Strategy Video: A Lesson for 2015 from Past Financial Crises
• Before financial market crises unfolder there is a steady erosion of the system's structure
• In 2008, an appetite for leverage and need for return led to implosion triggered by Bear Stearns
• The 1998 failure of Long Term Capital Management offers a similar story to the conditions we face today
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Financial crises often explode from periods of exceptional market performance and their appearance is usually catches the investing community off guard. Yet, as dramatic as the market reactions may be; these disruptive periods of rebalancing are not so obscure when the underlying structural circumstances of the financial system are accounted for. Back in 2008, the Great Financial Crisis was built upon an appetite for excessive return and leverage through high finance. It was, however, subprime and Bear Stearns' collapse that receives the blame. Further back, 1998 draws a strong corollary to today's market with an Asian financial crisis and Russian default leading to the dramatic failure of Long Term Capital Management. Heading into 2015, we have: excessive leverage; exposure to exceptionally risky assets; low returns; a dependency on low volatility; and growing investor doubt. We discuss the importance of appreciating a big-picture structural risk heading into 2015.
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