Unconstrained strategies for bonds are hot now with yields so low.  But wait. Let’s take a step back.  What do we mean by a constrained strategy?

A constrained strategy is one that limits the investments one can engage in either through:

  • Specifying an index that the manager is charged with beating
  • Specifying percentage limits for investments, split by categories such as credit quality, interest rate sensitivity, asset subclasses (ABS, RMBS, CMBS, Corporates, Agencies, etc.), and other variables
  • Barring investment in more funky fixed income instruments such as preferred stock, trust preferreds, junior debts, CDOs, ABS, RMBS, CMBS, etc.
  • Or some combination of the above.

There have been unconstrained strategies in fixed income before — they just weren’t called that.  Many value investors in the old days didn’t care what the legal form of the investment was — they only looked for an adequate margin of safety.  Their portfolios were a hodgepodge of debt and equity instruments.  Specialization in only doing debt instruments wasn’t common.

Most debt-only investments were constrained, particularly those from bank trust departments.  Of course, this was an era where investing in junk debt was not respectable for all but the most intrepid of investors.

With the advent of the 1980s we had two innovations: junk bonds and bond index funds.  The first took the world by storm with the demand for yield; I experienced that at the first insurance company that I worked for — they overloaded on junk bonds.  This was before the regulators began regulating bond credit quality more strictly.

The second took a longer time to germinate.  The first bond index fund came into existence in 1986 at Vanguard.  They couldn’t call it a bond index fund, because they could not exactly replicate the index.  There were too many bonds that were illiquid, and they could not buy them at any reasonable price.  Instead, they took an approach that we would call “enhanced indexing” today.  Match the interest rate sensitivity of the index, and the credit quality, but choose bonds that had more potential than the bonds in the index.

In that sense, though the SEC allows bond funds to be called index funds today, all bond index funds are enhanced index funds because there is no way to source all of the bonds.  And from my own days as a corporate bond manager, I learned that bonds in major indexes always trade rich.  From my piece, The Education of a Corporate Bond Manager, Part IX:

There was another example where I crossed bonds where it was legitimate — if it was done to help a broker in distress.  One day, someone offered me a rare type of Capital One bonds at a normal level, and I asked whether the bonds in question were the ones that were in a major bond index, without saying that per se.  After figuring that out, I bought them at the level, and called a broker that was likely to be short the bonds to see if he wanted them.  He certainly did, and offered them at a three basis point concession to where I bought them, as opposed to ripping the eyeballs out (as the technical term went).

The whole set of two transactions took 15 minutes, and made $15,000 for my client.  What was funnier, was that my whole family came to visit me that day, my wife and at that time, seven kids.  They heard the two transactions, though I had to explain it to them later. To the second broker, I had each of the kids say “Hi,” ending with the then three-year old girl who squeaked “Hi.”  He said something to the effect of, “I knew you had a large family, but it only really struck me now.”

That three-year old is now a beauty at twelve, and bright as anything, but I digress.  (They grow so fast… the nine-year old girl is cute as a button too.)

Bond management was once unconstrained by those who looked for total returns in the old days, and constrained in the old days by those who looked for yield.  (Many managers would not buy bonds that traded at a premium.)  Then the bond indexes became popular as a management tool.  In one sense, it freed bond management, because rather than hard constraints, they matched credit and interest rate sensitivities of the index.

But what that constrains is credit policy and interest rate policy.  One managing to beat a benchmark index has limited options.  What if you want to position for:

  • Widening credit spreads
  • Narrowing credit spreads
  • Rising interest rates
  • Falling interest rates
  • Yield curve steepening
  • Yield curve flattening
  • Outperformance/underperfomance of a given sector

Any sort of directional bet could go wrong, and more often than bonds that fit the idea of replicating the index parameters, but are special in ways that the index does not appreciate.  So rather than going “whole hog” with the bet, you merely lean toward it, such that if you are wrong, you won’t destroy the outperformance versus the index.

But in this modern world where derivatives are widely accepted as fixed income instruments, a la Pimco, fixed income managers can do a lot more.  There is more freedom to make or lose a lot of money.

The unconstrained strategy can be thought of  in two ways: always trying to earn a positive return with high probability (T-bills are the benchmark, if any), or being willing to accept equity-like volatility while the bond manager sources obscure bonds, or takes large interest rate or credit risks.

I prefer the first idea, because it is more conservative, and fixed income management should aim for safety on average.  As I have said before, I only believe in taking risks that are well-compensated.

But here’s a hard one.  With the yield curve so wide, shouldn’t a bond manager with an unconstrained mandate put a little into long bonds or long zeroes?  I would think so, but I wouldn’t put a lot there unless the momentum started to favor it.

I like the concept of the unconstrained strategy; indeed, it is what I am doing for clients, but it is of the first variety, try to make money for clients in all markets, and not just be a wild man in search of yield or total return.

I find the move to unconstrained mandates to be a return to what value managers did long ago, but in a more complex fixed income environment.  I wonder though, as to whether the future failures will invalidate the idea for most.  It is tough to manage any asset class while adjusting the risk level to reflect what should not be done in a given era, whether in equities or debt.  The danger comes from trying to maintain yield levels that are higher than what is sustainable.

This is a modest book with an immodest title.  Stocks will return 9%/year over the next 15 or so years.  Dow 38,820? C’mon, round it to 39,000 or 40,000!

Or, is the book so modest?  The Lehman Aggregate yields 3.5%.  Puny.  Moody’s Baa bond index yields 6.05%.  Since 1967, we are near the lows on that yield.  In relative terms, also puny.

It would be extraordinary for stocks to move ahead at 9% while low investment grade long bonds yield 3% less.  The same applies to the wider spread over the Lehman Aggregate.

Bonds are saying that the returns to capital are low, and given the artificial capital created by quantitative easing, that is not a surprise.  The Fed has consistently stopped the healthy process of failure, which redeploys capital to healthier and more profitable uses.

Now, maybe we get inflation to show up in a big way, and Dow 38,820 is the new 20,000 in real terms.

I agree with the thesis that the stock market has tended to move in waves.  I think Hirsch is jumping the gun a little on the next wave, and overstating the amount of likely return.

Now, as for the book blurbs — they are all overdone.  Better to understate the case.

Now, as to the book itself:  Hirsch thinks we will work through our problems.  So do I, but with more difficulty.

With hindsight, he critiques those who wrote Dow 36,000 ably.  He then critiques current bears, and I think he is right there as well.

He describes the last few stock market cycles of stagnation then boom.  But is past prologue?  I think it is in qualitative terms, but maybe not in degree, unless inflation reduces the real value of stocks.  The author thinks that is likely, even with the biased measures of inflation employed by the government.

Finally, he shares some investment strategies that he thinks will be useful in the future.  They aren’t worth buying the book, in my opinion.


If my father were the notable Yale Hirsch, I would have spent more time going over his stock picks in the appendix; the performance is better than the author conveys.

Who would benefit from this book:

If you lack optimism, you could benefit from this book.  If you are optimistic already, you don’t need this book.  Just realize that things are not likely to be quite so good as the author portrays.

If you want to, you can buy it here: Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It.

Full disclosure: This book was sent to me, and I did not ask for it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

I don’t often do a Q&A with book authors, but I appreciated my dealings with Roddy Boyd, the author of Fatal Risk.  It’s official publication date is tomorrow, but it is now available at Amazon.  If you want to buy it, you can find it here: Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide.

Full disclosure: This book was sent to me by the author, unsolicited.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.


1) What impressed you most about your interview(s) with M. R. Greenberg?

To begin, his utter and consuming passion for AIG. He does not distinguish between AIG and himself, at least in any appreciable sense. What happened to AIG thus happened to him and vice versa. He will never forget anything and he will never forgive anything. Nor, for that matter, will he concede very much. The other issue is that per David Schiff’s observation, Greenberg never stops, he is “Always running.” Since his obsession is work, then everything else in his life can be elegantly understood: The foreign policy stuff, bringing his sons into the business, the travel schedule of a foreign diplomat, the boards and foundations. Since AIG was everywhere and doing everything so was Greenberg.

2) If you could have gotten others to talk with you, who would they be, and what questions would you want them to answer?

It’s a tie between Win Neuger and Martin Sullivan. I’d want to ask Sullivan if he really saw events per his Congressional testimony on the fall of 2008, where he laid much blame for the collapse at the feet of mark-to-market accounting. This is akin to Morgan Stanley’s John Mack complaining about short-sellers at the same time–a complete abdication of all intellectual responsibility. I’m guessing Sullivan has a lot more to say than just stuff about accounting. Regardless, no one at AIG had much to say about mark-to-market accounting in 2005-2007, when they had billions of dollars in unrealized gains from their sundry portfolios.

With Neuger, I would want to start at the very beginning of the expansion of the securities lending portfolio, which tracks to around the very minute of Greenberg’s departure. It’s easy to take shots after a crash but I wouldn’t do that; I’d want to know how he thought AIG was going to have a different end than the number of other securities lending portfolios that extended duration during low rate cycles and modest volatility. I’d also want to know when HE realized there was trouble, that you can’t always unload $150 million worth of mortgage-credit paper on the bid side. That conversation might get interesting.

3) AIG Financial Products had three eras, with three different managements, strategies, and interactions with AIG parent company.  Why wasn’t AIG able to manage AIGFP to keep it sound?

In a word: competition. In 1987 the only limits to what FP could do was what they could dream up. They dominated the landscape with a virtual monopoly. Come 1996, every I-bank and commercial bank was in rate swaps in a big way and, in the case of Gen Re and Credit Suisse, had their own Financial Product units seeking to do “bespoke” transactions. By 1999, Goldman was actively leveraging its corporate finance relationships to do custom transactions. Hedge funds, by the early parts of last decade, are competing with them on the asset finance side and on every sort of complex short-term trade FP entered, they were competing against the prop desks of Goldman, Merrill, J.P.Morgan and the like.

There is also the intellectual drift common to every enterprise. A founder comes in and designs a business in a certain fashion; By the second or third generation of management, it’s highly unusual to have the same rigid adherence to the founder’s goals. For an (extreme) example, look at the Ford Foundation and its role within the Liberal firmament and then look at who Henry Ford was. The divergence of mission usually occurs obliquely. For instance, Joe Cassano would have looked askance at a speculative bet directly on the mortgage market via Freddie or Fannie passthroughs. Instead, FP wound up long the mortgage market via writing insurance coverage they were told would never be impaired.

4) Are there any areas/subsidiaries inside AIG that you would want to look more closely at after writing Fatal Risk?

Not really.

5) What do you think the last moment was that AIG still had control of its own destiny was?

Maybe late 2006 or early 2007. Assuming some visionary philosopher King rode in with a mandate to hedge all risk, with total operational control and the budget to see it through, they would have had the ability to go out and buy a fair amount of coverage in the ABX indices for FP (and maybe structure some custom swap with a large bank) and begin an immediate “run-off” at the Securities Lending portfolio. It would have cost them billions of dollars and they still would have taken some bitter losses in the autumn of 2008. Still, I can see a $10 billion “investment” across FP and Securities Lending going a long way to preserving autonomy. It should be noted that I asked this question at every interview and no one said anything like it was even considered. FP executives say they never considered buying CDS on the CDS they were writing since it would have completely eliminated the “profits” from premiums. Go figure.

6) What would it have taken for AIG to be properly managed after Greenberg’s departure?

There was a massive gap in the knowledge base of the men who stepped in after the departure of Greenberg, Ed Matthews and Howie Smith; Martin Sullivan and (CFO) Steve Bensinger knew enough to run AIG in a bull-market. Their greatest weakness was in not having a suitable understanding of the downstream, or long tail, risk of derivatives, particularly in the reference securities. They were almost childlike in their trust in systems and processes: If PWC or a big law firm looked at something, that was good enough. The problem was that it isn’t. This isn’t to indict them: A guy like Steve Bensinger was a solid Treasurer but the CFO job at AIG required the ability to be an accounting whiz plus having equals parts risk guru and legal eagle–I’m thinking of a David Viniar sort–and he wasn’t any of those things.

Part of this problem has to do with the fact Greenberg/Matthews/Smith had seemingly been there forever and so a bright, truly talented next generation CFO or COO never bloomed. How could it have? Any ambitious 40 something would conclude that the AIG executive suites were permanently closed. So there was no backbench to hand and as I explain in the book, a post-Greenberg transition plan was not something Hank thought much of as a concept. Practically speaking, Sullivan was never remotely suited for the role since he had zero financial management experience. Moreover, his trusting, amiable disposition insured that when his former peers like Joe Cassano ran into hot water, he didn’t have a skeptical or questioning bone in his body. That’s a big risk to run when you have a Financial Services unit embedded in your company that is larger than Lehman Brothers and many times as complex. Greenberg, on the other hand, had little fear of conflict and had a track record of asserting himself over his trading desks.

7) Did AIG management err in moving so aggressively into areas that exposed them to the credit cycle and equity markets?  Do you think Greenberg could have been happy running a smaller insurance enterprise that would have a hard time growing profitably with moderate risk?

Part one: That’s the core challenge of AIG’s entrance into “The Kingdom of Money” as I put it. As conceived, its financial units were never supposed to have this risk; that was what the asset management units were for. Per question #3 however, FP inevitably had its advantages competed away and was forced to seek profits in areas that had long been frowned upon, like getting long fixed income risk.

Part two: No. Handsome and steady profits were attractive to Greenberg but growing them were what he was all about.

8 ) What were the shortcomings from Greenberg being an autocrat at AIG, even if he was one of the most talented CEOs ever?

In AIG under Greenberg the single-minded focus on profits, new opportunities and growth that he instilled obviously facilitated a period of expansion and wealth creation that has a bare handful of rivals in history. However, given time and the law of averages, profit opportunities began to fade (the returns on assets tell this story) so they had to go farther out on the risk curve to sustain income growth. There is the same end to this story every time. Secondly, autocratic organizations tend to have weak leadership benches. At the unit level, AIG was shot through with talented people from top to bottom. The person who could run the company post-Greenberg, however, arguably didn’t exist at the company. For a talented executive, in retrospect, AIG was a company that you either came to understand that you were never going to go any farther than where Greenberg saw you going or you left. A lot of people chose the latter but over time, many of them “went along,” and didn’t speak up at key junctures. For instance, in the securities lending debacle, the global investment unit’s senior leadership seemed fine with things but it was a pair of rank-and-file portfolio managers, Mike Rieger and another guy, who spoke up. They were roundly ignored.

9) What aspects of AIG’s culture overall helped lead to the eventual failure?

A problematic trust in process over actual insight and investigation. Time after time, “A law firm signed off on it” was considered actual risk management; it’s not. There was also just abysmal risk management, not only in the obvious things like writing $73 billion of super-senior CDO tranche protection and the Securities Lending debacle, but in the minutiae. It appears no one even looked at the credit support annexes, which were standard in all swaps. Moreover, FPs valuation systems were completely inadequate in getting real market prices for the underlying CDOs. There is an element of the “The Wizard of Oz” to AIG–”So that’s what is behind the curtain?”

10) Do you think AIG got sloppy in the early 2000s as business got more complex, and the need to meet earnings estimates grew more difficult?  (Gen Re, PNC, Brightpoint, etc.)

Yes. They were all very different transactions but yes. Gen Re should have been caught by a mid-level risk analyst or lawyer in the general counsel’s office around the second week it was under construction. Brightpoint and PNC were separate but had at their core the manipulation of earnings. The odd thing is that the PNC transactions had been done several times in Japan with the same ill intent and were thoroughly blessed by regulators there, who were apparently happy to do anything to suggest that the nightmarish balance sheets of Japanese banks were improving. They had not a concern in the world that the deals were totally abusive to the investor.

11) At the end, AIG had subprime risk in their life insurers (through securities lending), mortgage insurers, at American General Finance, and at AIGFP.  Was it a mere coincidence that they had it everywhere?

No. AIG was a corporation whose ethos was a ceaseless hunt for earnings. When you are a AAA, or AA+ and fund at Fannie/Freddie levels, the carry trade is a very obvious place to capture some seemingly risk free spread. Given that AIG’s risk management was highly passive–relying on what others said about risk (as opposed to doing their own work)–trusting the rating agencies to get it right came easy. What was interesting is that Securities Lending and the mortgage insurance company continued to add exposure months after the market started to turn but American General Finance and FP examined the market in-depth, had a heart attack and immediately ceased those lines of business. The best thing? No one said a word to each other. AIG, in this sense, resembles a large and dysfunctional family, where no one shared anything with anyone, even Mom and Dad. Under Greenberg, big decisions like that invariably resulted in long, detailed phone calls where the decision was hashed out with Greenberg and Matthews. They would abide the decision but would want to know every reason why it was made.

12) Did it ever dawn on anyone at AIGFP that they were the big patsies insuring subprime securitizations prior to them stopping the practice in entire in 2005?  Or that the Street were patsies for relying on one insurer? (Forget that the US bailed them out in the bailout of AIG.)

Not as laid out in your question, no. An FP executive named Gene Park has become a minor celebrity because of media accounts that have him as a “Voice in the Wilderness,” decrying abusively structured mortgage credit. Park certainly hated the sector and let it be known but his effect was limited in that Cassano disliked him with varying degrees of intensity. A guy named Andrew Forster, who ran the asset-finance group out of London and had ultimate authority over the swaps, was much more methodical and cautious. Park certainly communicated his dislike to him but Forster took months to flesh out his concerns. It doesn’t appear that the concerns over the swaps were ever put in terms of systemic risk but rather as just something that had higher than expected likelihood of default. It is difficult to overemphasize how incurious many at FP were.

13) What area in the AIG parent failed to note that AIGFP could call upon resources inside AIG upon downgrades, forcing a posting of collateral?  Treasury? CFO?  That had to be signed off on by someone at the AIG parent, no?

Every area. No one really looked at the absolute risk levels of the insurance FP was writing, no one looked at the CSAs, there were no autonomous risk procedures for determining valuations, no one modeled corporate cash flows in the event these swaps became a problem and it goes on. In July of 2007, when there was the first collateral demand from Goldman, much of the senior management of AIG was unaware this product line existed. That’s a problem.

14) Tim Geithner was supposed to be the Fed’s point man on derivatives.  How could he miss something this large? How do you think derivatives should be regulated?

Let me combine these two questions. Geithner missed it because he didn’t know enough to look for it, but I interviewed a number of senior Fed officials who had not missed AIG’s rapid balance sheet expansion, the leverage of the banks and brokers to each other and, ultimately, everyone to structured products. Their response was that the Fed (in New York) only analyzed bank holding companies, or the entities that owned the big banks. They fully acknowledged the financial filth going on but said it was at the operating units, where they had no ability to do anything. That was the purview of the Office of the Comptroller of the Currency, another federal regulator with minimal funding and difficulty retraining an experienced analyst corps. I’ll bet you can figure out how it went from there.

The only regulation that really, truly, deeply matters in pondering the credit crisis is the repeal of Glass-Steagall. Once banks were able to throw themselves and their funding capacities into market-making and underwriting full bore, nightmares could only result. To that end, the only regulation that matters in reframing a regulatory apparatus is the reimposition of Glass-Steagall in some form or shape. Commercial banks, all joking aside, have usually been pretty good at making loan decisions; conversely, when investment banks dominated the marketplace, risk was a function of how much capital a firm was willing to lose at one time. For all the mania’s and fads that come and go in the markets, from the mid 1930s onward, Wall Street did a decent job of keeping its insanities form effecting the economy too much.

It would be optimal if we got back to that.


Many thanks to Roddy Boyd for the answers.  He want above and beyond again.

The core discipline of value investing is not buying it cheap, but margin of safety.  Margin of safety means you aren’t going to lose too much if you are wrong, and face it, we make mistakes.  I do, and you do.  It goes back to the two rules: 1) Don’t lose money. 2) Don’t forget rule #1.

In my last piece On Con Men, I dealt with irregulars.  And even in my more recent piece, Avoid Investment Scams and Bad Advice, Web Edition, I dealt with irregulars.  By irregulars, I mean those that don’t come through a regular channel for investing.  These are people that try to attract those that want something off the beaten path, for either high return, or high safety.

But not all con men are irregulars.  Some are regulars, with all the trappings of success — they work for a well-known firm.  They dress well, speak well, and are aware of most major trends, and the concerns of investors.  They have seemingly well-designed financial plans that the firm’s models produce.  They have clever ways of helping you meet your income goals.  Everything about them says, “We can assure financial security for you.”

I have interacted with some of these fellows (no ladies yet) on boards that I have been on.  (Oddly, when I was a corporate and mortgage bond manager, the people I interacted with were far less slick.  I think the bond market tolerates people that are more down-to-earth than the equity market does.)  I usually have to bite my tongue, because  they are front men.  They know the limited bits that they have been fed by sales management, but they really don’t know much beyond that.

On rare occasion, I will take the floor and rant at the salesman.  I try not to; I only do it if they lie (as I see it).  Usually, they’re just trying to earn a living, and there is nothing to be gained by making fools of them.  But occasionally, they try to lure people into investments that are not in their best interests.

I have often said that the lure of free money brings out the worst in people.  I think that one key area of that is the seeking of yield.  I will say it plainly: Wall Street can give you whatever yield you like, if you don’t care about preservation of principal.  Yield is the oldest scam in the books.

Wall Street has a wide variety of yield products, and I highlight this now, because we are in a low yield environment, and they will bring these products out more often as a result.  One example that I have talked about before is structured notes.  What I would like to talk about tonight are reverse convertibles.

One easy way to enhance yield is to sell an option against your positions.  The problem with that is that the option could come into the money, and you suffer a capital loss as a result, often exceeding the extra income “earned.”

With convertible bonds, you have the best of all worlds.  The holder is long an option.  If things go well, it is convertible into stock.  If things go, badly, you have the downside protection of a bond (which can still default, but hey, you are higher in the bankruptcy pecking order.  Maybe you’ll get something?).  The cost of the best of all worlds is a lower yield than one would get on straight nonconvertible debt.

Reverse convertibles are the worst of all worlds.  The holder is short an option.  When things go well, it remains a bond.  If things go badly, it converts into stock, usually at a low price that delivers a capital loss.  But, the equalizer here is that if it remains a bond, you get a high yield.

That’s a big “if.”  My counsel to almost everyone is avoid complex products.  If you can’t get the yield that you need through ordinary vanilla products that are transparent, then either reduce your spending or consume a little capital.  Wall Street and insurance companies thrive on complexity, because you can’t price it or do comparisons.  You are playing their rigged game; they may not be trying to skin you, but just nick you.  Nicking you means they win, but you continue to play the game, so that they can nick you again.  It is like playing in a casino; the edge of the house is fixed, and will wipe anyone out that does not have an advantage (card counting in blackjack), but it does it so slowly and with volatility, that players do not perceive it.

Complex products are not created to do you a favor, but to cheat you on average.  Think about it: if you are invited to play a game for money, as an amateur, do you want to play against professionals?  I thought not.  But if you feel that way, why do you buy products from Wall Street that they know a whole lot better than you?

This goes back to my rule: don’t buy what others want to sell you; buy what you have personally researched and want to buy.  But what if I can’t understand enough to do anything with investing?  Then what?

Find your friend who knows the most about investing.  Ask him for his friend who knows the most about investing.  Repeat a third time if needed, but get to someone who can give you intelligent impartial advice.  If all else fails, go to Vanguard, and take their advice.  They will not harm you, though they might not help you a lot.

But be wary of those that offer easy solutions.  What is free is seldom cheap, as the Ferengi would say.  Get trustworthy intelligent third parties to look over your investments, and avoid slick salesmen with clever products that are hard to understand.

For those that have read me for years at The Aleph Blog, this book will impart little that is new.  But, you get a set of powerful arguments in one integrated slim package.

I really liked this book.  The author took a broad view of bubbles, and developed five lenses through which to analyze them:

  • Microeconomics
  • Macroeconomics
  • Psychology
  • Politics
  • Biological (contagion) analogies

This picks up the growth in debt, the misaligned short-term versus long-term incentives, crowd behavior, imitation, political agreement with booms, finger-pointing during busts, etc.

This book integrates the ideas of Keynes, Minsky, the Austrian economists, Soros (reflexivity), and others.  The author was very willing to interact with the view of those that might not fully agree with him, and yet bring out the areas where they do agree.

And the author tests the five lenses on five bubbles:

  • The tulip bubble
  • The Great Depression
  • Japan in the late 80s
  • The Asian crisis in 1997
  • The US Housing Crisis 2006-?

Not surprisingly the crises chosen support the theory.  It would be interesting to see what the author would say on other bubbles, like the South Sea Bubble, the Tech Bubble, etc.

And so the author summarizes his case, and I think he does it well. But then he takes it a step further, and effectively says, “Well, is there an obvious bubble to point out now?”  And so he points out China.  The debts, the manipulation, malinvestment, bad incentives, etc.  You can read it for yourself and draw your own conclusions.

My main verdict on this book is that it provides a firm basis for evaluating bubbles.  I place it behind “Manias, Panics, and Crashes,” and “Devil Take the Hindmost,” but not by much.  To the author: Great job.


I disagree with the idea that booms and busts are a capitalist phenomenon.  Command-and-control economies do have booms and busts — the Great Leap Forward was a boom followed by a tremendous bust.  The effort to plant cotton in the Soviet Union was short-lived, leading to declining yields and destruction of the ecology of the Aral Sea.  There are more examples than this; at least in capitalism, the boom yields some decent rewards.

Who would benefit from this book:

Anyone who wants a better understanding of the boom-bust cycle will benefit from this book.  The author has nailed it in my opinion.  This book will help you to properly skeptical in the next unsustainable boom, and minimize your exposure to the bust.

If you want to, you can buy it here: Boombustology: Spotting Financial Bubbles Before They Burst.

Full disclosure: I asked the publisher for the book, and they sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.