Before financial market crises unfolder there is a steady erosion of the system's structure
In 2008, an appetite for leverage and need for return led to implosion triggered by Bear Stearns
The 1998 failure of Long Term Capital Management offers a similar story to the conditions we face today
Financial crises often explode from periods of exceptional market
performance and their appearance is usually catches the investing
community off guard. Yet, as dramatic as the market reactions may be;
these disruptive periods of rebalancing are not so obscure when the
underlying structural circumstances of the financial system are
accounted for. Back in 2008, the Great Financial Crisis was built upon
an appetite for excessive return and leverage through high finance. It
was, however, subprime and Bear Stearns' collapse that receives the
blame. Further back, 1998 draws a strong corollary to today's market
with an Asian financial crisis and Russian default leading to the
dramatic failure of Long Term Capital Management. Heading into 2015, we
have: excessive leverage; exposure to exceptionally risky assets; low
returns; a dependency on low volatility; and growing investor doubt. We
discuss the importance of appreciating a big-picture structural risk
heading into 2015.
