This note looks at the global economy and financial markets one year on from Lehman Brothers’ demise.
The key points are as follows:
– The global economy is now in far better shape than was the case in the aftermath of the Lehman Brothers’ collapse a year ago. Money and credit markets have improved dramatically, share and commodity markets have rebounded & economic indicators are recovering. Just as share markets melted down on fears of depression post Lehman Brothers’ demise they have melted back up again as talk of depression has given way to signs of recovery.
– The key lessons from the sub-prime mortgage crisis and associated debacle are that there is still a business cycle, monetary and fiscal stimulus still works and, in view of the manic nature of human behaviour, sound regulation of the financial system is essential.
– For investors the key lessons are: that higher returns come with higher risk; be wary of financial engineering and products that are too hard to understand; be wary of having too much debt; and don’t think that having a well diversified portfolio of growth assets will necessarily protect you in a financial panic.