PANEL 1: RETHINKING THE GLOBAL FIAT MONEY SYSTEM

Moderator: Mary Anastasia O’Grady
Member, Editorial Board, Wall Street Journal

Comments that the Fed buying MBS reminds her of the Latin American countries that she covers.

Benn Steil
Director of International Economics
Council on Foreign Relations

Central bankers as Churchillian war leaders, rather than dull technocrats.

Y = C + I + G  Economists treat C, I, and G as easy substitutes but they have different effects over time.

Krugman advocated creating a housing bubble, to replace the NASDAQ bubble.  (DM: They are trying to create new bubbles now via QE.)

Sweden and Australian central banks sold foreign assets to buy dollars and euros during their financial crises.

Central banking effective when governments can borrow near the policy rate of the central bank w/a tight correlation.  Implies that the ECB is no longer an effective CB for the fringe.

Central Bankers not particularly effective with fiscal policy.

Can Central Banks act without capital?  Will German taxpayers recapitalize the ECB? Doubtful.

On the Fed:

If the Fed got into trouble (negative net worth), the Treasury would back up, recapitalize it.

Suggests that the Fed should exchange MBS with the US Treasury for Treasuries.  Suggests that MBS will produce significant losses.

George Melloan
Former Deputy Editor, Wall Street Journal

Jokes about what a nickel could buy during the (big Baby Ruth bar) Depression and now (a jellybean).

Talks about post-WWII monetary policy in Britain, and how British Socialism led them astray.  War in Vietnam did much the same thing in the US, leading Nixon to end Bretton Woods.

Dollar’s primacy increasingly questioned.

Inflation coming as the Fed creates credit to fund the US government.

Doubts that multilateral currencies like the SDRs of the IMF would work. The Euro proves that.

The US needs monetary reform, but we might need to fail before that comes.  Gold, bitcoins, scrips, barter if things break down.  Fiat currencies are liquid, barter is inefficient.

If the US dollar goes, a lot else will go down as well. (DM: think about Chinese banks.)

Gerald P. O’Driscoll Jr.
Senior Fellow, Cato Institute

Gold standards can be done if the currencies reflect the fair values of the currencies.  I.e. France made its currency too cheap post-WWI, and Britain too expensive.

Gold standards are not always associated with deflationary periods with low growth.

No monetary system survives big wars.

Nixon went off the gold standard when the CPI was at a high 4.2%.  Monetary policy run by the seat of the pants then.

Argues that classical liberalism requires a gold standard.

Q&A

Fiat currencies even larger proportionately in Africa.  Give seniorage as foreign aid to Africa?

O’Driscoll: dollarization is faux gold.  Gold would be better.  Seniorage can’t be given away.  We need it.

Steil: Helps the African countries get along fine.  Dollarization of Panama has not hurt them; they know the US won’t send help.

O’Grady: Argentines tried to find a way to use US Dollars, but wanted seniorage, thus but devalued instead.

Question to Steil on Operation Twist, duration risk to Fed?

Steil: Operation Twist worked for several nations.  40 bp move would wipe out Fed capital.  ECB purchases of PIIGS debt an alternative to Eurobonds, bailouts, etc.

Isn’t fractional reserve lending the problem?

O’Driscoll: leverage would come from other sources.  MMMFs?

Melloan: Politicization of monetary policy is the problem.

DM: misses the concept that asset-liability mismatches with leverage produces failures.

O’Grady: Wouldn’t a single mandate solve things?

All of the panel expressed doubts on this point.  The Fed needs it to hide, but they would find other ways to do it.

I’m just going to give notes from speakers.

Ron Paul

Inflation running about 4%/yr, would be higher if older standards were used.

Congress derelict in duties of overseeing the Fed.

Little enthusiasm in Congress for auditing the Fed.  More enthusiasm in the hinterlands, especially among students.

Fed facilitates big government; both parties like the flexibility that it gives.  Deficits matter, a lot.  Not much difference between the two parties on that.

Global debt relief is needed; balancing budgets is needed, and the sooner the better.

People feel worse in the US than 9% unemployment; US governments fear-monger for deficits.

Fed’s goal is to liquidate debt with inflation.

Likes that Bernanke is holding press conferences — puts him on the defensive.

Do we want Constitutional government or not?  His main interest is liberty. Does not allow for a central bank; gold and silver as currencies.

Fed will close when they destroy the money, unless closed politically before then.  Legalize competition in currency.  End legal tender laws.  Allow for the creation of private mints, with taxes taken off of gold and silver.

End fractional reserve banking, though Ron Paul admits there are disagreements among libertarians on the topic.

Questions

What is the Fed is audited and it less assets than stated?

 

Where would you regulate competitive money?

The States, once legal tender laws are abolished.

Since the rest of the world has fiat currency, why wouldn’t an international currency spring up?

Legal tender laws.  Also, look at the current trade wars via currency devaluation.

Supercommittee not doing much, will sequestration end?

Probably.  Once defense gets cut, people will get motivated, but they won’t cut spending.  That said there are a lot of frightened, motivated people out there

What about  TIPS?

Not much

Does QE discriminate against the poor (higher prices of consumer goods) in favor of the rich (higher asset prices)? (I asked this.)

Yes, and the rich disproportionately benefit from bailouts, and ordinary monetary policy as well, whoever gets the money first benefits.  QE benefits special interests.

How is the situation different now than in the ’70s?

Things are worse now.  More indebtedness, could have a catastrophic end.  Any reform that ignores monetary policy is not a reform.

Peace, prosperity and limited government… what he wants, and that requires reform of the Fed.

Conference can be followed here in real time.

More to come.

 

Why do you do what you do?  Do you do it for money?  Many do.  Do you do it because you love it? Some get to do that.  Do you do it because you think you have the truth, and want to make it known?  Few do that.

Mike Mayo seems to be one who works for the latter two reasons, and that made him unusual on Wall Street.  As an analyst of bank stocks on Wall Street, Mike Mayo was not always right, but he was right more often than not.  He had a strong desire to tell what he saw to be the truth, which did not win him friends amid general overleverage in the banking sector (the banks lent too much).

Wall Street does not exist to make the buyers of the securities rich, rather, Wall Street exists to help companies get financing; the large profits of Wall Street come from the creation of stocks, bonds, and other securities to institutions and individuals.

There may be a question, though: if Wall Street does not exist to enrich the buyers of securities, then why do they employ analysts who try to point out value to potential buyers?  Even today, it is because Wall Street wants to make money off of the underwriting of future securities.  After all there is no money to be made in the secondary trading of ordinary securities anymore.

That is why the opinions of analysts still remain roughly 65% bullish, 30% neutral, and 5% bearish.  Their posture reflects the way Wall Street positions itself for those they make money from: securities issuers, not securities buyers.

And similar to rating agencies, it has to be that way, because only the securities issuer has a concentrated interest in the issuance of a security, and for bonds, the rating.

So what happens when a rare smart truth-teller, Mike Mayo, comes along, and does not care about the revenue generation potential of his opinions?  He gets a good reputation from institutional investors, but often loses his job inside investment banks, because he was not profitable for them.  Some clever investment bankers would use a negative opinion from Mike Mayo to sell products to fix the problems of the bank in question, but that was rare.

Book Structure

This book is part autobiography, and part a financial economics text.  We learn about those who raised Mike Mayo, and those who influenced him in his career development.  We also learn about the economics of Wall Street, as I have described above.  But behind all of it is the nagging question, “Why do you do what you do?”  In an area rife with ethical conflicts, where money goes more rapidly to those who will be cheerleaders and promoters rather than truth-tellers, asking the questions that disturb the soul are uncommon, but affected the author.

In short, the book tells of his life, and how he came to be a bank analyst.  It goes through his successes, and some of his failures.  It spends too much time on his correct analyses of Citi (Citigroup).  It shows him learning how to be professional, and take the emotion out of issuing opinions, and reactions to opinions.

It takes us through three phases of his opinions: mixed, bullish (1994-1998), and bearish (1998+).  He was willing to be bearish and lose credibility in the short run.  Of course, what do we call someone who is wrong in the short run?  We call them wrong, though those who are patient may still benefit.

After that, the book offers his opinions on what is wrong with finance, which he summarizes as ABC: fix the Accounting, put insolvent banks into Bankruptcy, and reduce the Clout of banks. All salutary suggestions I think.

Quibbles

Though he spent time on some of his failures, he should have spent more time there.  That said, I am impressed by his determination.

Saving the big banks from themselves still seems to be an afterthought rather than a goal, despite all of his efforts.

Who would benefit from this book: Most investors would benefit from this book.  It will make you skeptical of investment banks; it will teach you how Wall Street thinks.  Beyond that, you might enjoy the story of someone who tweaked the nose of Wall Street, and survived (for now).  If you want to, you can buy it here: Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves.

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he 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.

 

This is the first book that I have reviewed twice.  I reviewed the third edition of the book previously, but I am reviewing the sixth edition now.

Kindleberger places the manias, panics, and crashes on a common grid, to see their similarities,  In it he draws on a number of common factors:

  • Loose monetary policy
  • People chase the performance of the speculative asset
  • Speculators make fixed commitments buying the speculative asset
  • The speculative asset’s price gets bid up to the point where it costs money to hold the positions
  • A shock hits the system, a default occurs, or monetary policy starts contracting
  • The system unwinds, and the price of the speculative asset falls leading to
  • Insolvencies with those that borrowed to finance the assets
  • A lender of last resort appears to end the cycle

The advantage over the third edition is that you get to hear about the Asian crisis LTCM, the tech bubble, Madoff, and the present crisis (banking & housing, soon to be sovereigns).

The main point for readers is to beware when monetary policy is easy, banking regulation is lax, and many seem to favor buying the asset du jour, often with leverage.  What is self-reinforcing on the way up will be self-reinforcing on the way down, but with greater speed and ferocity, as bad debts have to be liquidated.

Quibbles

Hindsight is 20-20.  If the US Government had rescued Lehman, something else might have proven to be “too big to rescue,” that the government might allow to fail, but miss the connectedness of the institution.  I do think the US Government should have been a DIP lender to troubled firms, but not a buyer of equity.

Who would benefit from this book: Most investors would benefit from this book.  It will make you more skeptical of assets that seems to be doing unnaturally well; it will also make you more skeptical about catching falling knives in the market.  If you want to, you can buy it here: Manias, Panics and Crashes: A History of Financial Crises.

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he 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.

 

What do you do with a book that has one major thing wrong, and a lot of minor things right?  I’m not sure, but my compromise is to give it a low num1er of stars on Amazon, and mention the good and bad points.

In a perverse sense, it makes sense that someone will write a book pushing high quality bonds when the yields are so low.  There are always those that push foolish retail investors to act amid low rates.  “It’s time to preserve value,” as low rates lock in low returns, but will low returns from bonds beat stocks, commodities, or cash?

I think not.  At present, high quality bonds are return-free risk, as James Grant would put it.

Now, the authors allege that bonds match/beat the performance of stocks over the long run.  But their argument relies on buying and rolling to an unusual bond – the long Treasury bond.  I’m sorry, but few could have bought and rolled that, the volatility is too great.  The same argument applies to junk bonds as well.  Bearing the excesses of maturity risk or credit risk over time can yield great returns, but few can live with the volatility.

I am not a backer of the idea that the equity return premium over bonds is big, but I do back the idea that it is positive.  Equities outperform bonds by about 1%/year, with a lot of noise, which makes the outperformance dubious to naïve watchers.  You need at least 40 years to demonstrate the effect.

The authors push their perverse view that a portfolio of high-quality bonds will outperform stocks.  Are they betting on the Second Great Depression in the process?  That’s what it would take, with rates so low.

Further, by limiting their fixed income purchases to AA bonds or better, the authors ensure that their clients lose money from their lazy investing, when it is well-known that BBB bonds return the best even after default losses.  I suspect the authors don’t want to deal with the stress that comes from occasional losses, which is a lazy way to run an investing business.  Good bond investing makes more on credit spreads than it loses on default losses.

The same argument applies to their avoidance of structured securities (ABS/MBS); intelligent investors can make extra money there.  Broad prohibitions of any investment should be a red flag to investors, particularly when the authors have no evidence.

Back to their five initial questions, with my answers:

1)      Everyone I know has the bulk of their money in stocks, and stocks always outperform bonds.

Sorry, but the authors obfuscated to make their case.  Over the long run, stocks have outperformed bonds by 1-2%/year, but that outperformance comes in spurts, it is not level.  The authors deceptively made their case by arguing the spurts were abnormal.  Sorry, but abnormality is a normal part of markets.

2)      I won’t be able to retire with the returns from bonds.

Particularly true with the lame way the authors invest; starve on their very modest interest income.  Investment returns are lumpy, but people want smooth returns.  Markets can’t be changed, but can people discipline themselves to wait for lumpy returns when they come?

3)      I understand stocks, but bonds are too complicated.

Bonds are simple, but yield little now.  Stocks yield more, but yes, can go down.

4)      Bonds won’t keep up with inflation.

No they won’t, but stocks, particularly cyclical stocks will do far better.

5)      Bonds don’t provide any growth.

One of the biggest lies of this book is that bonds provide growth as a result of investing what you don’t spend.  That is not growth, that is savings.

All that said, unless the investor can discipline his emotions, he is probably better off investing in bonds, even though he will earn much less.

Quibbles

Page 52 – The authors did not do their homework: the Old Testament did not prohibit interest; it prohibited taking interest from the poor, to avoid enslaving them.  Business loans were permitted.

Pages 330-331 the authors make a lot out the disadvantages of bond funds, but aside from paying an upfront load, the disadvantages are small relative to individual bonds over a long time period.

Page 362 – the authors don’t fully get stable value funds.  Yes, the attempt to create them for anyone to invest in did not work, but for 401(k)s, which is the majority of the market, there was never an investigation, and they function well to this day.

Who would benefit from this book: No one would benefit from this book.  It deceives and preys on the ignorance of average investors who have been burnt by the stock market.  If you want to, you can buy it here: Bonds: The Unbeaten Path to Secure Investment Growth.

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he 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.

I want to toss out a half-baked idea for others to play with, criticize, and adjust.

But first, a fully baked idea: the Euro was doomed to fail.  Any core Euro after kicking out the miscreants is also doomed to fail.  You can’t have monetary union long-term without political/fiscal union.  The roadblocks to economic union are cultural issues that express themselves politically.  The upshot is that either you politically merge nations that are similar (and intermarry), or your nation should have its own currency, so that needed macroeconomic adjustments can occur.  A single currency for disparate nations is a decidedly bad idea, and the Euro-sceptics so roundly derided in 1998 have been proven right within 14 years.

So, now for my half-baked idea — it is time to undo the Eurozone in entire, but we will keep the Euro, or rather, Euros.  This would have to be done quickly or it would not work well.  When those in the Eurozone wake up one morning, they find that they do not have Euros any longer, but Greeks have Greek Euros, Germans have German Euros, etc., and they do not trade at parity.

Most of this would take place through bank deposits and savings, which would instantly shift.  Currency is far smaller and would be stamped (for paper bills) or struck (for coinage) by governments that have an interest in having more currency in circulation, but until the stamping or striking, a euro is a euro, and can be used anywhere.  In the short run, that would mean that some currency would leak to core Eurozone countries and away from the periphery.

The pro-rata shares of the ECB would be handed back to the national central banks, and the ECB dissolved.  The national central banks would then be capable of pursuing the interests of their own nations.  What a thought!

But what about existing long term contracts to pay Euros?  If to a nation in the Eurozone, it can be paid in either of the new Euros, that of the payor or the receiver.  If to a nation outside the Eurozone, they get the Euro of that particular nation.  What was a credit loss or gain becomes a currency loss or gain.

Many of the Eurozone nations would have to support their banks during such a crisis for solvency reasons, but their national central banks would once again have the freedom to do this.

Yes, this would be painful, and it would be a mess.  But it would be a “Big Bang” that sets the nations of the Eurozone free from their artificial shackles, and allows the nations in the Eurozone to liquefy, inflate, and reconcile all of the debts built up.  It would also send losses to nations that lent to the Euro-fringe.  After this is done, all of Europe would be in better shape economically, and Europe would be more, not less united, because they don’t have to argue over monetary policy.

Thoughts?  I welcome them. 🙂  I know I have omitted a lot; I also know this is impractical given the nature of EU/EZ treaties, but I toss it out to stimulate discussion.

Update: thanks to Steve Hamlin for pointing out my typo in paragraph 2 — see his comment below.

 

 

Imagine that you had a privileged position analyzing mortgage securities, only to see your world blow up as the prices of residential real estate began to fall across the US.  You have now been fired.  You’re young, with a beautiful wife, and your first baby on the way.  Now what do you do?

You take a job at a local Waffle House.  Waffle House is a quirky comfort food purveyor stretching across the South, and rural areas of the US.  Living outside Baltimore, the nearest one to me is 30 miles west.

The author goes through indoctrination, and since Waffle House restaurants are open 24/7, he gets the night shift, and has to deal with all of the kooks.

That makes the book all the more entertaining.  In my younger years, I ran the night shift for three years inside convenience stores in major cities.  I met my share of nuts during those times.  If you haven’t been there, serving those who are up during the night, you don’t understand that they are different, a little off, compared to those that are working when the sun shines.

The book alternates between the nuttiness of a bright guy serving nuts and the lower classes, and him explaining how the economy works.  An odd formula for a book, but he makes it work.

I recommend the book, and I write this as one who was skeptical of the book when the PR flack asked me if I wanted it.

Quibbles

The comment on page 238 that an insurance company is a hedge fund in drag is utterly wrong.  Hedge funds have short liability structures, and often go out of business because they lose money, and investors leave them.  Insurance companies have longer liability structures, and they survive many situations that would otherwise kill a hedge fund.

Who would benefit from this book: Most investors would benefit from this book.  It entertains, and distributes knowledge casually, as if one were taking bites out of waffles.  If you want to, you can buy it here: Waffle Street: The Confession and Rehabilitation of a Financier.

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he 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.

Bubbles are easy to spot.  Wait, don’t most people say that bubbles are impossible to spot?

I’ll say that again: bubbles are easy to spot.  Why?  People have the wrong theory on bubbles.  They listen to those that don’t understand the efficient markets hypothesis, and think, “Prices are always fair predictors of the future.  I don’t have to think about the future as a result.” (It would be better to say that current prices are the short-term neutral line against which bets are placed.)

Don’t listen to academics on bubbles.  There have been booms and busts as far back as we can see.  If markets tend toward equilibrium, that is very well hidden — please require economists to take courses in history.  I mean this; I am not joking.  Neoclassical economics is not  a science; it is a religion, and with much less historical evidence to support it than Christianity has to support the historicity of the resurrection.

Why do I write on this? Partly because of Jason Zweig’s piece in the WSJ.  I ordinarily like what Jason writes; this is a rare exception.

Spotting bubbles gets easier when you don’t simply look at rising prices.  It is better to look at what is driving the rising prices.  How are players financing the purchase of assets is more important to view than even price trends.

It is hard to get a bubble without having an increase in debt-finance.  Financing with debt is cheaper, and riskier than financing with equity.  Financing long-term assets with short-term debt is even cheaper and riskier than financing with debt that matches the term of the asset.  Most bubbles end with some sort of financing time-mismatch, where the inability to renew short-term indebtedness in order to hold the asset leads to a panic, which leads some to say, “This is a liquidity crisis, not a solvency crisis.”  When you hear that leaden phrase, ordinarily, it is a solvency crisis, with long-dated assets of uncertain worth, and near-term liabilities requiring cash.

This is why the simplest way of looking for bubbles is to look for where debt is increasing most rapidily, and where the terms and conditions of lending have deteriorated.

But where do we have these issues today?  Let me offer a few areas:

  • We have a chain of financing arrangements in the Eurozone where many banks might have a hard time surviving the failure of Greece, Italy, Portugal, and perhaps some other nations as well.  Failure of those banks might lead to bailouts by national governments and/or a significant recession.  Anytime financial firms as a group would have a hard time with the failure of a company, industry, government, etc., that is a sign of a lending bubble.
  • There is a major imbalance in the world.  China trades goods to the US in exchange for promises to pay later.  Creditor-debtor relationships are meant to be temporary, not permanent as far as governments are concerned.  There may never be a panic here, but so long as the US retains control of its own currency, it is safe to say that they will never get paid back in equivalent purchasing power terms as when they exported the goods.
  • China itself, though opaque, has a great deal of lending going on internally through its banks, pseudo-banks, and municipalities, a decent amount of which seems to be for dubious purpose at the behest of party members.  The government of China has always been able in the past to socialize those credit losses.  The question is whether covering those losses could be so large that the government follows an inflationary policy to eliminate the debts amid public discomfort.
  • AAA and near-AAA government debt has been the most rapidly growing class of debt of late.  Maybe AAA governments that are unwilling to cut spending or raise taxes are a bubble all their own.  Remember, when you are AAA, the rating agencies let you make tons of financial promises — think of MBIA, Ambac, FGIC, AIG, etc.  Only when its is dreadfully obvious do the rating agencies cut a AAA rating, but once they do, it is often followed by many more cuts as the leverage collapses.

Now, my view here is both qualitative and quantitative.  To find bubbles there are indicators to watch, such as:

  • Low credit spreads and equity volatility
  • Low TED spreads
  • High explicit/implicit leverage at the banks
  • High levels of short term lending/borrowing (asset/liability term mismatches)
  • Credit complexity and interconnectedness
  • Poor Credit Underwriting
  • Carry trades are common (many seek free money through seemingly riskless abritrages)
  • Accommodative monetary/credit policy

All manner of things showing that caution has been thrown to the winds and lending is done on an expedited/casual basis is a sign that a bubble may be present.  Kick the tires, look around, analyze the psychology to see if you can find a self-reinforcing cycle of debt  that is forcing the prices of a group of assets above where they would normally be priced without such favorable terms.

Not that this analysis is perfect, but it follows the broad outlines of Kindleberger and Chancellor.  Speculative manias are normal to capitalism; don’t be surprised that they show up.  Rather, be of sane mind, and learn to avoid participating in manias, long before they become panics or crashes.

This book grew on me. Think of it as “How I hit a home run in investing.”  Who are the sluggers that earned outsized returns?

But, there is a problem here, and the book would have been better if it had recognized the problem.  In a few cases, the “greatest” made one (or a few) good decisions.  In more cases, they made many good decisions that compounded over time.

Was the first group lucky? Maybe, but when things work out for the reasons that you specify in advance, I think not.  The problem of the first group is repeatability, which for John Paulson, is proving to be an issue for his asset management shop at present.

The investment markets are cruel.  No matter what you have done in the past, the question comes, “What have you done for me lately?” The pressure is high, so no wonder that one of the investors that the book mentioned has gone into hiding.

There are two more dimensions here.  Imagine an investor that made some amazing gains , but then craters.  There are some brilliant investors for which that has been true: Livermore, Niederhoffer, Keynes, and more… how much credit should we give to the gains, if the price is flameouts?

Second, imagine someone who is the best in class at a low-return area of the asset markets, like Jim Chanos in short-selling, or Bill Gross at Pimco.  They may not earn that much, but the skill level is really high.  But is the skill level so high when they chose areas of the market to work in that are low -return?

Maybe the book should have featured private equity players, or real estate investors, or those that have managed university endowments well… there are other investors that would be comparable or better to the returns of some in this book.

Or ask, where is Buffett?  He would deserve a spot here, not for any one trade, but for the multitude of clever trades and mergers he has done over the years.

Quibbles

The book needed a better editor.  Information on Templeton is repeated.  Beyond that, most of the ideas on how an average investor could try to replicate the strategies of the great investors are akin to drinking near-beer.  They are too weak, but on the other hand, without the brilliance of the investors, an average person would not know when to but and sell.

With those caveats, I recommend the book highly.  It is well-written, and it will fill out knowledge gaps in amateur investors.

Who would benefit from this book: Most investors would benefit from this book.  If you want to, you can buy it here: The Greatest Trades of All Time: Top Traders Making Big Profits from the Crash of 1929 to Today (Wiley Trading).

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he 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.

This is a book that is bullish on China; it does not visit any of the arguments of the bears.

That said, there are many reasons to commend the book:

  • It accurately describes China’s foreign policy including its interactions with the developing world, which are often far more logical and consistent than US policy.
  • It is fair in its rendering that China may have been a factor in the credit bubble, but was not the primary instigator.
  • It describes how China has grown to interact with global organization on its own terms.
  • It describes the history China/US relations fairly, including the rough spots where China and the US don’t see eye-to-eye, and sometimes play dirty.

Places where I think the book misses

It will be difficult to displace the US Dollar as the global reserve currency.  So long as export-driven nations sell goods on net to the US, and want to keep their currencies artificially cheap, they will have to buy US dollar-denominated assets in order to make that happen.

Pretend currencies like Strategic Drawing Rights are a nonsolution.  It has no active market, and reflects a view that one can have a single monetary policy for the world.  If a single monetary policy for the Eurozone does not work, how much less the world as a whole?

Beyond that, though China is a leading nation economically in Asia, Asian nations are more diffident to follow China’s lead politically.  Outside of Asia, China’s diplomatic moves have been received more favorably, say, in Latin America and Africa.  Asian nations have a long history with China, and realize that its size and power needs a counterweight like the US.  I agree with the author that the US lost a lot of credibility diplomatically after 9/11, given the way that we responded, but the US still has a lot of favor among Asian nations in a way that China can’t replace.

Finally the book fails to develop the details of China’s economic/financial system, and as such, falls into the hole that China bulls often do, neglecting the huge buildup of bad debt inside the major Chinese banks.

Yes, China has set up asset management companies to relieve the banks of bad debts, and transfer the losses to the MOF.  The question remains how long can this go on?  Probably a long time, because China discriminates against average consumers for the good of the Party, and the banks that aid the Party’s efforts.

Though on net I recommend this book, you would also benefit from Red Capitalism, and Uprising: Will Emerging Markets Shape or Shake the World Economy.

Quibbles

Date error on P. 38 should have been 1999, not 1990.

Who would benefit from this book: If you want to understand the Chinese economy, you will like this book.  If you want to, you can buy it here: China and the Credit Crisis: The Emergence of a New World Order.

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he 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.