The four most frightening words for the financial markets are 'this time it's different'. Anyone who has lived through several economic cycles instinctively knows that when supposedly intelligent people say 'this time is different' then it is without a shadow of doubt time to sell.
After Hubris comes Nemesis, and Nemesis can thunder on to the international financial stage like a giant bear seeking to exit stage left. Citigroup CEO Chuck Prince used different words in July 2007, just before the toxicity of sub-prime mortgage lending became clear.
As long as the music is playing, you've got to get up and dance, he is widely and oftten quoted by way of warning. Though, to be fair to him, he did precede the quote with a caveat. “When the music stops, in terms of liquidity, things will be complicated.”
He was right
These words are seldom quoted but they do act as mitigation and he was proved absolutely right. Though it took until 15 September 2008 to appreciate just how right. The collapse of Lehman Brothers that day changed the financial world beyond recognition.
Anecdotal evidence from those who attended the annual gathering that is the Sibos congress suddenly found its aisles less crowded than usual. It opened the day that Lehman collapsed. Senior bankers of all nationalities rushed to book emergency flights home.
Seldom, if ever, has a game of musical chairs ended with such disastrous results. The crisis took time to percolate through the system but its roots lay in July 2007. Nemesis duly appeared and Chuck Prince stepped down from his position at Citi on 4 November 2007.
Shudder running down the spine
Hence the shudder running down this spine on reading 'this time it's different' in the Short View column in the Financial Times on 7 June. Miles Johnson wrote an insightful piece based on what he sees as a bubble denial by Jeremy Grantham of Boston investment firm GMO.
This Time Seems Very, Very Different is described on the GMO website as Part 2 of Not With A Bang But With A Whimper - A Thought Experiment, written by Jeremy Grantham.
Forming pages nine to 16 of the GMO Quarterly Letter, page 12 is where the alarm bells start sounding.
Jeremy Grantham writes
- We value investors have bored momentum investors for decades by trotting out the axiom that the four most dangerous words are: 'This time is different'
- For 2017 I would like to add, however, to add to this warning
- Conversely, it can be very dangerous indeed to assume that things are never different
There is a nuanced difference which even an experienced and sophisticated investor could struggle to detect. But there are two key issues. One, the market believes current higher levels of profitability are permanent. Two, a bear market can occur for one of many reasons.
This mention of markets and bears calls to mind longstanding mantras chanted at regular intervals by Bill Blain, London-based head of capital markets and alternative assets at Mint Partners, a specialist brokerage that forms part of BGC Group.
Bill Blain mantras
- The market has but one objective: to inflict the maximum amount of pain on the maximum amount of participants
- It's better to miss the last 10% of a rally than to catch the first 10% of a crash
- The market has no memory – and neither do buyers
This time it's different
And this is where the spine-tingling caused by: 'This time it's different' comes in. “We all want it to be different, but It never is…,” cautions Bill Blain, a keen sailor with a good eye for weather, in the financial world as well as on the water, almost audibly sighing.
The choice for investors armed with these warnings is clear. One, take Chuck Prince's advice to get up and dance while the music is playing? Two, anticipate the stopping of the music and bag a chair before they're all gone? Three, find a legitimate way to take advantage.
For what it's worth, I learnt another mantra in my early days on the graduate accelerated development programme at Midland Bank International Division back in the early winter of 1979, one which I have never forgotten. Dealer always profits somehow...