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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.
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%.
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.
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.
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:
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