Risk Latte - Rathke’s Law may come back to haunt the Asian stock markets this decade

Rathke’s Law may come back to haunt the Asian stock markets this decade

Team Latte
January 6, 2010

If there is one equity analyst that you should believe in, perhaps that person should be Christopher Rathke. The only problem is, he is no longer an equity analyst, at least not in the public domain.

Everywhere in Hong Kong there are signs of new skyscrapers being completed or new projects for building skyscrapers being undertaken. And some of these buildings are really tall. Of course, they are nothing compared to the recently completed 160 storey, super skyscraper Burj Khalifa in Dubai. Besides the Burj, Dubai is littered with near empty and half constructed skyscrapers and beautiful tall buildings.

And financially, Dubai is in shambles. Asset markets have imploded there.

Even in Hong Kong a lot of skyscrapers are going up these days. And everywhere here – actually, everywhere in Asia and perhaps the whole world – there is a lot of nervousness regarding the continuation of the bear market in stocks. Many noted analysts have predicted that we are in a structural bear market that actually started in or around the year 2000 and will perhaps continue for another decade or so. Last year’s stock market rally was just another bear market rally.

Is there a correlation between the rise and fall of stock markets with the height of the skyscrapers recently completed? The idea may seem ludicrous but apparently there’s a negative correlation between these two variables.

Have you heard of Chritopher Rathke? Or for that matter, have you heard of Rathke’s Law?

In 1994, Christopher Rathke was a very imaginative equity analyst working in Tokyo. Somehow he got intrigued by the idea that maybe there is a negative correlation between the construction of skyscrapers, and the height of the skyscrapers completed, and the fall of stock markets. So he did his research and what he found out became known – loosely – as the Rathke’s Law.

Rathke’s research showed that bull markets tend to reverse directions just as “a new contender” for the world's tallest skyscraper gets completed. He observed that these record-breaking skyscrapers coincided with the end of the long term bull markets: the Singer Tower was completed in 1906 which signaled the end of the bull market of 1895 – 1906; the Chrysler Building and Empire State Building both got completed in 1931 which marked the end of the bull market of 1921 – 1929; and though this particular data didn’t fit in very well, he also observed that New York's World Trade Centre was completed in 1973 which was not too far away in time from the end of the bull market of 1949 – 1966.

South China Morning Post’s columnist, Tom Holland*, has further elaborated on Rathke’s theory in January 4th edition. He has traced the history of skyscraper building frenzy from the 1900s until the completion of Dubai’s 160 storeys Burj Khalifa. In the 1900s New York city saw the completion of Metropolitan Life Insurance Company Tower and Singer Building. This was followed by the Panic of 1907, a financial crisis more popularly known as the "Banker's Panic" when the New York Stock Exchange dropped by almost 50%.

The roaring 20s, as the decade of 1920s was popularly called, saw another bout of skyscraper construction in New York. Notable buildings were Bank of Manhattan Trust Building, the Chrysler Building and the well known Empire State Building. Of course, we all know very well what happened in the final year of that decade; The Great Crash of 1929. The stock market collapsed like never before ushering in the era of the Great Depression.

Towards the end of 20th century Asia saw a boom in skyscraper buildings. In fact, it was the completion of the Petronas Twin Towers in Malaysia in 1998 that fired Chris Ratkhe imagination and made him embark on his research. The Petronas Twin Towers came about at the same time as the Asian Financial Crisis was unfolding. All over Thailand, Malaysia, Korea and elsewhere in Asia Pacific tall skyscrapers were going up as the stock markets were headed south. All this culminated in 2004 with the completion of Taipei’s Taipei Financial Centre, the 101 storey building, also known as Taipei 101. That was when the Taipei stock market fell 25%.

Now it is Dubai with 160 storeys skyscraper Burj Khalifa, a gigantic debt crisis, a crashing stock market and an imploding economy.

That guy, Rathke, after all got it right!

Reference: Why do Markets Melt Down? Rathke’s Law by Paul Slade, October 31, 1998 (The Independent Newspaper)
*The Higher they build, the faster the markets crash by Tom Holland (South China Morning Post, Jan 5, 2010),

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