There were times during 2007 when it seemed we had reached financial Armageddon; dramatic and sustained falls across the indices; oil almost reaching $100 dollars a barrel; gold edging towards $1000; catastrophic banking losses as well as a run on a major bank in the UK . In addition there was the spectacle of seeing a variety of banking luminaries kicked out of their jobs, including: Paul Wolfowitz of the World Bank; Stan O’Neill at Merrill Lynch and Charles Prince of Citigroup. However, the price of their collective failure was to be given the equivalent of the gdp of a small African state!
Yet despite the above the markets actually performed rather well. For example the Dow is up almost 10% up, the FTSE 100 up; Shanghai composite still going strong; Australia’s Stock Market had strong growth in 2007, and so the list goes on. It was the turbulence and volatility attributed to the sub prime saga and the subsequent credit crunch which rattled everyone and was only reflecting the fear element of the classic greed/fear cycle which grips the market in varying degrees on a fairly regular basis. The difference this time is that it was not confined to the share market but spread to the property market and managed to contaminate even seemingly safe investments such as simple bank accounts, ie Northern Rock.
Market cycles of fear and greed; boom and bust happen in varying degrees in all time frames and as traders and investors we have to understand firstly where we are in this cycle, and secondly how we want to fit within it. Put simply, risky volatile markets will always yield the greatest returns, since higher risks provide higher rewards, and greater losses. As investors we have to match our own appetite for risk to the returns. My own personal view, and a particular hobby horse, is that many investors do not spend enough time either researching or understanding the markets they want to invest in.
This has been particularly true of the buy to let market in the UK where novice property investors have rushed headlong in this arena with little or no research or even a basic understanding of yield. Seduced by developers’ cash back, no deposit down deals and guaranteed returns these investors are now starting to pay the price as interest rates bite and rentals do not cover mortgage payments.
However, it has been the speed at which these problems have erupted and affected so many so quickly. At the moment the markets do seem to be pointing to a slowdown as traditional markers such as falling consumer demand, rising oil prices and falling house prices can only lead to this conclusion. Sadly we also have to add geopolitical tensions with Iran, Russia and, in the last 48 hours, the fallout from the assassination of Benazir Bhutto in Pakistan, to this brew to conclude that 2008 is probably going to be even more difficult and troublesome for us all.