Are We About to Repeat 2008?

It would be far more sensible for investors to remain cautious about the future, rather than to assume that the sun will continue to shine indefinitely.
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The stock markets are frothy -- once again -- and it sure is starting to feel like 2008. Just 5 years ago the markets were partying like there was no tomorrow -- ignoring the bubbles that had developed, having failed to learn lessons from the plethora of previous financial crises, and pretending that if they just kept saying everything was fine long enough, everything would indeed be just fine. Well, it appears that after all that has happened, investors and markets have learned rather little.

Consider the challenges that remain to be tackled, and the new ones awaiting us. Apart from the chronically high unemployment and ongoing fiscal malaise, intractable policy gridlock, and inexcusable partisanship in Washington, sequestration is just around the corner. Given that Congress went on recess anyway, and that there are just 3 working days left for Congress to wave a magic wand upon its return before the spending cuts kick in, it certainly seems likely that at least some of the spending cuts will indeed be implemented. Wall Street is starting to pay attention, but only after the stock markets reached a post-2007 high last week.

What justified the rise in the first place? Relief that a depression did not occur and the economy did not fully implode at least partially explains it. But so does the new lean and mean corporate world, which has learned to do more with less, and has reclaimed profitability. Lost in translation on Wall Street is the continuing malaise of the middle and lower class, and the powerlessness of the government to kick start the economy. Wall Street has become adept at dodging bullets, over emphasizing good news, and ignoring bad news - and investors are allowing it to happen.

Consider also Europe's ongoing economic malaise, which is growing worse, with the average EU unemployment rate rising to nearly 12%, and youth unemployment in Spain and Greece approaching 60%. Government spending as a percentage of GDP exceeds 50% in much of Europe, and is unsustainable. Just as the U.S. government has found it difficult to turn things around, European governments are in an even deeper hole, with no end in sight. In all likelihood, Europe faces at least another 3 to 5 years of austerity before the pain will start to ease. That does not bode well for the prospect of a sustainable global recovery.

The global political landscape does not provide any real reason to feel better, either. With North Korea having tested its third nuclear weapon, Syria continuing to implode, and the possibility of war with Iran looming larger now than at any time in the past, there is real reason to be concerned. This comes at a time when the U.S. is withdrawing from its military engagement in Afghanistan and is retreating into a more isolationist paradigm. Even if there were a desire to change this going forward, our new budgetary realities, combined with a war weary public, make this difficult to achieve.

It would be far more sensible for investors to remain cautious about the future, rather than to assume that the sun will continue to shine indefinitely. What got us into the mess we are slowly emerging from is a combination of short memories, lax risk management, and good old fashioned greed. It doesn't appear that much has changed in the past 5 years. For that reason, it's probably just a matter of time until we see a repeat version of 2008. History has a strange way of repeating itself. If we continue to ignore the warning signs, we will have earned it.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk advisory firm based in Connecticut, and author of the book "Managing Country RIsk".

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