We all know why the financial crisis was so severe, says Albert Edwards: “Groupthink”.
The “bias of optimism” that surrounds finance meant that in the run-up to the crisis everybody insisted “everything in the garden was rosy”. And “nothing will change”. We are destined to repeat the mistakes because “few will acknowledge this crisis is nowhere near ending”.
Edwards is one of Societe Generale’s most prominent analysts, well known for his bearish market views. He warned about a property bubble in the years before the crash – he was one of the “dissenting voices” who “were ridiculed throughout the mid-2000s as the US and UK housing bubbles defied the pessimists’ pronouncements of collapse”.
Even in supposedly objective institutions such as the IMF, says Edwards, incentives were skewed to discourage a pessimistic view. Staff knew that they would face the “consequences” if they expressed “views contrary to those of supervisors, management and country authorities”.
The longer the bubble continued to inflate, the more the “vast majority of the analytical community” felt “that there was, in fact, no bubble”. Yet it was clear to many that this actually meant “that the crash would end up being all the deeper when it eventually came”.
And now, “despite two gut-wrenching equity bear markets in a decade, QE2 has taken analyst optimism back to all-time highs.” The new groupthink is that the “Chinese economy” – and by association, commodities – “will not crash in the same way as the US economy did in 2008”. Has everyone “forgotten just how vicious the collapse in prices in H2 08 was”? Have they “forgotten just how all-persuasive yet wrong the prevailing groupthink was back then”?
The only consolation is that “at least one consensus trend trade has just bitten the dust”. Emerging markets did well because they ‘were’ cheap. “As ever, this outperformance was extrapolated way into the future” but with investors now pulling out of emerging markets it’s clear that “groupthink failed again”.