Is there such a thing as a secular financial bubble? Has the financial sector become bloated out of proportion to the economy over the last few decades and is there be a contraction in store, abrupt or prolonged, back to a smaller financial sector? Was the crisis of 2008 merely the start?
I’m not sure of the answer but a couple of data points have stuck in my mind recently:
1) Below is a copy of two charts from the paper Fundamental Indexation by Rob Arnott, Jason Hsu and Philip Moore. Note how the Financial sector, both on a cap-weighted market value basis, the upper chart, termed the Reference Portfolio and on a fundamental accounting basis, the lower chart, has expanded steadily since the 1970s and now has become the dominant sector of the US equity market. By comparison, the Tech bubble was a fleeting aberration, now absent from the trends. In the same charts, updated to June 2007, found in their book The Fundamental Index, there was only a slight pullback in the share of the Financial sector in the Fundamental chart while the market value chart looked the same. Unfortunately, there are no numbers visible so it is hard to compare with today’s data and I wish and hope that the folks at Research Affiliates where messrs Arnott et al work will do updates. Read More…
I’ve read other articles written by Philip Moore and from what i understand he demonstrates clear evidence that events such as what we had back in 2008 is part of the story. Here in Canada we have pretty much recovered from 2008 but seeing as how the U.S. is still struggling to stay afloat i think we are still in trouble.
The chart is very interesting to pay attention to.
K-Waves, also known as the Kondrativ (sp?) waves shows a similar model of cyclical patterns in the financial sector. It is amazing to see that we just not be out of this yet.