“Equities become cheap slowly.” That’s the key insight from Russell Napier’s 2005 book Anatomy of the Bear. In it he looks at Wall Street’s four ‘great bottoms’ – in 1921, 1932, 1949 and 1982 – and makes the point that it took the Dow nine years on average to travel from its valuation peaks to its valuation lows on each occasion. Take out the 1929 to 1932 bear market and the average rises to 14 years.
I mention this partly because it puts our own great bear market (since 2000) into perspective (perhaps there isn’t long to go?), but also because it’s a reminder that whether one is talking of equity markets, economies or politics, big changes tend to happen slowly.
Endgames have dramatic incidents woven into them – huge price swings in the case of markets, or the likes of the Libor scandal in the case of unwinding credit bubbles. But these incidents don’t necessarily mark their actual end. Just as the time from peak to trough of the average bear market is over a decade, the end of the credit bubble will play out over decades rather than years.
Look at Bob Diamond. Last year he made himself famous (in a bad way) with his Radio 4 speech in which he claimed to have changed the culture of banking at Barclays. But you can’t change a culture in a matter of months. It takes years – long enough for all the top managers to have moved on.
And you certainly can’t swap a greed bubble culture for a morally acceptable one when the guy at the top is the poster boy for the former. Five years after this stage of the great financial crisis kicked off we haven’t really moved very far. We’ve bought time with quantitative easing and low interest rates, but we haven’t done much with that time.
Think back to where we were in 2007. In the words of Guy Fraser-Sampson in his new book The Mess We’re In, we entered the year “heavily drunk on a toxic cocktail of reckless public spending, unnecessarily swollen national debt, an asset price bubble (particularly in equity and property markets), a huge explosion of bank lending, and clouds of credit derivatives swirling around whose true ownership value and underlying liabilities were not always known with any exactitude”.
Now look at where we are today. We might be working our way back bit by bit from the bank lending and the derivatives, but we’ve still got most of the rest. And we’ve still got the problems that they were all symptoms of in the first place: huge but wrongly regulated banks, a government unable to commit to cutting the state, a Bank of England too prone to making mistakes, and a culture across our financial industry that just won’t work for the future. How do we start changing that?
I’ve written here many times about my thoughts on this (slash the state, split the banks, abandon short-term shareholder capitalism for real capitalism, have a go at creating sound money). John Stepek has some more – you can read his cover story here: Britain’s golden goose is long dead.