By Ross Barry -The strong performance of many share markets around the world has led many to speculate that another major correction may not be too far away. History has shown us, over the past 300 years or so, that major corrections have occurred every nine to 10 years, on average, albeit some have come closer on the heels of the one before, while others have been more than 20 years apart.
History has also shown us that financial manias and crashes are almost always an outworking of three things – an accumulation of large volumes of idle capital (savings), financial innovation and leverage. Most have also occurred following a strong, speculative surge in markets and a few years into a new phase of higher interest rates.
The less opportunities there are to deploy savings to create new wealth, the more they accumulate in safer stores of wealth. And the more wealth is stored rather than used creatively, the more the return on idle savings declines. The fact that yields on cash and bonds around the world are currently at, or below, zero per cent in real terms, tells us that there is a lot of storing going on right now.
We have seen this throughout history in the shadowy practice of “melting debt” in the 1860s, the proliferation of margin lending by Wall Street firms in the 1920s, the development of futures, options and “repo” markets in the late-1980s, and again with the mass production of highly leveraged CDOs built from sub-prime mortgages in the mid-2000s.
Too often, unfortunately, when productive risk-taking in an economy dries up, clever agents turn to new and resourceful ways to repackage riskier assets and promote them as something seemingly safer.
What makes investors succumb to the lure of such things is a whole study unto itself. more>