We can use the mantra that history is the best teacher... but we, rather, we the investors never learn. How long does it take to forget the important lessons of frugality, savings, discipline ... about 10 years it seems.
October 1987 The Dow had the famous one day 20% decline. Naturally, all markets were hit but Malaysia had our own bombs to deal with - the Pan El crisis. For the next few years, graduates were getting between RM400-600 a month for accounting jobs. Not even enough to pay rent.
Of course, we need to decipher as all correction or crisis was brought on by an incident or event. It is usually not the sole incident or event's fault. A major correction can only be triggered by an incident or event when the market's way overvalued. If the markets aren't overvalued, the event or incident would have a muted impact.
Such as the failed leveraged buyout of United Airlines in October 1989. Or the July 1990 invasion of Kuwait by Iraq. These generally do not count as major corrections.
October 1997 Asian financial crisis, brought on by easy money from foreign funds, and the proverbial mess when funds exited. Asia was so over-geared. It also impacted the developed markets during this massive correction.
March 2000 Dotcom bubble. Noticed how well we change the industry - from dotcom to internet to internet of things.
Almost all bubbles are necessary (even the tulips bubble). Bubbles are when funds go searching for the best returns over the most exciting new prospects, new invention, great innovation ... hence we need these funds surge to support and fund the startups or companies to search for the proverbial 'gold' in the new fangled industry.
This makes it easy to magnify the various business plans and R&D into the industry's nascent nooks and crannies. It is important for innovation and progress, and sadly we also have to contend with the massively high failure rate.
September 2001 Man-made catastrophe which dragged the world into a mini economic crisis. But cannot be categorized as a naturally evolving market correction due to market forces.
October 2007 Subprime financial crisis. Quite unfair, when the developed nations went crazy on debt binge on property, and when the party's over, the smaller nations also got whacked.
April 2010 The EU crisis stemming from the Greek tragedy.
August 2015 The shortlived by big correction brought on by the commodities crash.
We can actually block out the 2010 and 2015 incidents as non-major corrections. It is 2019 and it has been more than 12 years since the last major snafu. We are riding on borrowed time. So how will the next major correction look like? Where is it coming from?
China's Corporate Debt?? The year 2018 witnessed an unprecedented wave of corporate bond defaults in China, as the world’s second biggest economy lost steam amid a trade war with the United States. The expectation that the economy will slow further, combined with the government’s continued efforts to rein in debt and risky lending, suggest the number of defaults is likely to increase further in 2019. China companies defaulted on 39.2bn yuan ($5.8bn) in domestic bond in just the first 4 months, that was TRIPLED the pace for last year.
China’s property sector, which lies at the centre of the construction and development boom, had accumulated debts, including bank loans, trust loans and bonds, of 15.6 trillion yuan ($2.27 trillion) as of June 2018, more than double the 7.6 trillion yuan three and half years ago.
Defaults for Chinese corporate bonds — issued in both U.S. dollars and the Chinese yuan — soared last year, according to numbers from two banks.
Yuan-denominated debt rose to an “unprecedented” 119.6 billion yuan ($17.8 billion) — four times more than 2017, according to a February report by DBS. Nomura’s estimates were even higher, putting the size of defaults in onshore bonds — or yuan-denominated bonds — at 159.6 billion yuan ($23.8 billion) last year. That number is roughly four times more than its 2017 estimate.
However, I don't think the fuse will be lit by Chinese companies because NOT ENOUGH foreign funds hold their bonds. As it will be largely a domestic situation, it is likely to be "managed" by Beijing.
US High Yield Debt?? Companies are carrying a $9 trillion debt load, posing a potential threat should rates continue to rise and the economy weakens. Most Wall Street bond experts think the issue is contained for the next 12 to 18 months, though one says the market’s “angst” is “not misplaced.” A principal worry is over companies teetering between investment grade and junk that could cause market trouble should their standing deteriorate.
The rate of defaults for US companies on high yield bonds are not high for the moment. Things are still chugging along, markets at an all-time high there. Need to give it another 6-12 month. Hence the next big spike down is likely to be by this group but at least 6-12 months down the road.
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