According to an article written by John Plender of the Financial Times, “2014 is proving a vintage year for echoes of the pre-crisis world.” Though he measures that statement by noting that “a financial crisis is not imminent,” Plender finishes by warning that “the seeds of one are being sown.”
In the course of the piece, Plender looks at the question of why lending standards are falling if banks aren’t “pumping out credit and inflating bubbles,” putting forward one “potentially ominous” hypothesis that the shadow banking system could be both creating unseen competition and causing skewed perceptions of data.
To be sure, he provides important insight using key data and market predictors such as the Bank of England’s latest systemic risk survey, the trading range of 10-year US Treasuries and volumes of highly borrowed transactions. However, a guiding theme of Plender’s article is that “[a]n occupational hazard of observing markets is a recurring sense of déjà vu.”
While intuition and sentiment are certainly important to consider when investing, market participants must remember that data is king. That’s why Barry Ritholtz’s May 16 piece in The Washington Post is valuable to read alongside Plender’s analysis of the current state of the market. Ritholtz cites a famous quote from Sir John Templeton: “the four most expensive words in investing are: ‘this time it’s different.'” He suggests that the man is often misquoted and that “[i]nvestors need to understand when specific fundamental factors are different and put them into context.”
Ritholtz differentiates between real differences in market fundamentals and collective decisions that “this time is different.” For instance, profits didn’t matter during the dot-com boom because this time was different, and investors ignored traditional metrics during the credit bubble because this time was different. In both cases, the market crashed and investors lost.
Ritholtz also draws attention to the obvious: for many investors, greed dominates during a boom, and residual fear has a strong influence following a crash. As he notes near the end of his article, “[h]uman nature is unchanging … [y]ou are never different. But sometimes, the data is.”
His thesis speaks to the aim of the Investing News Network. We strive to provide unbiased and independent coverage of commodities markets, and part of helping to build investor confidence is showing when the data is different. Our goal is to find out about both sides of any story in order to allow investors to make informed decisions, providing a valuable piece in the due diligence pie.
Like Plender, we encourage investors to analyze various factors, and like Ritholtz, we stress the importance of making one’s own decisions based on true changes in fundamentals and by recognizing unspoken arbitrary decisions that “this time is different” for what they really are.
Securities Disclosure: I, Teresa Matich, hold no investment interest in any companies mentioned in this article.