The Dissolving Divides that Will Shape the Post-Crisis Investment Era
Overview
As the summer of 2018 draws to a close, our minds turn back to the financial crisis of a decade ago. Those events were so momentous in their impact on the global financial markets, economy and society that we still feel the aftershocks today. Investors and policymakers are still grappling with the effects of the crisis and the unprecedented response.
That is why we used this anniversary as an opportunity to engage with colleagues from across Neuberger Berman, not just to reflect upon the crisis and its aftermath, but more importantly to draw upon the countless conversations we have had with clients and company management teams from around the world to look to the future.
A Look Back
The 2008 – 09 crisis shocked stock markets, but its impact on debt markets was unprecedented. The 55% plunge in world equity markets was extremely painful, but within historical experience. By contrast, the catastrophe in credit markets—beginning in U.S. subprime mortgages, sending high-yield credit spreads above 2,000 basis points, and culminating in a European sovereign defaulting on an IMF payment—was an unparalleled and scarring experience
Policymakers’ responses to the crisis were equally unprecedented. Major central banks adopted vast quantitative easing programs and, in some cases, negative interest rates. Regulatory authorities overhauled swaths of banking and market regulation. Government balance sheets groaned under the weight of trillions of dollars of debt taken on from the imperiled private sector. Some, such as the U.S. and China, added substantial fiscal stimulus. Others implemented austerity measures, which in the case of the euro zone revealed structural weaknesses that remain unaddressed.
U.S. GDP contracted by more than 4% in the 12 months to the second quarter of 2009. Even the global economy shrank by 2% that year. Over the next five years unemployment peaked at 10% in the U.S. and 11% in the European Union. Youth unemployment in the EU hit 24%.
Key Events from 2008 to 2018
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22 February 2008
Northern Rock nationalized by UK government
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24 March 2008
New York Fed provides financing to facilitate JPMorgan's acquisition of Bear Stearns
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6 September 2008
Federal Housing Finance Agency places Fannie Mae and Freddie Mac in government conservatorship
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15 September 2008
Lehman Brothers files for bankruptcy protection
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16 September 2008
New York Fed authorized to lend $85 billion to AIG
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16 September 2008
Reserve Primary Money Fund "breaks the buck"
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19 September 2008
SEC prohibits short selling in the stocks of all companies in the financial sector
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11 October 2008
Congress establishes the $700 billion Troubled Asset Relief Program (TARP)
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13 October 2008
U.S. Treasury acquires $125 billion in preferred stock of nine U.S. banks, the first purchases of its Capital Purchase Program
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9 November 2008
China announces a $600 billion fiscal stimulus to combat the effects of the financial crisis
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19 November 2008
Ford, General Motors and Chrysler request access to the TARP
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29 November 2008
Iceland imposes capital controls
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11 December 2008
Bernard Madoff surrenders to authorities, admitting massive fraud
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16 December 2008
FOMC cuts the target for the effective Federal Funds Rate to 0-0.25%
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11 February 2009
MSCI World Index hits lowest level of the crisis, down 51% peak-to-trough
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11 February 2009
Recapitalization of Ireland's two largest banks, Allied Irish and Bank of Ireland
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17 February 2009
American Recovery and Reinvestment Act becomes law
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18 March 2009
Federal Reserve announces plan to purchase longer-term U.S. Treasury securities
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1 June 2009
General Motors files for bankruptcy protection
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20 October 2009
Greece's new Prime Minister, George Papandreou, reveals the true extent of the country's financial crisis
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21 January 2010
President Obama proposes restrictions on banks ownership of hedge funds and private equity funds, and on proprietary trading
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9 May 2010
IMF approves a Stand-By Loan for Greece, along with immediate joint financing with the E.U.
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10 May 2010
European Central Bank (ECB) introduces measures to stabilize Eurozone
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21 July 2010
U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act becomes law
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28 November 2010
IMF and E.U. agree a financial assistance program for Ireland, whose government outlines €15 billion of fiscal tightening
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9 August 2011
Apple's market capitalization surpasses Exxon Mobil's, making it the world's largest company
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11 August 2011
Standard & Poor's downgrades U.S. sovereign debt from AAA to AA+
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8 December 2011
ECB introduces its Long Term Refinancing Operations
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20 December 2011
Federal Reserve announces that it will implement the Basel III rules governing bank capital adequacy, stress testing and liquidity risk
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18 May 2012
Facebook lists on NASDAQ
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9 June 2012
Eurozone finance ministers agree a €100 billion emergency loan to recapitalize Spain's banking system
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26 July 2012
ECB President Mario Draghi pledges "whatever it takes" to preserve the euro
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6 September 2012
ECB offers Outright Monetary Transactions
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28 February 2013
Unemployment in the E.U. reaches its highest level, 11%
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19 June 2013
Federal Reserve Chair Ben Bernanke triggers the "Taper Tantrum" by announcing plans to reduce the Fed's QE purchases
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26 June 2013
E.U.'s Capital Requirements Directive and Regulations (CRD IV) implement Basel III rules on capital requirements for banks
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7 September 2013
China's President Xi Jinping announces the "Belt and Road Initiative"
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7 March 2014
MSCI World Index regains its pre-crisis high level, set in October 2007
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10 April 2014
China announces its "Shanghai-Hong Kong Stock Connect" trading channel
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5 June 2014
ECB adopts a negative interest rate for bank deposits
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1 January 2016
The E.U.'s Solvency II Directive, regulating the business of insurance companies, comes into force
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30 January 2016
Bank of Japan adopts negative interest rate for bank deposits
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24 June 2016
U.K. votes to leave the E.U.
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5 July 2016
10-year U.S. Treasury yield reaches all-time low of 1.36%, 10-year German government bond yield reached all-time low of -0.19%
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4 August 2016
Bank of England cuts interest rate to its lowest ever level, 0.25%
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21 September 2016
Bank of Japan introduces "yield-curve control" target for 10-year government bond yield
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9 November 2016
Donald Trump is elected President of the U.S.
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1 June 2017
MSCI announces plan to include China A Shares in its Emerging Market Index, from June 2018
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3 July 2017
China announces its "Bond Connect" trading channel
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27 July 2017
Apollo Global Management closes the largest ever private equity fund at almost $25 billion
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4 November 2017
CBOE Volatility Index hits all-time intraday low of 8.56, and all-time lowest close of 9.14
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12 March 2018
NASDAQ Index passes 7,572, 50% higher than its tech bubble peak of 5,048 in March 2000
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1 June 2018
Italy elects a government led by the Five Star Movement and Lega parties
- 22 Feb 2008
- 24 Mar 2008
- 6 Sep 2008
- 15 Sep 2008
- 16 Sep 2008
- 16 Sep 2008
- 19 Sep 2008
- 11 Oct 2008
- 13 Oct 2008
- 9 Nov 2008
- 19 Nov 2008
- 29 Nov 2008
- 11 Dec 2008
- 16 Dec 2008
- 11 Feb 2009
- 11 Feb 2009
- 17 Feb 2009
- 18 Mar 2009
- 1 Jun 2009
- 20 Oct 2009
- 21 Jan 2010
- 9 May 2010
- 10 May 2010
- 21 Jul 2010
- 28 Nov 2010
- 9 Aug 2011
- 11 Aug 2011
- 8 Dec 2011
- 20 Dec 2011
- 18 May 2012
- 9 Jun 2012
- 26 Jul 2012
- 6 Sep 2012
- 28 Feb 2013
- 19 Jun 2013
- 26 Jun 2013
- 7 Sep 2013
- 7 Mar 2014
- 10 Apr 2014
- 5 Jun 2014
- 1 Jan 2016
- 30 Jan 2016
- 24 Jun 2016
- 5 Jul 2016
- 4 Aug 2016
- 21 Sep 2016
- 9 Nov 2016
- 1 Jun 2017
- 3 Jul 2017
- 27 Jul 2017
- 27 Nov 2017
- 12 Mar 2018
- 1 Jun 2018
This unleashed significant social tensions. As the emerging economies opened to trade through the 1980s, '90s and 2000s and became the workshop for the world, cheap goods and cheap credit disguised the fact that the developed world had exported many of its manufacturing jobs. Inequality within countries grew even as global inequality diminished. The financial crisis revealed how unsustainable it was to use consumer credit to paper over the widening cracks.
As if all of this were not enough, the financial crisis and its aftermath coincided with an epochal change in the technological environment, from the arrival of smartphones and social media, to the spread of automation, artificial intelligence and “big data." This unleashed a wave of disruption as nearly every business model in every industry, from retail to media, from transport to finance itself, came under tremendous pressure to reinvent itself or die.
That was then, this is now:
The Four Trends in 22 numbers
Source: International Monetary Fund, Federal Reserve, European Central Bank, Bank of Japan, Standard & Poor's, Federal Reserve Bank of New York, World Bank, Bloomberg, Kleiner Perkins, PitchBook. Data as of 2008 and 2017 unless stated otherwise.
A Look Forward
We imagined ourselves 10 years from now. What are the forces that would still be driving the investment world, and what would have been dismissed as mere noise? We agreed that four big trends will still be shaping the economic and financial landscape.
We argue that all of this has propelled us into a new era in which some longstanding divides are being dissolved: divides between governments and markets, between the emerging world and the developed world, between the public markets and the private markets, between human and machine. Those dynamics lead us to our 10 key investment implications and five guiding principles for investors that we set out at the end of this project.
From these specifics, we believe that there are five guiding principles to take away: