“1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.”
Based on these observations, he names the following countries likely to become culprits: Spain, Ireland, UK, USA, France, Greece, Italy, and Japan.
Mr. Gross makes the salient point that the aforementioned study, “if anything, points to the inescapable conclusion that human nature is the one defining constant in history and that cycles of greed, fear, and their economic consequences paint an indelible landscape for investors to observe.”
Against this background, quantitative measures—the order of the day in risk management and stock picking—are a ticking time bomb. Black swans, low probability but highly explosive events, are bound to come up when least expected. In this environment, investment returns are akin to picking up pennies in front of an oncoming train.