A Round Trip And Now What?

I’ve spent a lot of time reading about what went wrong in the financial markets in the past year. A lot of the best stuff has come in the form of letters and presentations from hedge fund managers who have been at the front lines in this crisis. Most of that stuff is highly confidential and not bloggable. But there is one chart that I keep thinking about that I wanted to share with you.

I saw this chart in a presentation by a leading hedge fund manager. This is a Bloomberg chart that anyone with access to a Bloomberg terminal can recreate and I apologize for the grainy quality and somewhat out of date nature of this.


This is a chart that goes back to January 1994 and charts the S&P vs the rest of the world (minus Japan). Apparently taking out Japan doesn’t change this chart much but it’s cleaner without it.

This shows that for seven years from 1994 to 9/11, the US outperformed the rest of the world by a lot. And from 9/11 to the end of last year, the rest of the world outperformed the US by the exact same amount. It was one big round trip. And that round trip ended in a mess.

I am not going to try to explain why this round trip ended in a global financial meltdown, but it mostly has to do with massive leverage and liquidity and we finally hit the breaking point.

You’ll notice that in the past several months, the US has started to outperform again. This is probably due to positions around the world being unwound and dollars coming home (or something like that). I don’t know if you can make too much of the recent time period.

But the big question is where do we go from here? As we start think about how to position ourselves collectively for the next move up (whenever that comes and it could be a long while), I think this chart is worth paying attention to.

And if you haven’t read it yet, I suggest everyone read Fareed Zakaria’s The Post-American World. It gives an interesting context to this whole issue. Here’s my blog post that I wrote this summer after I finished it.

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