Is the next crash coming?

If you scan through the global financial media you will find no shortage of analysts anticipating the next market crash. There are any number of theories as to why it is imminent, inevitable and certain to happen sooner than you think.

While this speculation is often interesting, its predictive value is questionable. People have been expecting the next market crash almost since the last one happened, and, so far, they have all been wrong.

Of course at some point someone is certain to be right, eventually. In reality, however, most of the time we don’t see market crashes coming.

“If you go through the history books, very few have been widely anticipated,” says Cai Rees, a director at global investment firm SEI Investments. “What tends to be the pattern is that you are constantly solving for the previous crisis so that what happened before doesn’t happen again. Meanwhile something else that you’ve missed leads to the next crisis.”

The Turkey effect

What has happened with the rand over the last two weeks is an excellent example of this. Of all the issues that might have upset the local currency, a crisis in Turkey was hardly on the average investor’s radar.

While the unravelling of the Turkish economy is probably not going to precipitate a major market crash, it has nevertheless had a significant impact on the relative wealth of South Africans. One therefore has to ask what else might be out there that could cause even bigger problems.

Over the last couple of years there has been no shortage of potential causes of disruption.

“We’ve had Chinese debt, Russian sanctions, North Korean missiles, threats of nuclear war, German leadership doubts, Italian coalitions, the threat of a US trade war with China, and now we have Turkey,” says Rees. “These have all occupied investor attention for some time, but then we have moved onto the next thing.”

At the height of each of these issues there were market watchers calling them the reason for the next market crash.

“These things aren’t, however, of the scale or magnitude of anything compared to what led to the global financial crisis of 2008,” Rees argues. “These are shorter-term market fears, which move vast money around from one place to another and cause a lot of ups and downs.”

Moneyweb

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