come. But even if that is the case, and I have little reason to suggest it isn’t, just what will that worst case be?

Andy Singh has thought a bit about this, and over at Seeking Alpha he lays out a clear argument for thinking that the Great Depression should not be the model disaster at which we glance nervously. The size of the US economy has been shrinking for around 12 months, but the Depression lasted for 43 months. This, in itself, proves nothing, but given that the deep recessions of the past, including those covering the entire world economy, have ended with boosts in US consumer spending, there is less to worry about now. The European Union and the so-called BRIC countries – Brazil, Russia, India and China – offer much larger consumer spending blocks now.

The world doesn’t rely on just one economic hero any more.

Of course this will give no comfort to the person who somewhat bitterly commented on my last post about the demise of Storm Financial’s margin-buying clients, but it offers a less panicked response to the current situation that what we’ve been receiving for a while. Singh estimates the recession is halfway through, with no new economic depression in sight. And I should add, why did so many – me included – turn their thoughts so quickly to the Great Depression anyway? Is it still our greatest nightmare, or simply a metaphor of convenience?

Ronald Chan, a fund manager and freelance journalist here in Hong Kong, has been asking the same thing lately. Ronald is one of my clients, but he’s also an engaging thinker who can easily simplify market psychology and lay bare its frivolities. In today’s issue of the Standard he argues that this is but the latest in a long line of market downturns that have cast our eyes back to the Great Depression. While in no way ignoring the economic difficulties that are increasingly obvious here in Hong Kong just as they are in other countries, Ronald points to a true market eternal – things change. Economic cycles, market fluctuations, these are the results of our nervous natures.

Green, by [phil h], with Creative Commons licence (Attribution-Noncommercial-Share Alike 2.0 Generic)We tend, I think, to manufacture our own worries on a grand scale – in that way we can focus on the Colossus, but ignore his lack of muscle. Allow me to return to W.J. King’s prescient words, then, written in 1944 with war and economic turmoil still fresh in mind. Actually, the book was originally entitled The Unwritten Laws of Engineering, and in hindsight that seems an even more fitting sobriquet.

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