Ten Years After: Then and Now.
As I was taking the picture on the left ten years ago, the US housing market was in the process of reaching a historical high. It would be four to six months before the pinnacle in prices and activity was hit, and two years before the magnitude of that event fully descended upon us, although rumblings could be heard earlier.
How we arrived there is still a matter for debate, at least in the heads of some people. For me the reason was an overinflated housing market, with all the associated consequences in mortgage securities and their derivatives, due to an aggressive monetary policy in the aftermath of the tech stock market crash of 2000-2003. The idea was not to repeat the outcome of the Great Depression by providing the system with all the liquidity necessary to survive. One of the outcomes of this policy though was also to encourage investors to take on more risk with the result that many people ended up twisting their overall portfolio balance beyond recognition. The fact that housing had not experienced nominal price declines encouraged people to ignore all signs of a possible unsustainable situation. We all know how it ended.
This year, as I took the picture on the right, we have a similar story to contemplate. The scenery is different: housing is not the hot spot; some people say it’s the bond market, others the equity markets. The actors have changed but the movie line is still the same. Monetary policy once more has attempted to stave off the inevitable path of capitalistic cycles: a regeneration of opportunities that must go through a cleansing of the system, a clipping of dead wood that in the process gives the word “risk” some meaning.
“Capitalistic cycles” have been known, written about, discussed and for the most part accepted for decades. Most of the theories underlying them appeal to our common sense once we spend a little time with them, but it would seem to no avail since our main concern is in avoiding all pain. Just as medicine provides more ways of dealing with the latter, monetary policy dispenses the Tylenol of finance freely.
I suspect this is what people really mean with the expression “kicking the can down the road”. We push the real issues behind each cyclical story further down the time scale, swamping people and future generations, and in the process we manage to keep everybody busy with politics, regulation, screams against “globalization” and capitalism in general, inequality, and so on. It’s like playing a game where we constantly change the rules to fit our wishes of the moment. Or if you look at a graph of the S&P 500 from 2000 it’s like viewing multiple tsunamis, with two -40/50% market declines in less than 10 years.
It’s natural it won’t work.
Photo sources: left – own photo, September 2005 (Leica Digilux 2); right – own photo, June 2015 (iPhone 6).