On 15 September 2008, one of the oldest and largest financial services firms in the world, Lehman Brothers, filed for bankruptcy in America. Why is this such an important event, you may be wondering?
The Lehman Brothers demise is believed to have been a major contributing factor to the events that lead to the 2008 financial crisis. What it showed was that to succeed in long-term wealth management, we need to understand the context of risks and opportunities globally. The specific events surrounding the Lehman Brothers collapse in 2008 were important when informing what we have today, especially as we are starting to see greater volatility and uncertainty returning to our markets.
HERE ARE OUR THREE KEY INSIGHTS:
- The speed at which financial distress gets transferred all around the world and the contagion caused by a single event can affect so many geographies, assets and asset classes. A decade on and people are forgetting the risks that lurk within the markets. Up until the beginning of 2018, we experienced exceptionally low volatility in the markets, which has resulted in them becoming increasingly sanguine that such an event will not occur again. We disagree with that.
- The reaction of central banks to the 2008 financial crisis saw them very rapidly adopt new strategies to liquefy the global system and to ensure systemic health in the global banking sector. They cut interest rates to below zero, and then added additional stimulus to the economy, all in an effort to save the banks. This begs the question of what will happen when that stimulus gets withdrawn? In fact, as global liquidity has started tightening, we are already seeing the ramifications on brittle asset classes.
- Over the last decade we have learned how asset classes interact with each other and in times of stress how old correlations break down. What will happen once global liquidity becomes tight again? Will they return to the old regime, or stabilise at a new level? The fact of the matter is, the volatility we started experiencing in 2018 and into 2019 is only the beginning.
This year has seen increased volatility in the markets. These insights are very important to us at Citadel, as we seek to stay ahead of the market to protect and grow your wealth.
Written by George Herman, Citadel Chief Investment Officer