Since the early 1980's the financial sector has ridden an extraordinary wave of prosperity. The combination of increasing debt levels and rising share markets turbo-charged the growth in the banking and investment industries.

To highlight the strong correlation between the fortunes of the financial sector and credit booms, let's look at two images. The first from Hoisington Investment Management is titled 'US Total Debt since 1870'.

The second graph was obtained from Thomas Philippon's, November 2008 research paper titled 'The Evolution of the US Financial Industry from 1860 to 2007: Theory and Evidence'.

The evidence in both credit bubbles is clear. Rising debt levels were the wind beneath the wings of the financial industry. There is, however, one significant difference between now and the 1930's peak in the US financial industry. This time around the investment industry is far larger and more sophisticated than it was in the 'Roaring 20's'.

In today's investment industry we have institutional and boutique fund managers; hedge funds; investment administration services; industry superannuation funds; self-managed superannuation funds; online broking services; options trading programmes; financial planners; share brokers and the list goes on.

The credit bubble combined with technology spawned a multi, multi-billion dollar industry. A lot of people have their livelihoods and capital tied up in this industry. Call it survival or self-interest, but there is no way they will go down without a fight.

If we look to the past to possibly divine the future, we see the US financial industry went from being 6% of GDP in 1930 to less than 2% of GDP in 1950. Over a twenty-year period the industry contracted more than 65%.

As revenues stagnate, businesses aligned to the financial sector will look to maintain profitability by reducing costs. This is evident in job losses in retail banks, investment banks and share broking firms.

If the global share markets follow in the steps of the past two major credit contractions - The Great Depression and Japan post-1990 - revenues will fall substantially and the recent job losses will be the tip of the iceberg.

2007 All Over Again

Let's take one step back and look at the period leading up to the market top in 2007; the investment industry had an easy story to tell. Share markets had returned on average 15% per annum (growth plus dividends) for nearly 25 years. Interest rates had fallen from over 16% to around 4%. Little persuasion was needed to encourage investors to swap their cash for shares.

It was like 'stealing candy from a baby'. There were the occasional hiccups in the growth story - the 1987 crash and the 2000 'tech wreck' - but the recovery after these periods were used as evidence to convince doubters of the market's resilience - 'in the long term shares always go up'.

Revenue streams were based on a percentage of funds invested. All industry participants clipped the ticket and enjoyed rising levels of income and profitability...

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