Hindsight

I have been cleaning out my office in preparation for moving from DC to Chicago. I came across a small publication by GaveKal Research entitled Our Brave New World, published in 2005. It argued that the outlook for the global economy over the next several years was rosy:

For over ten years now, a wide majority of market strategists and economists from respected investment banks (Morgan Stanley, Dresdner…), a large number of upscale financial publications (The Economist, The Financial Times…), highly respected consulting firms (Lombard Street Research, Grant’s Interest Rate Observer, Gloom Boom Doom…) have drawn on historical parallels to warn us that the expansion of the past decade in US consumption was both unsustainable and likely to end in tears. Real estate all over the Christian civilised world was bound to collapse, along with global equity markets. The world would then enter into an ‘ice age’. So far, despite the strength of the above thought process, and the numerous historical parallels, the dreaded meltdown has completely failed to materialise. So what is the next step?

[…]

The reason so many analysts drag their feet in admitting that history has failed to rhyme this time around is that it would lead one to the dreaded conclusion that ‘things are different this time’.

[…]

And yet, this is exactly what we aim to argue in the following pages.

Arguing that ‘things are different this time’, we freely admit that we might end up drawing the wrong conclusions, say silly things and establish relationships where there are none. We also realise that some of our more cynical clients (say those sitting in Boston or London), might read the coming chapters and conclude that we have really been drinking the Kool-Aid. These are the risks when one ventures into uncharted territory. We accept these risks gladly, for we are convinced that the first step to successful investing is an understanding of the current world.

Unfortunately, History is of little help to this understanding. We have to draw solely on logic, and the help of our friends and clients.

In their catalog, you can see a publication called The End Is Not Nigh, in which “we push some of the themes developed in Our Brave New World a little further and review the reasons that have led us, in recent years, to shy away from prophecies of doom and why we remain positive on global financial markets”. That was in 2007. September 15, 2008, the very day that Lehman Brothers filed for bankruptcy, their research argued “that the US economy will avoid recession and that the Government rescue of Fannie Mae and Freddie Mac would probably mark the low-point of the economic slowdown.”

Then came A Roadmap For Troubling Times in 2009. Something must have scared away the optimism.

It is well-known that few investment and research organizations foresaw the impending crisis, but it is still remarkable to have something in your hands argued so strongly that, only a handful of years later, reads so transparently misguided. Contrary to what they wrote about History, it can be very illuminating to read pre-Recession reports that turned out to be so spectacularly incorrect.

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