Tuesday, August 19, 2008

A 100 year storm?

The investing pantheon has been famously negative for more than a year now. Plenty of people have compared the current banking crisis to a 100 year storm. From a Prem Watsa interview. :

History shows that there are 100-year storms and 50-year ones. In 1929, a 100-year storm, only 10% survived the market crash and it was only those who were negative in 1925 and did something about it.

Q: Is this a 100-year or a 50-year market and what’s the difference?

“The 100-year is a Depression. The 50-year is what happened to Japan in 1989 to 2003. We don’t know yet.”

While it’s hard to appreciate the magnitude and severity of the current crisis, this interesting article from PIMCO's Emerging Markets watch drives home the point.

“It’s like deja vu all over again” as we see a classic Emerging Markets (EM) balance of payments crisis unfolding before our very eyes – but this time in the U.S.

Here's an eye-opening chart from the same:

In summary:

  • Average length of the banking crisis is 4 years.

  • Emerging markets have a higher fiscal cost, even though the output loss in developed economies is higher (I wonder why).

  • The average output loss of 24% in developed countries is HUGE.

  • While the average length of the crisis is about 4 years, the “lost years” due to GDP shrinkage could be a lot longer.

  • There is a wide difference between a banking crisis alone, and a banking AND currency crisis. An average output loss of 5.6% in a banking crisis alone is basically ~2 years of lost growth. That 30% output loss in a banking and currency crisis translates to a lost decade.

The article concludes by recommending Brazilian bonds, Singapore dollars and Chinese yuan. Recommends avoiding converging European currencies (particularly Hungary and Romania), US Dollar, and the long end of US treasuries.

Wait, there's more. Here’s what a recent NYTimes article on Dr. Doom Nouriel Roubini says:

After analyzing the markets that collapsed in the ’90s(the emerging market crises), Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.”

It's rare to see such a strong chorus of negative pessimism. If this is indeed a classic “balance of payments” problem, then I’d reckon this crisis would be a long drawn out one.

The smart money seems to concur.