Lessons From Market Crises

Welcome to the 68th Pari Passu newsletter.

Over the last few months, we covered very technical lessons including Class Gerrymandering, Contingent Convertible Capital Instruments (CoCos), and Reverse Dutch Auctions. This week, we are taking a step back and we are going to dive deeper into a less technical topic: market crisis. We will learn about the 3 major types of crisis each with a historical example and identify the general lesson to be learned from it.

The reason we should study market crises in the first place is to gain an understanding of the financial world's cyclical nature and the recurring themes that define it. While the below lessons might seem easy and intuitive, cycle after cycle, smart investors keep falling into the same traps.

The wisdom of Mark Twain, who famously said, "history doesn’t repeat itself, but it often rhymes," is particularly apt in this context. By examining historical patterns and crises, investors can develop an informed perspective on potential future outcomes.

Introduction

Throughout the timeline of humans and the history of the financial system, there have been extraordinary booms and busts that have rippled across generations even up to this day. Before we study market crises at various points in history, it is important to define exactly what we are looking for. Put simply, a market crisis is a shock to the price of assets. However, as we go on to look at different market crises, we can see that there are different types:

1. The Market Bubble - where the quoted price of assets outstrips the fundamentals

2. The Financial Crisis - an extended period of easy monetary policy and loose oversight

3. The Macroeconomic Trigger - a crisis that is based on macroeconomic events

Japan: The Market Bubble

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