I've been subscribing to an excellent weekly financial commentary service which alerted me to some research that has been done specifically on this subject. Professors Carmen Reinhart and Kenneth Rogoff recently published a paper 'The Aftermath of Financial Crises'. Here's an excerpt
"... Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes."
Some interesting (if not worrying) stats;
Average % decrease in housing prices (post a financial crisis) - 35.5%
Average length of downturn - 5 years
Current % decrease in UK house prices - 15-20%
Current Length of Downturn - 1.5 years (?)
Average % decrease in equity market prices - 55.9%
Average length of downturn - 3.4 years
Current % decrease in UK equity market prices - 40-45%
Current Length of Downturn - 1.5 years (?)
So what can we see from this? Well there's good and there's bad news. We can see there is portentially still some way to go, both in terms of duration and % decreases, but on the positive side 'past performance is no indication of the future' - Now although that may sound a little corny, let me try and explain my views on this. Firstly, this is not a localised banking crisis, this is global. Almost without exception every major first world economy is currently dealing with this problem. This has to be a good thing as all those clever dudes together will surely come up with a solution. Secondly, its been evident to date that governments (and central banks) are prepared to do everything they can in order to stave off a serious depression. Interest rates are tumbling, pressure is being put on lenders to pass these rates on and Governments are stepping in and saving banks. Thirdly, and specifically looking at the motor industry, now is the time for governments to insist on investment in what will become the cars of the future. "You want a bail-out?, No problem, but we will only bail you out if you invest £££ in what we tell you (eg hydrogen cars and clean fuel stuff)" - With innovation comes opportunity and with opportunity comes more jobs..
I spent last night writing my trading account review of 2008 and it was by no means as bad as (probably) 80-90% of hedge funds. I was down just over 6% for the year (this after a stella start to the year of +13% for Jan and Feb!). I am actually very pleased with how it went. It was my first full year trading and I learnt an incredible amount about not only the markets, but also myself and my trading abilities and strategies. My core strategy stopped functioning due to volatility increases - some reports suggesting volatility was up over 400%! I did however 'roughly' follow my trading rules and I ceased trading after a string of losses. I'm waiting for volatility to return to late 2007 levels before I begin trading this strategy again. Whilst I was 'on the bench' however, I developed a really cool day trading strategy that looks like it could form the basis of a very solid and profitable day trading strategy - I'm not one to be secretive about strategies - this new one is based simply on price and volume - looking at large volume bars (on 5 minute charts) and seeing what price is doing. It's really looking at what is called 'professional money' - (what are the big boys doing) It's a hybrid Volume Spread Analysis system and I'm very excited by it, not least because it's been working for me, but because it's as pure a system as there is. No clever technical indicators, just price and volume. I'll post more on this at a later date.
I'm off to pick the ex up from Sainsburys (not only do I live in the attic, I also offer a very competitive taxi service....Still she is a great cook!)
Later all :)
