3 Major Financial Crises: The Learnings

Industry

25 October 2018

The “Boom and Bust” cycle πŸ’£πŸŽ† is a repetitive economic phenomenon that transports us through periods of prosperity and austerity. Although this pattern has become an inevitable aspect of everyday life, some episodes are particularly memorable and have pronounced consequences.

Here we outline three major financial crises and their consequences.

Triggering factors and outcomes can be influenced by several variables, and history has taught us that major financial events can have significant impacts and leave a lasting mark on society. With GetGo you can join the action and trade the markets, making sure that history is on your side.

How?

The algo produces trade signals based on historical facts, and although this doesn’t guarantee any outcome, it does give you a certain safety in numbers. Crucially, GetGo allows you to go both long and short, which means you can make profitable (or losing, SIGH…) trades in both rising and failing markets. Whether it’s “boom” or “bust”, GetGo is designed to spot potentially profitable opportunities.

 

And here we go…

1. “Precursor to the Great Depression” (1929 wall Street Crash)

1920’s America (the roaring 20s) was characterised by growing consumerism, high levels of  confidence, extended credit lines and the growth of investors buying shares on margin – the birth of the so called “on paper millionaire”. Living standards were high, urbanisation 🏠🏘️ (and even suburbanisation) was on the rise and the “American Dream” was becoming a reality for large subsections of the population. However, by the end of the decade it was evident that supply was outstripping demand in new consumer product lines (all those who could afford a vacuum cleaner had already bought one!), share prices had become divorced from real potential earnings and it was becoming clear that irrational exuberance, rather than rational economics, was driving growth. 

The modernisation of financial markets had paved the way for greater retail participation but it was accompanied by a ‘herd mentality’ amongst margin investors which led to a toxic climate and mass sell-offs.

On 29 October 1929 (Black Tuesday 🌚), share prices plummeted by $40bn in one day! And by the start of 1930, many stocks had lost 90% of their value. The bull market had been replaced by a bear market 🐻 with devastating consequences.

The learnings 

The end of the great depression and what precisely stimulated the economy into recovery is still debated today. Initially, Roosevelt enacted a series of government programmes via his New Deal reforms (amongst other things, these created jobs and protected savers in the first 10 months of 1930, 744 US banks had gone bankrupt with lax protection laws causing savers to lose their deposits). However, it was possibly the onset of the Second World War and the creation of 12 million jobs for Americans which was the most pivotal factor.

2. Dot-com Bubble “Y2K Bubble” (2000-2002)

Between 1997 and 2001 personal internet access in the U.S. doubled πŸ‘¨‍πŸ’» and a large number of new internet companies adopted a “get large or get lost” strategy, setting their sights on IPOs to raise capital. Regulation within the U.S. at the time was heavily in favour of entrepreneurship and tech growth with low interest rates and the 1997 Taxpayer Relief Act stimulating the stock market. By the year 2000, anything “.com” was hot and the NASDAQ composite stock index (which included many internet-based companies) had risen 400% and reached a price to earnings ratio of 200! It was becoming clear that a bubble had formed and confidence amongst investors started to wane. 

The crisis began in February 2000, when the Federal Reserve announced plans to raise interest rates, which led to significant stock market volatility as analysts debated whether or not technology companies would be affected by higher borrowing costs. This was followed a few weeks later by Japan entering a recession and a global sell-off disproportionally affecting the previously hot tech stocks. One unique contributing factor to the bubble bursting was the realisation of a number of accounting scandals (e.g. Enron, WorldCom and Adelphia Communications Corporation) which eroded stock prices on an almost unprecedented level.

By the end of 2002, stocks had lost $5tn in market capitalisation with the NASDAQ 100 dropping 1,114 points from its peak!

The learnings

The crisis led to several high profile bankruptcies and paved the way for dramatic changes to American company and accounting law. Tech companies also became wary of IPOs, abandoned the “get large or get lost model” and now tend to carry a greater percentage of cash relative to debt compared to other sectors.

2. “America sneezed and the rest of the world caught a cold” (2007 Global Financial crisis) πŸ€’

The 2007 financial crises was possibly unique in terms of its global magnitude and the complexity of its contributing factors. Its origins stem back to a period of significant growth in home ownership across America during the second Bush administration encouraged by 105% mortgages being offered to home buyers and NINJAs (individuals with no income, jobs or assets) being granted secured loans. The growth in mortgage approvals was accompanied by the creation of mortgage backed securities (collateralised debt obligations where payments to investors were based on the cashflow of the asset) and credit default swaps (derivative contracts used to bet against colaterisded debt obligations), which in very simplistic terms meant that financial institutions were able to sell off debt to other institutions all over the world who wanted to speculate on the price of U.S property. This was unproblematic when property prices were rising and mortgage payments were being honoured, but when interest rates rose, home buyers defaulted on payments and property prices began to decline –it became clear that large financial institutions all over the world were holding toxic debt. When U.S. investment bank Lehman Brothers collapsed on 15 September 2008, it was clear the market had a full blown international banking crisis to contend with.

Across the pond in Europe, banks realised that their balance sheets had become saddled with large amounts of sub-prime mortgage debt from North America and distrust of other potential bubble markets (such as Spain and Ireland) grew. This led to credit lines diminishing and consumers withdrawing deposits from banks (e.g. the bank run on Northern Rock). The Eurozone’s single monetary policy but decentralised fiscal spending caused havoc across the European Monetary Union and led to an almost catastrophic sovereign debt crisis as national deficits increased on the back of bank bailouts.

The learnings

The crisis led to the Basel III Capital and Liquidity Standards being drawn up and adopted by countries across the world to prevent future insolvencies in the banking sector. Prudential regulation also increased globally, with regulation being enacted to ensure shortermism was no longer being incentivised and that financial institutions made clear distinctions between their investment and retail operations. On a European front, greater fiscal unity was demanded by law with bail-in (opposed to bail-out) mechanisms being established.

So…

The global financial markets are complex interconnected webs that are hard to predict without an understanding of historical trends and/or trading experience! But with GetGo you don’t need to be a trader to trade, you can receive AI driven trade signals whenever an emerging opportunity in the markets is spotted based on historical price movements.

The algo can analyse millions of data points every hour and we’ve performed over 30 million back tests. Check our infographic for more on how GetGo Signals come to life.

And although trading based on historical data can’t guarantee an outcome, we believe that it represents a credible strategy that can give you the edge!

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