The impact of the financial downturn of 2008-09 was felt throughout the world. The US government and regulators failed to regulate the US financial system. Institutions, individuals and regulators took on way too much financial risk. The meltdown could be attributed to a mix of people not knowing what was happening and poor ethics. Fast forward 10 years, and the global markets are in a better place (not the best especially if you’re an emerging market, though it sure beats a financial meltdown). But for how long will it remain this way? How quickly should we forget the past? Like the quote by George Santayana, “Those who cannot remember the past are condemned to repeat it”
Now is the time to understand what transpired during the period. Why now? Because the recession is going to come again, that’s why! If now is indeed the time, let’s choose not to repeat past mistakes.To achieve this, I will explain what caused the recession, what happens during a recession (shining the light on Nigeria), and why another recession will come. And then I’ll tell you the exact date when the next recession will begin.
What caused the 2008 financial crisis?
The catalyst of the 2008 financial crisis was an over leveraged US housing market. Investors believed they could get more returns from the interest rates of homeowners compared to the US treasury yields at the time. So they bought mortgage-backed securities ( made of thousand of individual mortgages bundled up together and sold as financial instruments). As the demand for mortgage back securities increased, lenders (investment banks, banks, mortgage banks) made loans easily accessible to individuals ( exactly what happened in this hollywood blockbuster). Investors bought a huge amount of mortgage backed securities. There was also an increased demand for more similar complicated financial instruments (subprime lending facilities, collateralized debt obligations, and unregulated over the counter derivatives).
As home prices went higher, lenders made even more loans accessible, and lending requirements were reduced. In the housing market, supply was up while demand was down. This led to defaults (people failing to make their mortgage payments). Shortly after, individuals and institutions alike stopped buying mortgages, which led big financial institutions to halt the buying mortgaged backed securities. By 2007, big lenders such as AIG and Lehman Brothers declared bankruptcies. House prices fell ( the bubble burst) and the US stock market crashed. The US government had to step in to bail out banks and other big businesses with $700 billion. All these factors spurred the recession in the global economy. The US markets are now back to normal levels.
What happened to Nigeria’s economy during the last financial meltdown?
During the last financial crisis, oil price fell by 294% to $50.00 a barrel in November 2008 from $147.00 per barrel in July of the same period ($50.00 was below the $58.00 per barrel benchmark oil price for Nigeria’s 2008 budget ). To manage the situation, the Federal Government made withdrawals from the Excess Crude Account (reserves) to make up for the revenue shortfall in the 2008 and 2009 fiscal years. Nigeria’s Inflation also spiked to 15.1% in 2008 from 6% in 2007 and remained at double digits till January 2013. The Nigerian capital markets has since normalised.
Why another global downturn will come
Economists can’t tell you when exactly the next downturn is coming, but that doesn’t mean that it wouldn’t come. The reason why another recession or downturn will come is because the economy works in a cycle. The reality of the economic cycle means a recession or downturn will always be a part of how the markets play out. Let’s take the case of what’s going on in Emerging Markets (EMs).
According to billionaire investor and Chairman of Bridgewater Associates, Ray Dalio, EMs such as Argentina and Turkey are already two-thirds of the way to debt crisis levels ( during a debt crisis a country is unable to pay back its debt). Once these markets reach their lowest point, expect to see investors come into these markets to acquire valuable assets at cheap valuations. The only defense for countries during such times is to skillfully use monetary and fiscal policy instruments, restructure balance sheets, and lean on the support of the International Monetary Fund (IMF).
Dalio believes we are in part of the cycle where central banks all over the world are beginning to tighten monetary policy. He posits that the next US downturn is 2 years away, and the key to investors survival to maintain balanced portfolios. He suggests that people should take time to study the 48 debt crises that have occured over the past 100 years , so as to be able to recognise patterns and make the most of downturns when they occur. ( he released this research in free book last week which I link below)
Mr Dalio’s advice seems logical (and I will be taking his advice. I mean he is a Billionaire, with a B, after all.) I would just like to add for those who are still skeptical about investing that it is still worthwhile to invest in fundamentally sound stocks during a market crash. Sure they would fall, but once the market stabilises they would gain lost value back.
According to the Financial Times, an investor with £10,000 in the FTSE 250 index on the eve of Lehman’s collapse would now have a portfolio of £30,0000. Also it’s worth noting that US equities have been the best performing asset classes between September 2008 and 2018. (according to Fidelity Investments (US)) .
( Please if you believed me when I said I would tell you the exact date when the next recession would begin, I was only kidding. Forgive me. I’m a writer not a babalawo)
Key takeaways
- A big mistake is not looking at how the economy changes
- A recession will occur sometime in the future because its part of an economic cycle
- It important to dedicate time to understand where we are in the cycle- prepare and position yourself accordingly
- Spend some time going through the resources below to have a firm foundation on how economic cycles work This will go a long way in developing the right mentality for tough times
- The key to survival during the downturn is to maintain balanced portfolios
Recommendations
Articles:
Ray Dalio’s free book ” A template for understanding the big debt crises”. Reading the first 60 pages is enough to give to you a firm understanding of how debt crisis occurs. The mechanism is always the same. Click here
9 Ways to Protect Yourself and Profit during an Economic Collapse. An interesting article I stumbled upon suggesting various ways to protect wealth during an economic collapse. Worth a read. Click here
Impact of the Global Financial Crisis on the Nigerian Economy. A nice write up from Proshare about the 2008-09 recession. I like how it included the opinions of then governor of the Central Bank of Nigeria (and how things actually played out). Click here
Videos:
How the economic machine works: one of the best videos out there about the economy period! It is a must watch for people young and old. click here
The 2008 Financial Crisis: Crash Course Economics #12. The folks at crash course are adept at making the most difficult topics simple. Definitely worth checking out. Click here
Dalio on Turkey, Argentina, and the Next Economic Downturn. One on the interviews Bloomberg conducted to commemorate the 10 year anniversary of the crisis. Dalio announces his book and explains why the US downturn is not far away. Click here
By Akinfemi Onadele
