In hindsight, I’m not happy about what I wrote August-October 2007. As the bubble built I criticized it in fainter ways than it deserved. Given the implosion of money markets, I should have been more bearish. Part of that faintness stemmed from the stigma that came to bears in that era. But here are articles from that era:
Attempts to explain the relationships between implied volatility and equity, and also corporate bonds.
Subprime was getting blamed, but there were many areas where markets were very speculative at the time. I call them out here, and I was not often wrong.
I got a lot of publicity over this one. I may do another one in 2011. It is important to understand that those on the FOMC are not geniuses. They are bright, but slaves to a view of the world that is not accurate. The Fed drinks their own Kool-aid.
As the markets declined, there were a lot of signs of the oncoming trouble that were ignored. Following market liquidity was an aid to avoiding some of the crisis that was to come.
I anticipate a lot of what will happen in the next 18 months, while not taking that much action.
I get some publicity for being a little ahead of the crowd in suggesting that Minsky was correct in the way he viewed economic cycles. I also anticipate what will happen one year later.
In the midst of the money market panic, the Fed added liquidity, whether it was right to do so, or not.
These are the rules regarding currency interventions, ignored by hubristic governments that go their own way, and lose value as a result.
In this article, I attempted to estimate what variable drove stock market performance in aggregate ten years out. I discovered:
- Note that it was a bullish period, and that stocks did not lose nominal money over a ten-year period to any appreciable extent.
- Stocks almost always beat bonds over a ten-year period, except when inflation and real interest rates 10 years from now are high.
- Investing in stocks during low interest rate environments can be hazardous to your wealth.
- Watch for inflation pressures to protect your portfolio. Stocks get hurt worse than bonds from rising inflation.
- Inflation and real rate cycles tend to persist, so when you see a change, be willing to act. Buy stocks when inflation is cresting, and buy short-term bonds when inflation is rising
I argued that if many hedge funds had mismarked assets, then many investment banks would as well. Definitely worked out that way, but bigger than I expected.
This was a forty minute talk that I gave to the Society of Actuaries at their Annual Meeting. Very big picture, and very prescient. Worth a look if you have 15 minutes sometime. I put a lot of work into this one.
Every now and then, some crank like Bill Clinton comes up with the idea that “all we gotta do is invest the Social Security trust funds in the stock market, and the funding problem will go away.” This is the antidote to that malarkey.
But, as the markets approached their recent highs during this period, I was skeptical, but insufficiently skeptical. Further, I blew it on Deerfield, National Atlantic, and my view of how FOMC policy would evolve. So for this era of my blogging, I have my regrets — I should have done better, even though I got some interesting things right.