Market Crises and Goldfish

From Business Day's MsManagement, October 2008

I HAVE a goldfish called Fred. He, or she — one can never be sure — is a happy fish. He leaps about when I get home and even flings himself against the side of his tank with glee. I tell myself he’s pleased to see me, but he probably just wants to be fed. He’s a fish after all. And if research is to be believed, Fred only has a three-second memory.

But before anyone reckons that the human race is superior to a goldfish, I’d like to point out that, in relative terms, markets have a three-second memory too.

As the global financial meltdown continues, we have all manner of people flinging themselves dramatically against the side of the bowl. The little bubbles emerging from their mouths contain such gems as “It’s never been this bad before”, “It’s the end of capitalism”, “Everything’s irrational”, “It’s impossible to predict the future”, “Maybe SA will cut rates”, and “Let’s follow China’s example instead.”

And just as you have to be suspicious of a goldfish that gets all amorous at feeding time, you have to be wary of the emotions coming out of a market during a crisis. Because a lot of what’s being said is fatuous and ill-informed and goes a long way to proving that human beings have a horribly short attention span.

Let’s start with the statement that “it’s never been this bad before”. That’s just wrong.

Remember the dotcom crash? We said the same thing then. Human beings have a need to imbue the present with calamity and meaning.

Remember those fateful planes flying into the World Trade Centre ? That was also billed as the worst thing ever — the New York Stock Exchange closed down for an unprecedented three days.

And that’s just what has happened in the past decade. In the market crashes of 1929 and 1987, exchanges dropped almost 30% of their value in just one day. By comparison, the JSE and other bourses around the world have taken more than six months to drop that much this year.

Further, in the 1929 crash there were no regulators and few bail-out packages. Some investors lost everything. To me, that seems worse than the turmoil we’re living through, but our goldfish-like attention to the present precludes a perspective on the past. And that’s dangerous because forgetting the past encourages panic in the here and now.

As for the global financial crisis signalling the end of capitalism — yeah, right. Since markets started trading, as far back as the 1500s, there have been attendant collapses. None of those collapses has changed the world order. Why? Because behind every bulging pair of fish eyes, there lives fear and greed. Despite themselves, investors know that risk and reward are closely interlinked and she who plays the market does so with the understanding that you can lose everything, but you can also make a killing. There may be a lot of yelling when the losses outweigh the gains, but in reality investors are swimming about, hungry to be fed again by the great engine of capitalism.

Along with this cycle you get the outrage about the huge bonuses paid to the bankers whose institutions have now fallen apart. That’s also part of the three-second-memory syndrome.

In good times, people fearlessly defend ridiculous levels of pay, forgetting that bad times are inevitable and that extreme pay will look inappropriate when the cycle turns.

During the meltdowns, investors froth at the mouth about huge pay packages, forgetting that in a few years’ time the lucky CEO who gets to oversee the upturn will be paid even more. At that time the bulk of the goldfish will merely nod in approval because they’ll be getting their fish flakes too.

As for SA suddenly cutting interest rates, it’s just not going to happen. We’ll know by this afternoon . Though it would not be unprecedented, it’s highly unlikely.

Let’s go back to basics, if anyone is able to focus for a bit more than three seconds. The central bank in SA targets inflation. Inflation is high. Cutting rates could push inflation even higher. And that’s a chance the central bank will not take.

As for those who think markets are irrational and the future is unpredictable — well, that’s nothing new. Markets are always a bit irrational and no one has ever been able to predict the future. Except maybe Nostradamus, and he’s never been much help to investors, let alone goldfish.

When it comes to following China’s lead — what? Do we want a blend of capitalism and communism that at its heart means executing people who won’t work in sweatshops or who disagree with the state? Maybe Julius Malema, our esteemed Youth League leader, would like it (because he’s a bit of a piranha), but for those of us who believe in democracy and free markets, the idea that China has got it right is unpalatable.

But if we try to look beyond our rather cloudy fish tanks, what is it that we might see? In the short term, there will be more banking collapses. But there will also be more government intervention. Markets will be crazy and volatile for at least another year. In the medium term we will have hit the bottom of the bowl and a sense of calm will return.

In the long term, maybe five years from now, markets will be trending upwards again and irrational exuberance will emerge. We’ll think we’ve never had it so good. And we’ll be wrong, but we’ll be fat, happy fish again. Because we may suffer from memory loss, but we’re pretty good at surviving