Since at least the January 2015, when the SNB de-pegging sent the Swiss franc soaring against the euro, costing some of the world's largest currency dealers hundreds of millions of dollars in losses, Wall Street banks and the media have blamed the severity of the crash not on market factors endemic to markets, but on another less obvious variable: Millennials.
Since the financial crisis, there have been only a handful of short-term bursts of volatility (the 2013 "taper tantrum", the Brexit vote, the August 2015 yuan devaluation, and the January 2016 China-inspired turbulence) in stock, bond and currency markets.
This means a whole generation of Wall Street sales people, strategists and traders has come of age without experiencing a crisis-like sustained selloff.
As Bloomberg explains, a whole generation of millennials has come of age without experiencing a real crash - much to the chagrin of their bosses, who are worried that a sea of red might leave their young associates slackjawed in terror.
And they have good reason to be concerned: As WSJ reported in the aftermath of the Swiss flash crash, panicky young traders on currency dealers' trading desks inadvertently exacerbated the crisis by rushing to shut off liquidity causing volatility to surge to levels unseen in modern markets before or since.
Some fund managers have tried to insulate this risk by only hiring analysts, traders and salespeople with decades of experience. One such individual is GAM emerging-markets PM Paul McNamara...
Many bankers older than 40 shudder at the thought of what will happen if – or when – some unforeseen trigger sparks a crash that drags down not just stocks, but also bonds and currencies together. Etched in their memories is the Lehman Brothers collapse in 2008. In its wake, stock market valuations alone were cut in half.
By contrast, most millennial investors have only worked in an era where central banks printed trillions of dollars to prop up their economies and markets. Since starting their careers, average interest rates in the developed world have barely nudged above 1 percent, inflation all but vanished, the S&P 500 Index more than doubled and bonds rallied so high that more than $7 trillion of debt is negative yielding.
“You have to have had that stage where you’re looking at the screen through your fingers to really appreciate risk-reward in this industry,” said Paul McNamara, who heads a team of five at GAM U.K. Ltd. in London managing $11.5 billion. “Not just seeing things go wrong, but going so much more wrong than you imagined was possible.”
McNamara avoids hiring anyone who hasn’t endured an “absolute disaster”—the youngest member of his team is 39—for fear they may be too complacent. He should know. When he was 28 in his first gig as a junior fund manager at Julius Baer in 1997, he loaded up on the Indonesian rupiah and bought some more on the way down. It kept sinking and the bet lost him single-digit millions.
...But McNamara is in the minority...
A survey of more than 4,800 fund managers in London, New York and Paris conducted last year by crowd-sourced data provider Emolument showed half of respondents had nine years of experience or less. That means there are hundreds of managers who didn’t live through the 2008 collapse and its run-up, let alone the dot.com bubble that burst in the early 2000s or the 1997-1998 Asian financial crisis.
And as the Fed tries to walk the tight rope of normalizing policy after an unprecedented period of centrally-planned intervention, the risk of millennials' inexperience is compounded by the fact that we're living in an economic environment (with record-low and negative interest rates and, until recently, bewilderingly low volatility) that are virtually unprecedented.
But while millennials may have never endured a 1987-style collapse that would qualify for the record books - many have felt the crushing pain of being woefully wrongfooted.
“I think I am ready for the next downturn,” said Victor Massue, 28, a senior fixed-income fund manager at AISM in Luxembourg. He learned his lesson in 2016 when he bet that Donald Trump’s election would be bad for markets and the opposite unfolded.
“Humility is one of the most important values in finance, it prevents you from having an over-inflated ego,” Massue said. “Markets are risky, new traders should know that the aim of the game is not to earn money, at first—it’s trying not to lose and survive.”
To be sure, as one trader who spoke with Bloomberg pointed out, this lack of experience might not matter: After all, like Bill Gross famously said, the global economy is entering what he called "a new normal" where growth and real rates adhere to a lower flight path than they once did.
In this new paradigm, the question is: Do millennials have an advantage because they don't need to unlearn outdated behaviors?
Or does their collective lack of experience represent one of Wall Street's largest undiversified risks?
“Find me someone who worked in the era of 15 percent inflation and I’ll talk to them about Bitcoin and the Internet,” said the 29-year-old fund manager.