The billionaire investor George Soros, speaking at Sri Lanka Economic Forum 2016 on Thursday morning, said that the current situation reminded him of 2008. I have a lot of respect for Soros, probably more than most as I was on a cable desk in 1992 when he made his name as the British government abandoned their attempt to support Sterling, resulting in the so-called "Black Wednesday".
On this occasion, though, I think that he is wrong. This is not 2008 all over again - instead, it is 1998. This is more about currencies than credit, more about emerging markets than developed. I have a personal tie to that one, too. I had just set up a spot forex desk in Moscow at the time, and watched from far too close as the Russian banking system imploded.
Seventeen years is an eternity for a trader, but those with long memories may be able to recall that crash. It really began in October of 1997 when a crisis in Thailand prompted a dramatic 6% one day drop in Hong Kong’s Hang Seng Index and triggered selloffs all around the world culminating in a 550+ point drop in the Dow. Doesn’t that sound eerily familiar?
Of course, no two crises are alike and the differences here are what should give investors hope. What causes huge reactions in markets at times such as in 1998 is the shock as things unwind and, as bad as it seems right now, this period of turbulence is no shock to those who have been observing markets for the last few months. Even I saw this one coming. My training in the forex market taught me to pay attention to three key areas: currencies, commodities and bonds, and all three were flashing warning signals at the end of last year.
The commodity collapse and dollar strength that we have seen are closely related and have been well documented. Both point to overcapacity and worry about the sustainability of a credit based surge in emerging markets. The U.S. bond market, meanwhile, with yields refusing to soar despite the fact that the Fed has reversed policy, hinted strongly at the effect that all of this would have on equities in developed markets. It really didn’t take a genius to see a period of volatility ahead.
The good news for all of us, though, is that those warning signals also indicate something else...the effects of weakness in China and other developing markets is already to some extent priced in. The chaos that began in 2007 was exaggerated because it seemed to come as a surprise to markets. Bursting bubbles, when the market has failed to act as a forward discounting mechanism, are the real problem. Equities finished last year negative, commodities have been falling for over a year and money has already fled to the relative safety of the U.S. dollar without any massive disruption, which all suggests that this “crash” will be fairly short lived.
The question, as always, is “How can we make money on this?” Even though I don’t believe this is more of a major correction than a crash, caution right now is definitely advisable. This has the feel of a fear-driven selloff, and fear is a powerful driver, so jumping in feet first would be foolish. I would, however, favor starting to average into large, stable companies that are massively undervalued from a long term perspective. Apple (AAPL), Caterpillar (CAT) and even oil majors such as Exxon Mobil (XOM) could go a little lower if the fear persists but before too long these levels will look like bargains.
It may seem to many people that the whole discussion of whether 2016 is like 2008 or closer to 1998 is a pointless one. Who cares which it is? Both saw dramatic declines in stocks and the eradication of chunks of wealth. What counts, though, is not what has happened but what will happen. From that perspective the fact that markets have already priced in a 1998 scenario indicates that as bad as things feel right now there is light at the end of the tunnel.
By Martin Tillier
(nasdaq.com)
