- Discussions about the global financial crisis have slowed dramatically the last few years, but there are three new books from highly qualified authors with the potential to affect public perception on the primary causes of the Global Financial Crisis.
Of course, the best selling book about the crisis is Michael Lewis' The Big Short and the movie will premier December 11th. The film's trailer already has millions of views.
- Ben Bernanke's The Courage to Act: A Memoir of a Crisis and its Aftermath (10/5/2015)
- Greg Ip's Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe (10/13/2015)
- Roger Lowenstein's America's Bank: The Epic Struggle to Create the Federal Reserve (10/20/2015)
- The third quarter of 2015 was rough for many investors with US funds averaging losses of roughly -8%, international funds -10%, and emerging markets -16%. Balanced funds were off about -5%, while taxable bond funds were off about -2% on average.
- The Robo-Advisor industry continues to be a hot topic. I was asked to present at the Los Angeles Chapter of the American Association of Individual Investors. My presentation last month (which is already partially out of date due to recent developments) can be viewed here. I am scheduled to present next at the CFA Society of Los Angeles on August 5th focusing more on the wealth management industry perspective. Vanguard and Schwab's respective Robo-Advisor offerings continue to attract assets and more firms are entering the space (the Robo-Advisor Scorecard and Extended List reflects those updates).
- The second quarter (see links on the Benchmarks page) was a generally flat to slightly negative quarter for most investors. US and international stocks averaged about +1% for the quarter, but interest rate sensitive investments tended to have negative returns with real estate funds in particular down significantly, while taxable bond funds were down -1% and balanced funds also had slight losses for the quarter on average.
- Jason Zweig's "Intelligent Investor" column in the Wall Street Journal this weekend is titled Less Is More: What Small Investors Can Learn From a Pension Giant. Zweig quotes me in the article regarding Calpers decision to dramatically reduce the number of external managers they contract with. I had previously commented on the topic (and I cite numerous others) in my commentary titled Odds and Probabilities, which I still hope to expand on some day.
- One of the hottest topics in the investment business recently has been so-called "Robo-Advisors." Wikipedia describes Robo-advisors as "a class of financial adviser that provides portfolio management online with minimal human intervention." Comparing the various firms is somewhat like comparing apples, oranges, bananas, and perhaps some other fruits and I was somewhat annoyed seeing virtually every commentary list different firms, so I started building a master list of firms that are competing in the robo-advisor space. Wealthfront and Betterment are often mentioned, but the original Robo-Advisor is Financial Engines, which has a huge business via employer-sponsored defined contribution plans (a target market for some of the newer firms). Guided Choice and Promanage are other prominent firms with niches arguably competing in the space. I built this Robo-Advisor Scorecard & Extended List to get all of the firms I've seen mentioned in one list and get some perspective based on the publicly disclosed discretionary assets under management. By my count there are forty something firms to be aware of (acknowledging they are not comparable in many ways - some are software providers, some are brokers, some include human more interaction, while others have none).
- 1Q2015 was another positive quarter for most investors. US Stock funds averaged roughly 2 1/2% for the quarter, but international stocks generally did even better averaging 4% (although emerging market stock funds were generally up 1-2%). Real estate funds were strong again returning north of 4%. Balanced funds average about 2%, while taxable bond funds generally returned a little over 1%.
- 2015 is off to a rough start for stock investors, but 4Q2015 was another good quarter for most investors. Balanced funds generally returned 1-2% for the quarter and 5-6% for the year (depending on whether you refer to Morningstar or Lipper/WSJ metrics - links are updated on the Benchmarks page) and taxable bond funds generally had modestly positive returns for the year. US stock funds returned roughly 5% for the quarter and 8% for the year (despite investors withdrawing more than $50 billion from US stock funds), while the S&P 500 was even stronger and completed a triple double (>10% returns for the third straight year). International stock funds were popular with investors (taking in over $86 billion from investors), yet they had negative returns (down slightly for both the quarter and the year). This is another example of poor timing by investors, which I plan to be write about extensively this year. We have decades of research demonstrating the remarkably consistent pattern of investors buying high and selling low and making moves that are against their best interest (recently popular "gap" metrics documenting the difference between dollar weighted and time weighted fund returns is part of the story).
- Cornell Professor Assaf Razin kicks of 2015 as the 56th participant in the Global Financial Crisis Survey. Professor Razin is a prolific author and recently published Understanding Global Crises: An Emerging Paradigm. See also Theories of financial crises and Does creditor protection mitigate the likelihood of financial crises and their effect on the stock market? at Voxeu.
- 2014 wrapped up with the S&P 500 returning over 13%, making it three years in a row with double digit returns.
- Nicholas Ryder is the 55th participant in the Global Financial Crisis Survey. Professor Ryder is an expert in financial crime and published The Financial Crisis and White Collar Crime: The Perfect Storm? in July. Ryder writes that multiple factors "provided an economic and financial setting that was exploited by white collar criminals" (see Ryder's summary here). The initial survey sample of 22 participants was posted on 11/11/2011 and the second sample of 22 participants was posted on 8/27/2013. Another 11 crisis commentators (or half a third sample) have formally weighed in since then.
- James Galbraith is the 54th participant in the Global Financial Crisis Survey. Professor Galbraith is the author of the recently released book The End of Normal: The Great Crisis and the Future of Growth. Galbraith describes the crisis as "the cumulation of a sequence of historical events, of changing circumstances and deepening difficulties." He sees positives and negatves in three FCIC reports and has an interesting take on the government versus financial sector fault narratives. You can read Galbraith's take on the crisis here.
- The newest crisis author to participate in the Global Financial Crisis Survey is Gabriel Investments managing partner Richard Vague. Vague is the author of the recently released book The Next Economic Disaster: Why It's Coming and How to Avoid It. Vague co-founded and subsequently sold multiple firms including First USA (the largest Visa issuer in the industry, which was sold to Bank One in 1997). Vague believes private debt (business plus consumer debt, including mortgages) and high overall levels of private debt (marked by what he describes as "runaway lending") is the main reason for financial crises in major economies (numerous researchers in recent years have come to similar conclusions). Vagues survey response can be viewed here.
- The Benchmarks page has been updated with links to Morningstar and WSJ/Lipper 3Q14 fund returns data. 3Q2014 was a generally down quarter for most investors. Bond funds tended to have slightly negative returns and stock funds had losses averaging roughly 2%, while balanced funds tended to have slightly lower losses. Real estate, international stock and emerging market funds tended to have larger losses. Investors and academics that study stock market anomalies can note that for the 10 year period, large cap growth funds slightly outperformed small cap value funds. Value and size are the two most commonly discussed "risk factors" and many have attempted to increase returns by outweighing those factors. That could indicate it's a good time to consider those factors, or it could indicate the factors have lost or could be losing their effectiveness due to their popularity. Of course there are always new factors being discussed (for instance see Fama and French's recent paper A Five-Factor Asset Pricing Model).
- Six years ago today (9/7/2008) the US Government placed Fannie Mae and Fredie Mac under conservatorship marking one of the critical events of what would become known as the Global Financial Crisis (with Lehman Brothers bankruptcy following a week later). Hundreds of books have significant discussions of the crisis, and Timothy Geithner's recently released book Stress Test has the potential to become one of the primary crisis reviews due to Geithner's central role. Many prominent crisis commentators reviewed or discussed Geithner's book shortly after its release in May. Now that I've had a chance to read the book in its entirety, I've added some excerpts to several of my crisis related pages. I've posted a page of my comments with excerpts and links to reviews and other relevant media (including some of Geithner's interviews) in my Stress Test Book Review.
- In yesterday's (9/6/2014) Wall Street Journal article titled Read ‘Em and Reap: Smart People for Investors to Follow, Jason Zweig encourages "investors to socialize 'only with investors who are calm and methodical.' Here’s a small selection of websites, blogs and Twitter feeds that I think pass that test." Zweig's list includes, among others Berkshire Hathaway shareholder letters, William Bernstein's Efficient Frontier, Memos from Howard Marks, and a less well known web site called Investor Home.
- The Benchmarks page has been updated with links to Morningstar and WSJ/Lipper 2Q14 fund returns data. 2Q2014 was another good quarter for most investors. US Stock funds as well as balanced funds averaged roughly 3 1/2% for the quarter. International stocks were modestly stronger than US stocks and emerging markets were even stronger posting gains of over 6%. Real Estate and Utilities were particularly strong with returns of roughly 7 & 8% respectively, while equity precious metal funds returned over 13%.
- Timothy Geithner's Book Stress Test is officially a NYTimes best seller, and although I'm not aware of a most criticised crisis book list, if there was one, Stress Test would likely be making a run for the title. Before it was even released, it was drawing critical comments (for instance, see Jennifer Taub's column). Since it's release some of the other crisis commentators that have weighed in on Stress Test include William Black, Robert Reich (who calls Geithner "delusional"), Sheila Bair (who recommends the book, but not for the usual reasons), Michael Lewis, Joe Nocera, and Dean Baker. Geithner's column in the WSJ was titled The Paradox of Financial Crises and the book was reviewed by the WSJ and NYTimes, plus Geithner also appeared on the Daily Show for an interesting interview. I haven't read it yet, but plan to.
- With yesterday's release of Timothy Geithner's Book Stress Test another round of commentary about the crisis is underway. By my count, there have been more than 350 books with substantive crisis related discussions. I've created a new page at GFCResearch.com to serve as a central portal for my aggregation of crisis research. Coincidentally, one of today's NYTimes "Stress Test" articles notes "an impromptu contest for the best metaphor for what was happening." I've also posted a new crisis related collection of analogies, metaphors, and vocabulary.
- The Benchmarks page has been updated with links to Morningstar and WSJ/Lipper 1Q14 fund returns data. 1Q2014 was a modestly favorable quarter for most investors. US and international stocks tended to be roughly flat, while REITs and bonds generally earned positive returns thanks largely to interest rates dropping after spiking toward the end of 2013. Over the last 10 years A) US Stocks B) International Stocks C) Real Estate D) Junk Bonds, and E) Emerging Bonds have all had fund returns just above 7%. While emerging markets stocks have lagged over the last 3 years, they outperformed all the other major asset classes over the last ten years with returns over 9%.
- Dean Starkman, author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism, discussed financial crisis cause narratives and Investor Home's Crisis Survey in an article in The New Republic titled No, Americans Are Not All To Blame for the Financial Crisis. Regarding the "Everyone-is-to-blame" crisis narrative, Starkman hasn't officially weighed in on the survey (he writes in the article "I haven’t voted yet"), but Starkman clearly favors the narrative that Wall Street is to blame for the crisis. His article also includes interesting commentary on multiple crisis topics, including crisis loses due to fraud (relative to all mortgage losses) and the large percentage of subprime loans taken by prime-eligible borrowers.
- There was somewhat of a slowdown in the pace of commentary and books about the Global Financial Crisis, but the debates about crisis causes and who is to blame continue and there are some notable books forthcoming. With Timothy Geithner's book (and several others) pending (my tweet about three of them due in May was a popular retweet), we now have indications that Ben Bernanke plans to write a book which has led to BernankeBookTitles suggestions at Twitter.
- After several years of hard work searching for more Crisis Experts Survey participants, last year I was thinking about wrapping up when I got to 44 (the original group was 22). But then commentators started contacting me, so I've continued to periodically prospect for more. I've been searching for the elusive 50th survey participant for several months (and have been in contact with some very prominent individuals about potentially weighing in) and this week not 1, not 2, but 3 crisis book authors weigh-in, bringing the sample to 52. The sample is diverse by region & profession, but still lacks enough female participation. The latest experts to weigh in continue to add to that diversity, but we still don't seem to be getting much consensus (although the recent participants have been leaning toward finding more fault with Wall Street).
- Nomi Prins is uniquely qualified to comment on the crisis having worked as a Managing Director at Goldman Sachs and Bear Stearns (as well as experience at Lehman Brothers and Chase Manhattan Bank). She published It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street in September of 2009 and her latest book All the Presidents' Bankers: The Hidden Alliances that Drive American Power will be out April 8, 2014.
- Matthew Watson is a Professor of Political Economy at the University of Warwick, UK and recently published Uneconomic Economics and the Crisis of the Model World.
- Larry Allen is a Professor of Economics at Lamar University in Texas. He is the author of The Global Economic Crisis: A Chronology (2013) The Encyclopedia of Money (1999, 2009), and Global Financial System 1750-2000 (2004).
- The Benchmarks page has been updated with Morningstar and WSJ/Lipper returns data. 4Q was another good quarter for most investors, although strong returns were focused in the US stocks, which returned roughly 9% (32% for 2013). International stocks returned roughly 6% (18%), while emerging markets returns about 2.5% (flat) and real estate funds were generally flat (up 1.5%). Balanced funds returned roughly 5% in 4Q and 14% in 2013. Taxable bond funds generally had positive returns for the quarter, but losses for the year. Bank/variable loan and high yield bond funds were generally the strongest performers in fixed income with returns around 2-3% in 4Q and 6-7% for the year. The Great Rotation debate looks to be back in play given that record amounts were invested in US equity mutual funds and ETFs in 2013, while record amounts were withdrawn from US bond funds.
- The Nobel Prize in Economics was awarded earlier this week to Eugene Fama, Lars Peter Hansen, and Robert Shiller (Press Release - Trendspotting in asset markets. As Mark Gertler commented in the WSJ "They've all been on the short list for many years...The interesting thing is how the three are connected." Brenda Cronin calls it Not as Shocking as Some Think and is one of several that notes Shiller called The Efficient Market Hypothesis one of ‘the most remarkable errors in the history of economic thought.’ I have a linked discussion of Efficient Market Hypothesis discussing Fama, Shiller, and others, where I link to an article in which Shiller writes "The Efficient Market Hypothesis is one of the most egregious errors in the history of economic thought...It's a half-truth." (My tweet of the quote was a popular favorite and retweet.) Ironically, the Nobel committee seems to have adjusted (not really) Shiller's "half" comment to "a third" in awarding both of them the award (along with Hansen). A few other interesting commentaries on the award I've seen include these from Michael Casey who calls them The Oddest of Bedfellows, Roger Lowenstein who writes the Nobel Needs Grounding in Reality-Based Economics, and Elisabeth Kashner who writes about Fama & Shiller: The Great Democratizers. Of course, Shiller is also one of the primary examples of people that DID see a crisis coming (as well as a dot.com bust). And of course, people, academics, and even politicians, should be able to have a difference of opinion and debate facts in a respectable and peaceful manner, which is clearly an objective of the Nobel committee. And despite Shiller's critique of EMH, he states in this Washington Post commentary that "Fama has done a lot of important things. I’m pleased to be united with both [Fama and Hansen]. I am an admirer of both of them, and it is an honor to be associated with them in this way."
- 3Q13 was generally a good quarter for investors (updated Benchmarks page), although volatility in interest rates did lead to some losses in some asset classes. US equity funds returned an average of nearly 8%, which was a few % above the S&P 500 (small cap growth funds did particularly well). International Stock funds were up slightly more, but emerging stock funds were up less (about 5%). Balanced funds were generally up more than 4% and taxable bond funds were up just under 1% for the quarter. US Real Estate funds were down 2%, but global real estate funds were up.
Two individuals have been added to the discussion of Who Predicted The Global Financial Crisis? and they are also the latest two weigh-in on the Crisis Survey.
See Thornberg's take and Colombo's view on the Global Financial Crisis and the latest survey results here (now up to 49 participants).
- Christopher Thornberg is the Founding Partner of Beacon Economics and has been credited with warning in advance of the housing crash by the LATimes and other sources. Those who have read Michael Lewis' The Big Short might find it interesting that Thornberg has served on the advisory board of Wall Street hedge fund Paulson & Co. since 2006. Andrew Lahde was also a student of Thornberg's and Thornberg invested with Lahde.
- Jesse Colombo has been credited by the Financial Times and others for predicting the housing crash, and stock-market-crash. He is a Forbes contributor and his primary web site is TheBubbleBubble.com
- The five year anniversary of the Lehman bankruptcy and the critical weekend of the Global Financial Crisis brought some renewed interest in the Crisis Books List and the Global Financial Crisis Expert Survey, thanks in part to some favorable comments and links (like this Bloomberg.com article from survey participant Yalman Onaran). Not one, but two more recent crisis book authors are the latest to weigh in on the crisis survey. Jeremy Hammond of Foreign Policy Journal is the author Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis. Princeton Professor Nolan McCarty is a co-author of Political Bubbles: Financial Crises and the Failure of American Democracy. See Hammond's take and McCarty's view and the latest survey results here (now up to 47 participants).
- While the flow of books discusssing he financial crisis has slowed in the last few years, it hasn't stopped. In fact some of biggest players (like Timothy Geithner) and well known commentators (like Jeremy Siegel) have books with crisis discussions scheduled for release in 2014. Also expected in early 2014 is In Bed with Wall Street: The Conspiracy Crippling Our Global Economy from mortgage industry veteran Larry Doyle. Doyle is the latest to weigh in on the Global Financial Crisis Expert Survey. See Larry Doyle's take on the GFC.
- Many financial media sources are running articles and features this week to mark the 5 year anniversary of the critical events of the Global Financial Crisis.
- The Wall Street Journal has A Crisis That Reshaped the U.S. Economy, The Cast of Crisis, The Events That Shook the American Financial System, This Day in Crisis History (9/3- ), What a Financial Crisis Looks Like, Lessons of the Rescue, A Drama in Five Acts, Financial Crisis Quiz, plus interviews with Henry Paulson (see also below) and John Thain.
- The Economist asks Where’s the next Lehman? "Is global finance safer? And are more crises on the horizon?... The quick answers are yes, and yes...The disaster of September 2008 had many causes...The underlying one was a surge in debt, particularly in the financial sector, brought on by a housing bubble. The ensuing bust was made more dangerous because of the second weakness: the complex interconnections of securitised finance meant that no one understood what assets were worth or who owed what. Lehman’s failure added a third devastating dimension: confusion about whether governments could, or would, step in as finance failed." They also offer their Crash course on the origins of the financial crisis - "With half a decade’s hindsight, it is clear the crisis had multiple causes. The most obvious is the financiers themselves...Central bankers and other regulators also bear blame... A “savings glut” in Asia pushed down global interest rates. Some research also implicates European banks... All these factors came together to foster a surge of debt."
- USA Today asks Could it happen again? and interviews Sheila Bair
- Fortune asks Are we ready for the next meltdown? After the fall
- Henry Paulson is releasing an updated version of his book FIVE YEARS LATER: On the Brink with a new prologue. There is also a new 85 minute film coming 9/16/2013 (available on Netflix) titled HANK: Five Years from the Brink.
- FCIC Chair Phil Angelides is posting his 5 Must Dos this week.
- Adair Turner writes in The Failure of Free-Market Finance that "Five years after the collapse of the US investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt... If we do not address the fundamental fact that free financial markets can generate harmful levels of private-sector leverage, we will not have learned the most important lesson of the 2008 crisis."
- One of the reasons I haven't had many comments recently was because the kids were on summer vacation and we decided to take a major road trip. I'm a sucker for exotic beaches and ski resorts, but I have to say our road trip this summer was probably our best vacation to date. If you've never been to Yellowstone National Park, I highly recommend you add it to your to do list. This was my third (and best) visit and one of my intentions was to get completely away from the finance world, yet ironically we ended up getting close-up to real bulls and bears. I posted details, pictures, and videos for anyone interested at 1 Day in Yellowstone, including my son's video of a bull elk walk by.
- Earlier this month Jay W. Richards released Infiltrated (on the topic of exploitation following the financial crisis), which quickly became a bestseller (#4 at NYTimes). Richards is the 44th crisis expert to weigh in on the Global Financial Crisis Expert Survey. See Richard's take on the GFC.
- In Nov 2011, I released the initial survey of 22 crisis experts regarding the causes and prescriptions for the Global Financial Crisis. Today's 44th entry completes a second sample of crisis experts. While many of the high level results are very similar for the two samples (which implies the results are relatively robust), there are some changes of note which may imply some shifting of opinions regarding the crisis. Specifically, a larger percentage of the participants in the second sample (a majority in fact) prefer the narrative ("Everyone" was at fault: Wall Street, the government, and our wider society). In the first sample the narrative that Wall Street was responsible came in second, followed by the narrative that the government was responsible. In the second sample, the narrative that Wall Street was responsible came in a distant fourth (behind "Everyone", Government, and None of the narratives), which may offer some anecdotal evidence that as time has passed, fewer crisis commentators are concluding that Wall Street was responsible for the crisis and more are concluding that the Government and wider society played major roles (along with Wall Street). More details on the Survey Summary page.
- Coincidentally, Andrew Ross Sorkin writes in the NYTimes (Five Years After TARP, Misgivings on Bonuses), that former Treasury Secretary Henry Paulson told him "I believe that the root cause of every financial crisis, the root cause, is flawed government policies." Paulson is the author of On the Brink, which is being reissued this week (FIVE YEARS LATER: On the Brink -- THE NEW PROLOGUE: A Look Back Five Years Later on What Happened, Why it Did, and Could it Happen Again?) to coincide with the crisis anniversary.
- The second quarter of 2013 was an eventful one and most likely to be remembered for the so-called "taper tantrum" which coincided with a spike in interest rates and record outflows from bond funds in June. While the proponents of Sell (stocks) in May strategy generally haven't benefited from exiting equities, those that have been underweight long-term bonds were not surprised by falling bond values. While my prior discussions (3/13/2012 & 1/8/2013) of the many individuals that were warning about risks in bonds were arguably early, the general consensus now seems to be that interest rates bottomed. Certain categories of bonds that are considered by some to be among the safest investments (like long term treasury bonds and inflation protected bonds) suffered substantial losses in 2Q and many are questioning their prospects going forward, especially if interest rates continue to trend higher. Among the primary questions for investors (both during the quarter and going forward) remains whether to under or overweight bonds. Those that have turned to some yield focused asset classes (like REITs, High-Yield Bonds, and MLPs) have likely been exposed to perhaps more volatility than they might have expected.
- Morningstar and Lipper 2Q13 numbers had taxable bond funds losing roughly -2.5%, while TIPS funds lost -6.6%. Balanced funds (which hold stocks and bonds) had smaller losses averaging less than -1%. Domestic stock funds averaged +2.3%, while the broad indexes were closer to +3%. However, international stock funds lost -2.2% and emerging market stock funds were off -7.5% on average, while among the hardest hit were equity precious metals funds losing roughly -35%.
- The market proceeded to sell-off today, as might be expected by supporters of the "Sell in May" theory. I discussed the theory last year here. The articles (that I noticed) on the topic actually started in April. Examples include
- Don’t Sell in May, Says Raymond James Strategist (AO 4/29/2013)
- How to play going away in May (MW 4/26/2013)
- Should investors sell in May and go away? (USAT 4/16/2013)
- Busting the Sell in May and Go Away Myth (Ferri 4/8/2013)
- Adam Johnson on "Street Smart" (Bloomberg 4/5/2013)
- Why it pays to sell in May (Hulbert 4/5/2013)
- Sell in May? No Way! (AO 4/1/2013)
- There have been a number of books written about Occupy Wall Street (as well as films about OWS). I haven't read any of the recent ones (three recent OWS books are reviewed here in the Financial Times), but I have recently read and can recommend The Occupy Handbook. Edited by Janet Byrne, the book is a large collection of writings from over 60 contributors, including numerous best-selling writers and individuals that warned in advance of the crisis. While OWS sympathizers will find plenty of material describing the movement and various positions held by OWS supporters, there are also commentaries from critics of the movement. I found the book particularly interesting because it is rich in opinions about causes of the crisis, plus some prescriptions for fixing the remaining problems. My review of The Occupy Handbook with extensive excerpts is here.
- There have now been more than 300 books with substantive discussions of the Global Financial Crisis, including over 30 "best sellers." While the quantity of books released in the last year has slowed dramatically from the pace of prior years, the quality has been at a very high level recently. The latest to weigh in is Washington Post Columnist Neil Irwin, with The Alchemists: Three Central Bankers and a World on Fire. You can read an adapted excerpt here.
- 1Q2013 was a strong quarter for most investors, particularly those with large allocations to US stocks. Per Morningstar the S&P 500 returned over 10% and domestic stock fund returns averaged over 12% (Small Cap Value funds over 14%). International stock returns were also generally positive although not as strong, with intl funds up about 5%, and emerging market funds up less than 1% on average. Bond investors tended to be slightly positive, with high yield funds returning almost 3%, but TIPs and international bond funds generally showing modest losses.
- There have been some interesting articles this week discussing real estate prices and changes in home rental prices in some regions (for instance, see John Gittelsohn's latest at Bloomberg). Some believe that institutional investors that have bought homes to rent them may have added too much rental supply in some cities (see comments at NakedCapitalism and ZeroHedge). There are also legitimate concerns that short-term oriented investors in the new asset class may try to exit at the same time in large numbers, thus contributing to falling prices. Yet, the number of participants and the long-term commitment to the space seems to be growing. Two pure plays (SBY and RESI) came public in December, two publicly traded private equity firms (BX and CLNY) are major players, JPMorgan has clients invested in the strategy, and several others major players are racing toward IPOs. Over a year ago Warren Buffett said "I'd Buy Up 'A Couple Hundred Thousand' Single-Family Homes If I Could." At least one of the firms (BX) has reached 10% of that number and I wouldn't be surprised if the major players get closer to Buffett's range in the next few years. I suspect those that have writen off the buy to rent movement might be underestimating both the demand for the new asset class among institutions and retail investors, as well as the interest of these firms in creating long-term revenue streams from managing the properties and investment vehicles. More details at the updated Buying Homes to Rent page.
- There is a very worthwhile debate about defining investing and speculating that started last week via the CFA web site and the Wall Street Journal. Participants in the debate include Robert Hagstrom, Howard Marks, Martin Fridson, and Jason Zweig. I previously commented extensively on this topic in 1999 and 2010 and I respectfully submit my definitions with elaboration in this discussion (with links) Are you an investor, speculator, or investulator? Fridson's argument (which is very problematic for most of the people in the so-called "investment" industry) has, as far as we know, remained unchallenged and I believe that is because he is correct. I follow-up on Fridson's conclusion that any movement away from a market index (which he calls "subdiversification") is speculative, but my definition of investing includes a requirement that there be both a theory, as well as empirical evidence that the activity generates positive risk-adjusted returns over the long run for all the participants in aggregate. Some believe that investing is long-term while speculating is short-term. I don't believe length of time in a position is a required component of investing, although in general it is correlated.
- There is a new asset class that is getting attention both in the press and among institutional investors. As of December, individual investors also have the opportunity to invest in REITs that buy single family homes and rent them out, passing the income to shareholders (although that is in theory at the moment). SBY and RESI started trading publicly in December and several others have announced plans to go public including a division launched by Public Storage founder and Billionaire Wayne Hughes. I've created a new page listing more than a dozen significant players publicly mentioned as active in this new field, statements about expected returns, as well as quotes and links to articles in the popular financial press. See my new page on Investing in Rental Homes.
- Regarding the Great Rotation discussion below, the recent fund flow data coming in doesn't support the theory that investors are moving from bonds to stocks (currently). Both equity and bond funds have had inflows, although the big January equity inflows generally came from cash rather than bonds (see Investmentnews article).
- I've written extensively about those that publicly warned in advance of the Global Financial Crisis. Some like Nye Lavalle went public in attempts to warn about problems in the mortgage markets, but others also tried to warn about mortgage and debt problems, yet couldn't get much reaction. Last week on PBS, Frontline aired their latest crisis documentary The Untouchables. You can watch it at the web site, which also has an article about pre-crisis warnings. See Blowing the Whistle by Azmat Khan, where you can read about Richard Bowen and his email warnings to the Citigroup Board. Due diligence underwriter and supervisor Tom Leonard (RIP 2012) wrote letters and emails to television and network journalists, but no one contacted him and Due diligence contract underwriter Eileen Loiacono was eventually interviewed by the House Judiciary Committee.
- Another interesting article on the Frontline website is Were Bankers Jailed In Past Financial Crises? While the latest PBS documentary focuses on the lack of executive prosecutions, AdvisorOne (and others) have summarized the SEC’s Biggest Penalties Since Financial Crisis and points out the agency has charged more than 150 firms and individuals, and returned $2.6 billion to investors. In December Former IndyMac execs told to pay FDIC $169 million, and William Black asked Why Did Obama and Cameron Save a Criminal Enterprise Like HSBC?", and previously The SEC Lost A (Primary Reserve) Market Crisis Case. The Wall Street Journal also summarized prosecutions, settlements, and penalties to date and notes A civil trial against former Goldman Sachs employee Fabrice Tourre, related to the Abacus case, is set to begin in July. The Justice Department won its first financial crisis-era criminal prosecution against Wall Street in February, when two former Credit Suisse employees pleaded guilty to charges of conspiracy for inflating mortgage bond values in 2007 and 2008.
- On another crisis topic, Andrew Haldane rhetorically asks Have we solved 'too big to fail'? (1/17/2013) and answers "No." Previously, in The Dog and the Frisbee, Haldane wrote "no regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight." William Isaac and Cornelius Hurley discussed how to solve the ‘too big to fail’ problem (1/17/2012) in the FT, while Richard Fisher of the Dallas Fed offered his Proposal for Ending ‘Too Big to Fail'. Roger Lowenstein argues in Geithner’s Bailouts Didn’t Create Our Mess (1/21/2013) "the important post-crisis work that remains isn’t to fret over too big to fail; it is minimizing the likelihood and severity of a future panic.
- Several crisis debates continue to play out in public (i.e, whether Wall Street or Government Policy were primary culprits in causing the crisis). For instance, Dick Kovacevich says Blame Fannie and Freddie for Mortgage Crisis and Ed Pinto has been warning about problems at FHA, while Jesse Eisinger calls that The Latest Myth About the Government’s Mishandling of the Housing Market. Matt Taibbi also weighed in with Secrets and Lies of the Bailout (1/4/2013).
- The big investing topic of the last week seems to have been the theory of a "great rotation" out of bonds and into stocks. I've collected quotes about risks in long-term bonds (and I continue to see articles on that topic, for instance see Fortune's The ticking time bomb in bond funds and Rising Bond Yields. This Is Just the Start at CNBC), but the great rotation argument goes beyond money moving out of long-term bonds, to money flowing into equities. The current focus follows large recent inflows into equity funds which followed outflows in recent years. BofA Strategist Michael Hartnett looks to have coined the phrase "great rotation" from bonds to equities in this 1/11/2011 commentary. I asked Hartnett about the derivation and he points to the graphic on page 5 showing the DJIA and Treasury Bond yields (which dropped from 14% in the early 80s to historic lows last year). Hartnett writes that the beginning of every great bull market in equities (after the first world war in the 1920s, the second world war in the late-1940s, and during the war against inflation in the early-1980s) coincided with a major inflection point in the trend of long-term bond yields. He also highlights the flow of funds into bonds and out of equities from 2007 to 2012 (see for instance fund flows graphic via JPMorgan's end of year guide to markets or a similar graphic via Fidelity). I've seen the topic prominently discussed at CNBC, Bloomberg, WSJ and FT (both of the latter articles note that "we’ve seen this type of flow into equities before in January” the "last four years ... only to see that trend reverse"). This economist article concludes "mini-rotation is more likely." So the big question is whether the jump in equity flows was again a January event, or the beginning of sustained flows into equities (and potentially out of bonds).
- In March of 2012 I noted that some very prominent people were warning about the risk/return tradeoff in long-term bonds. Stocks jumped on the first trading day of 2013 and junk bonds have hit new highs, but I've again noticed a lot of commentary about risks in long-term bonds in the popular financial media like the WSJ and CNBC, among others. I've added to my collection of commentary and warnings about risks in long-term bonds here.
- 4Q was a generally positive quarter for investors and 2013 was another good year for many asset classes. The benchmarks and performance evaluation page has been updated with new links. Balanced funds were up just over 1% in 4Q and almost 12% for the year. US stocks were generally flat in 4Q, but up mid teens for the year, while international stocks rose about 5% in 4Q and about 18% for the year (emerging markets were slightly stronger for both periods). REITs returned roughly 2 & 20 (in 4Q and 2013) and outperformed the S&P for the fourth straight year. But Hedge Funds, which often charge 2 & 20 (actually more like 1.8 and 18.6), lagged for the fourth straight year.
- The latest Global Financial Crisis Expert to weigh-in on the Crisis Survey is Ludwig Chincarini, author of the recently released The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal. Chincarini has an interesting take on the current state of the crisis and in his survey response he notes that "it is hard to decipher what was due to the crisis, what was due to policy action, and what was due to a realignment to a normal state of growth."
As 2012 came to a close and 2013 kicked off with a stock market run, there has been an increase in chatter about the possible end of the "crisis." For instance, (via Fortune) Lloyd Blankfein commented last month "I think we're where we were in 1944 ... The war isn't over yet, but pretty much everyone sees the end soon." The vast majority of crisis commentators I've surveyed over the last year or so considered the crisis to be ongoing and expected it to continue into at least 2013. Some believe the crisis triggered by the collapse of the housing prices and subprime losses ended around 2009/2010 (and wikipedia has a page about the Financial Crisis of 2007-2008). Yet its common to consider Euro crisis and the current low growth environment to be at least related to the Global Financial Crisis (and wikipedia also has a page about the causes of the crisis titled Causes of the 2007–2012 global financial crisis).
Since the crisis began, there have been hundreds of books with substantial commentary on the crisis, scores of academic articles, and dozens of films and documentaries. The peak for crisis commentary appears to have been in 2010, when more than 100 books were published (up from over 80 in 2009 and about 25 in 2008), but the pace has slowed considerably since then. There were around 45 in 2011, and about 25 that I'm aware from 2012. Yet, we still don't have consensus on the primary causes and which elements of the crisis which had they not occurred, the crisis would have been avoided.
While the number of books and articles are continuing to drop, there are still more coming, with many prominent public figures and academics scheduled to weigh in this year. Forthcoming books discussing the crisis include
- 1/24/2013 After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead from Alan Blinder
- 2/24/2013 The Federal Reserve and the Financial Crisis from Ben Bernanke
- 2/24/2013 The Bankers' New Clothes: What's Wrong with Banking and What to Do about It from Anat Admati and Martin Hellwig
- 7/12/2013 5th edition of Stocks for the Long Run from Jeremy Siegel (in this interview Siegel writes that the first 3 or 4 chapters of the new edition are devoted to looking at what caused the crisis and what the outcome of the crisis is going to be.)
- Those interested in the bullish stock market case may find Jeremy Siegel's 1 hour CFA video and presentation of interest.
- The "Global Financial Crisis" debate of the week revolves around the role of the 1977 Community Reinvestment Act (CRA). The broader debate involves whether there are unintended consequences from government actions in encouraging home ownership and lending (with the CRA being the current topic). This debate was reignited by a new paper coming from a globally diverse group of four authors representing some prominent institutions that concludes the CRA did encourage risky lending. This paper follows-up on the FCIC report and its discussion(s) of the CRA's contribution (or lack thereof) in the crisis (with the majority report dismissing any significant link between the CRA and the crisis, but Wallison's dissent suggesting otherwise). See Did the Community Reinvestment Act (CRA) Lead to Risky Lending? (10/1/2012) by Sumit Agarwal, Effi Benmelech, Nittai Bergman, and Amit Seru (NBER version)Additional details from the paper and extensive links (on both sides) and background at this new page about the Community Reinvestment Act (CRA) Crisis Debate.
"Yes, it did... We find that adherence to the act led to riskier lending by banks ... The effects are strongest during the time period when the market for private securitization was booming."
- Two of the most frequently referenced crisis researchers are Carmen Reinhart and Ken Rogoff. They coauthored This Time Is Different: Eight Centuries of Financial Folly and you can read many of their papers at SSRN including This Time Is Different (March 2008 paper) and Is the 2007 U.S. Sub-Prime Financial Crisis so Different? an International Historical Comparison (Jan 2008). Barron's interviewed Reinhart and Rogoff in this weekend's edition discussing financial crisis and current conditions. See Top Culprit in the Financial Crisis: Human Nature. Regarding debt Reinhart states "When we talk about having a debt overhang, it is not just about public debt, but also significant private debt, household debt, bank debt, domestic debt, and external debt. Regarding Europe, Rogoff states "Look at Europe. A lot of policies are directed at keeping European banks afloat, and it is crippling the credit system" and Reinhart states "Credit events don't end with Greece. This is not a Greek problem. This is a European problem. So be prepared for a lot of volatility surrounding future credit events. "
- On the issue of household debt there is a spirited debate ongoing about actions taken and not taken during the recovery and the role of mortgage debt. Among the many commentators are crisis predictor and survey participant Dean Baker and prolific academic publisher Amir Sufi. Sufi believes "high levels of household debt in combination with the collapse in house prices was a primary factor in the onset and severity of consumption collapse from 2006 to 2009" (see Household Balance Sheets, Consumption, and the Economic Slump).
- Two very prominent and experienced money managers have thought provoking articles out regarding long term growth and stock market prospects. See Jeremy Grantham's On the Road to Zero Growth and Cliff Asness' An Old Friend: The Stock Market’s Shiller P/E. The bullish case is (again) presented by Jeremy Siegel in The Case for Dow 17000 from Kiplingers.
- Many have expressed frustration with the lack of prosecutions following the Global Financial Crisis. This week another high profile trial ended with a federal jury clearing two former money-market mutual-fund managers of fraud charges. The Wall Street Journal summarizes prosecutions, settlements, and penalties ($2.2 billion) to date.
- Yaron Brook and Don Watkins (coauthors of the recently released book Free Market Revolution: How Ayn Rand's Ideas Can End Big Government) are the latest to weigh in on Glass-Steagall at Forbes.
- FSA Chairman Adair Turner (author of Economics After the Crisis) comments on the crisis in a speech at South African Reserve Bank.The crisis of 2008 was essentially a crisis of excessive leverage, the result of a steady build up of excessive debt contracts over several preceding decades. That excessive leverage led to bust. And after the bust, deleveraging creates deflationary pressures which we cannot offset by conventional monetary policy alone, since interest rates are at the zero bound.
- The vast majority of crisis experts I've surveyed don't exect the global financial crisis to end until at least next year. While not everyone agrees that the Euro crisis is related to the crisis that was triggered by subprime loans and the bursting of the US Housing Bubble, many consider them related in some way. German Chancellor Angela Merkel recently suggested that the Euro crisis will take at least five years to resolve.
- Gary Gorton has a new book coming out titled Misunderstanding Financial Crises. Gorton was associated with AIG and previously published (in 2010) Slapped by the Invisible Hand: The Panic of 2007. Gorton argues against the consensus explanation of the financial crisis (often summed up by "Greedy people did bad things”) while focusing on "bank runs" as the key element of crisis. FT Alphaville has a Q&A session for those interested in reading more about Gorton's take on the crisis. Although I will note that the subtitle of Gorton's new book is "Why We Don't See Them Coming" and I know some (actually over 50) people who have the right to say they aren't included in that "we" group.
- Professor Johan Lybeck is the author of A Global History of the Financial Crash of 2007-10 and the 42nd participant in the Global Financial Crisis Experts Survey. Lybeck earned PhDs in the US and Sweden and has extensive experience working with treasury departments and financial institutions. Lybeck currently resides in France and has authored 20 books in multiple languages. See Lybeck's survey response here and the updated voting here.
- The debate over Glass-Steagall (and whether it should be reinstated in some form) continues with President Obama effectively taking a position counter to the majority FCIC report argument that the repeal of Glass-Steagall was a cause of the crisis. In an interview with Rollingstone, Obama states "But there is not evidence that having Glass-Steagall in place would somehow change the dynamic. Lehman Brothers wasn't a commercial bank, it was an investment bank. AIG wasn't an FDIC-insured bank, it was an insurance institution. So the problem in today's financial sector can't be solved simply by reimposing models that were created in the 1930s." Matt Taibbi comments today in A Brief Response, which includes "The repeal of Glass-Steagall was just part of the decades-long deregulatory effort that led to this toxic situation... It wasn't just Glass-Steagall – it was Glass-Steagall plus all of this other stuff that made the world so dangerous." Somewhat surprisingly, Taibbi adds in between those two quotes "a 2004 SEC decision to lift restrictions on leverage for the country's biggest investment banks allowed companies like Lehman to borrow forty dollars or more for every one they actually had." See 10/12/2012 note below with links to prior discussions (by Andrew Lo, Bethany McLean, and William Cohan) that argue the specific SEC rule change didn't contribute to the crisis.
- I just happen to be reading Henry Paulson's On the Brink and yesterday I found on Youtube what seems to a mirrored version of Aaron Ross Sorkin's Too Big Too Fail film (in 7 pieces). That along with Inside Job (which can be viewed here) are two of the don't miss crisis films for anyone that hasn't seen them yet. I don't know if one or both of these aren't violating some kind of rights, but they have been in public domain for some time.
- The article of the day is Andrew Ross Sorkin's discussion about replacements for BOTH Bernanke and Geitner.
- The fact checkers gave thumbs up and down on various statements by both candidates last night and backers of both sides have plenty of examples to cheer for and back away from (see 3rd debate links Factcheck, Politifact, The Fact Checker). Regarding the two major "fact" disagreements from the last two presidential debates here are the relevant links. Regarding the US auto makers facing failure during the crisis, Romney's claim that he supported federal assistance after bankruptcy (to which Obama suggested "let's check the record") is supported by Romney's NYTimes Op-Ed Let Detroit Go Bankrupt (11/18/2008) which includes "The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk." The disagreement from the 2nd debate is less clear-cut and the topic was Remarks by the President on the Deaths of U.S. Embassy Staff in Libya Rose Garden. Here is the specific language with one sentence before and after. "Our country is only as strong as the character of our people and the service of those both civilian and military who represent us around the globe. No acts of terror will ever shake the resolve of this great nation, alter that character, or eclipse the light of the values that we stand for. Today we mourn four more Americans who represent the very best of the United States of America." So Obama did mention "acts of terror" but did not specifically state that the attack in Libya was an act of terror. The broader perspective on the Bengazi incident is the subject of this 41 minute video Death And Deceit In Benghazi. On a lighter note, its a good time to revisit this Fortune discussion about the differences between Democrats and Republicans Wendy's or Subway? Depends which way you vote. (6/13/2012).
- As the election approaches I decided to create a link list aggregating articles grading President Obama's performance, as well as arguments for and against re-electing Obama. I also put together a list of 2012 books about Obama. See my report card of Obama's report cards.
- Heading into the final presidential debate on Monday, there are some great videos from the last few days to break up the seriousness for anyone that did not see these yet.
- Obama at last night's Al Smith Dinner
- Romney at last night's Al Smith Dinner
- And from Jimmy Kimmel (which hopefully implies less about Americans in general than it implies about the people walking around Hollywood)
In the Vice Presidential debate last night there was an interesting comment by Joe Biden regarding the "Great Recession" (see Transcript).And, by the way, they talk about this Great Recession if it fell out of the sky, like, “Oh, my goodness, where did it come from?” It came from this man voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy. I was there. I voted against them. I said, no, we can’t afford that."The angle that US government spending and in particular war costs (without getting into who voted for them) caused the great recession is one I haven't seen often, but has been suggested by Nobel Laureate Joseph Stiglitz who wrote in The true cost of the Iraq war: $3 trillion and beyond in 2010 that "The global financial crisis was due, at least in part, to the war." Stiglitz has been lauded for predicted the global financial meltdown and placed 4th in Revere Award voting. However, he has also taken flak for 1) a 2002 paper (for instance see WSJ's Systemic Risk and Fannie Mae) often cited for stating "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero" and 2) for arguing that a 2004 SEC rule change was a crisis contributor, which has been addressed in detail by among others a) Andrew Lo in his 21 Book Review and Summary, b) Bethany McLean in The meltdown explanation that melts away, and c) William Cohan in How We Got the Crash Wrong.
- John Allison's book The Financial Crisis and the Free Market Cure was #1 on WSJ (Neilsen Bookscan) hardcover business bestseller book list last week, and Sheila Bair's Bull by the Horns was #3. They also made last weeks NYTimes bestseller list but ranked in the high teens. Of course, not everyone is praising Bair's book. For instance, Phillip Swagel questions Bair's version of some events in his review of her book. Swagel is one of the few government insiders to write extensively about the crisis so far (along with Hank Paulson in On the Brink and Bair). See Swagel's 2009 paper The Financial Crisis: An Inside View (or here).
- The third quarter of 2012 was rewarding for most investors. Despite a slowing economy, persistent unemployment, and continuing international issues, the anticipation and subsequent announcement of additional quantitative easing encouraged investors and market values rose in the vast majority of asset classes. The S&P 500 and Wilshire 5000 returned more than 6%, while Morningstar and Lipper both show US stock fund returns averaged over 5%. International and emerging market equity funds were slightly stronger with average returns of almost 7%, while balanced fund investors had returns averaging roughly 4.5%, and bond fund investors averaged over 2%.
- Global Financial Crisis theories and research remain a hot topic.
- Mark Adelson has a working paper that is drawing some attention for estimating that the global losses from the financial crisis may be up to $15 Trillion (see WSJ blog). In The Deeper Causes of the Financial Crisis– Mortgages Alone Cannot Explain It, Adelson cites many of the prior must-read research on the crisis and elaborates on his five deeper causes (securities firms converting from partnerships to corporations, the 30-year trend of deregulation, the quant movement, the spread of risk-taking culture through the financial industry, and globalization).
- Sallie Krawcheck chimes in with The Glass-Steagall Debate Doesn't Matter.
- Anthony Catanach and Edward Ketz have a commentary on Restoring Criminal Liability for Financial Fraud.
- There have been hundreds of books discussing the Global Financial Crisis and dozens of them qualify as "bestsellers" (although there is no precise definition of that term by itself). Perhaps the next (and one of the few written by one of the main government participants in the major events) to join that bestseller list is Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself by former FDIC Chair Sheila Bair (the book is #23 on Amazon as I write this). You can read an excerpt from the book via Fortune (where Bair is a contributor) describing a crucial Treasury meeting (Oct. 13, 2008) and WSJ has The Big Interview with Bair. Bair also has a new blog with additional news and updates.
William Cohan has another interesting column out in Bloomberg Businessweek titled Rethinking Robert Rubin: An assessment of the former Secretary of the Treasury. One of the major disagreements between the Democrats and Republicans on the Financial Crisis Inquiry Commission was whether the repeal of Glass-Steagall caused or contributed to the global financial crisis. Chapter 4 of The Majority report was titled "DEREGULATION REDUX" and began with "Expansion of banking activities: 'Shatterer of Glass-Steagall.'" In November 1999, Congress passed and President Clinton signed the Gramm-Leach-Bliley Act (GLBA) and The New York Times reported that Citigroup CEO Sandy Weill hung in his office “a hunk of wood—at least 4 feet wide—etched with his portrait and the words ‘The Shatterer of Glass-Steagall.’” In their Dissenting Statement, Hennessey, Holtz-Eakin, and Thomas summarized "Neither the Community Reinvestment Act nor removal of the Glass-Steagall firewall was a significant cause. The crisis can be explained without resorting to these factors." Yet, there are Democrats and Repulicans on both side of this debate. Cohan points out that Rubin stated at a CNBC forum, “It is a myth that the repeal of Glass-Steagall contributed to the financial crisis.” Cohan continues "This is no longer the consensus. Aside from Paul Volcker, several of Rubin’s ex-Citigroup colleagues have recently revised their opinions." Cohan also mentions former Citigroup executives John Reed, and Richard Parsons, as well as Sandy Weill himself who told CNBC in July 2012 that the law’s reinstatement in some form is necessary to restore confidence in the financial system. Yet, as Cohan points out Larry Summers "dismisses this as revisionism, warped by hindsight and political convenience." Cohan also notes that "Greenspan, Levitt, and others have conceded errors in judgment that, upon reflection, may have created conditions that led to the crisis." Rubin told the New York Times in April 2008 “I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.” Actually, dozens on people publicly warned in advance the crisis, and Cohan also discusses former Citigroup banker (relieved of his duties in January 2009) Richard Bowen "who repeatedly warned senior management, including Rubin," that he believed 60 percent of the mortgages the firm was buying and stuffing into mortgage-backed securities were defective.
Other recent discussions on the topic of Glass-Steagall include Repeal of Glass-Steagall Caused the Financial Crisis (8/27/2012) by James Rickards (author of Currency Wars), who summarizes "the fact that there were so many parties to blame should not be used to deflect blame from the most responsible parties of all—the big banks." Back in May, Andrew Ross Sorkin (author of Too Big To Fail) in Reinstating an Old Rule Is Not a Cure for Crisis pointed out that after pressing Elizabeth Warren about whether she thought the financial crisis or JPMorgan’s losses could have been avoided if Glass-Steagall were in place, she conceded: “The answer is probably ‘No’ to both.” See also comments from Dean Baker and Barry Ritholtz (who writes that the repeal of Glass Steagall itself did not cause the financial crisis. However, the repeal did help make the crisis worse). Michael Hiltzik summarized in We need a stronger Glass-Steagall Act to regulate financial firms (5/30/2012) that "People tend to link the 2008 crash to the repeal of Glass-Steagall a decade earlier not because they've made a reasoned analysis of the connections between the causes of the financial crisis and the provisions of the old statute. Rather, they're thinking metaphorically: The repeal symbolizes the rush of deregulation of the 1990s. That's good thinking, because deregulation driven by lobbying by Wall Street and the banks in that era did set us up for disaster."
Of course the other FCIC dissent came from Peter Wallison who argued the crisis resulted from housing policy, and on that topic the Economist has an interesting discussion and poll on Home-ownership: Should home-ownership be discouraged? with Andrew Oswald and Richard K. Green, which includes discussions of the experiences of other countries regarding home-ownership policies.
- Rand Corporation has a new study out titled Hedge Funds and Systemic Risk. While the study appears to be focused on whether hedge funds played a primary role in causing the Global Financial Crisis, it looks like it also includes some interesting summaries of prior studies and information from surveying fund managers, lawyers, and regulators. It's available from Rand for $19.96 and the web sites includes the authors' (Lloyd Dixon, Noreen Clancy, and Krishna Kumar) recommendations and key findings ("Hedge Funds Did Not Aggravate the Recent Financial Crisis Through the Credit Channel"). Looks like it will also be available shortly at Amazon for less. See also Don’t Blame Hedge Funds for Financial Crisis, Study Says @ the WSJ.
- On the topic of the crisis, there is some interesting material in The Cost Of The Wall Street-Caused Financial Collapse and Ongoing Economic Crisis is More Than $12.8 Trillion from BetterMarkets. On page 10, the authors summarize what they believe caused the crisis in two paragraphs (which includes "any fair and unbiased review of the key events leading up to the crises and the crises themselves demonstrates that Wall Street deserves to be at the top of any list of those responsible for causing the crises." While I have found plenty of support for that position in my surveying of crisis experts and the individuals that predicted the crisis, the narrative that Wall Street primarily caused the crisis is running 3rd in my polling, far behind "Everyone" was at fault and even slightly below the government was primarily responsible narrative.
- While many of the individuals that warned in advance of the Global Financial Crisis, have gotten plenty of attention for being among the few that saw the crisis coming and attempting to warn the public, there are some individuals that haven't gotten much attention, yet appear to be deserving of credit for their warnings. A few weeks ago I came across this NYTimes article from earlier in the year titled A Mortgage Tornado Warning, Unheeded by Gretchen Morgenson (co-author of Reckless Endangerment). Morgenson and Wikipedia cite Nye Lavalle for multiple prescient warnings about many of the biggest players that got into trouble and played major roles in the Global Financial Crisis. Lavalle wasn't involved in the industry until he fought back against a lender on a family property, which led him to begin researching mortgage abuses. Lavalle subsequently became a foreclosure debt defense expert and confronted multiple problems at Fannie Mae (which were investigated in depth and eventually disclosed) and Bear Stearns, and also identified robosigning practices long before the crisis. Further, as early as 2000, Lavalle claimed that Bear Stearns and EMC Mortgage were engaged in predatory servicing and lending abuses as well as cooking their books, and that their practices would ultimately bring down the U.S. economy and international financial markets. I spoke with Lavalle last week and his responses to the Global Financial Crisis Experts Survey have been added here making Lavalle the 41st participant of the survey. Like most of the other participants, Lavalle thinks we are still in a relatively early stage of the crisis, but he does not believes the crisis can be summarized with a simple narrative. You can read his more about his opinions about the crisis causes and fixes, as well as link to his early research and warnings at his survey response page.
- There is a somewhat disturbing, yet not terribly surprising report out from Diligence Reveiw Corp documenting that among SEC Registered Investment Advisors 11% report a “significant adverse regulatory event” and they manage 46% of assets among the advisors, yet 46% of the advisors on the "green list" (no reportable events) manage only 10% of assets among the advisors. Why the Advisors with some history of red flags would have more assets under management and the advisors with clean records would have much less in assets under management is certainly due to multiple factors, but in a logical world you (or at least I) would hope it would be the opposite (advisors with clean records managing most of the money). See Red-Yellow-Green Report on All SEC-Registered Investment Advisors for definitions and details of the report.
- Long weekend viewing/reading in case you missed any of these...
- The SEC is out with a 212 page report on "Financial Literacy that concludes "studies have found that investors do not understand the most elementary financial concepts." People (in Baltimore, Atlanta, and San Diego) were surveyed using peculiar theoretical funds named 1) Petunia Core Equity, 2) Gardenia Asset Allocation Portfolio, and 3) Hydrangea Bush Government Bond Fund about prospectuses and trade confirmations. Only 17% correctly identified that the trade confirmation involved a mortgage-backed security. I was curious what one might look like since I doubt many investors actually trade them (see page 52 of the appendix). 45 public comments were also submitted and commented on in the report. The report also concludes "many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns. Moreover, based on studies cited in the Library of Congress Report, investors lack critical knowledge about investment fraud."
- Heleen Mees's doctoral thesis entitled ‘Changing Fortunes: How China’s Boom Caused the Financial Crisis’ is a somewhat different angle on the primary cause of the Global Financial Crisis (in line with the "Giant Pools of Money" theory). The report is 171 pages and includes citations of prior work by Kotlikoff, Taylor, Rogoff, Bernanke, Greenspan, Shiller, Tversky, and many others.
- Nassim Taleb has a commentary out titled Why It is No Longer a Good Idea to Be in The Investment Industry and he advises those interested to "Pick a less commoditized business or a niche where there is a small number of direct competitors. Or, if you stay in trading, become a market-maker." Among those with commentary are Felix Salmon and the WSJ. The reality is most people that consider themselves to be in the "investment industry" are actually in the speculation or gambling industry. There just aren't enough people (like Jack Bogle, who just released The Clash of the Cultures: Investment vs. Speculation, and Charles Ellis, whose article Murder on the Orient Express: The Mystery of Underperformance is available for free courtesy of the Financial Analysts Journal) that are willing to spell it out and do something about it. Trading and market-making are different topics.
- The debate spurred by Bill Gross' commentary last week (see below) continued into this week. Some often cited commentary include these from Andrew Ross Sorkin (Why Are Investors Fleeing Equities? Hint: It’s Not the Computers at the NYTimes) and Josh Brown (American Idle: Five Reasons We Hate The Stock Market). But those that are focusing on the steady flow of funds out of equity mutual funds are missing part of the story, which is that funds have been flowing into equity ETFs, which is pointed out in The 'cult of equity' isn't dying — it's going passive from InvestmentNews. Ben Iker at GMO comments on the relationship between GPD growth and stock returns, Henry Blodget sides with Siegel on one big issue (and update), and Larry Swedroe says Bill Gross isn't entirely wrong.
- Weekend viewing/reading in case you missed any of these...
- Super-heavyweights Bill Gross (The King of Bonds from PIMCO) and Jeremy Siegel (of Wharton and Wisdomtree and author of Stocks for the Long Run) have been sparring on the financial networks over expectations for stocks. The battle was touched off on 7/31/2012 by Gross in his August 2012 commentary titled Cult Figures, in which he states "the cult of equity is dying," the "Siegel constant of 6.6% real appreciation, therefore, is an historical freak" and even uses the term "Ponzi scheme" (please read the commentary for the context). Siegel responded on CNBC in Why Bill Gross Is Wrong About Stocks: Wharton's Siegel (7/31/2012) and Gross replied on CNBC the next day in Bond King Slams Stocks. Then yesterday on Bloomberg Siegel Says Bill Gross has the 'Economics Wrong' with Gross responding in Gross Vs Siegel: The Gloves are Off (short version of the exchange). Jack Bogle chimed in on the debate at Bloomberg in Jack Bogle on Long-Term Returns for Stocks, Bonds and says there is some merit to Bill's argument, but says "buy and hold is never dead" and he also points out that all these returns are before costs. Jack Bogle's latest book The Clash of the Cultures: Investment vs. Speculation is out on the 7th. The debate revolves around the equity risk premium and the research of Elroy Dimson, Paul Marsh, and Mike Staunton. They published Triumph of the Optimists: 101 Years of Global Investment Returns in 2002 and updated their research in 2006 with The Worldwide Equity Premium: A Smaller Puzzle in which they "infer that investors expect a premium on the world index of around 3-3 1/2% on a geometric mean basis, or approximately 4 1/2-5% on an arithmetic basis." Last year they again updated their research in Equity Premia Around the World and concluded "the equity premium relative to Treasury bills was an annualized 4.5%" (don't miss the tables and graphics on the last few pages for the big picture). That paper is included in Rethinking the Equity Risk Premium (free) (Dec 2011) along with contributions from Siegel and many prominent researchers and professionals on the topic. See also Global Investment Returns Yearbook via Credit Suisse.
- Some new commentary and data on the financial crisis and it's impact include two from the St. Louis Fed (The Foreclosure Crisis in 2008: Predatory Lending or Household Overreaching? and Household Financial Stability: Who Suffered the Most from the Crisis?). Michael Lewis' The Big Short has sold more than 1 million copies according to court documents (see ‘Big Short’ Author Lewis Asks Judge to Dismiss Libel Suit).
- Other interesting reads include Jeremy Grantham's quarterly Welcome to Dystopia! which focuses on his "food crisis" argument and How The Poor, The Middle Class And The Rich Spend Their Money (8/1/2012) from NPR.
- As we approach the 4 year anniversary of the critical weekend at the center of the global financial crisis (the focus of Andrew Ross Sorkin's book Too Big To Fail and film), hundreds of books with substantive discussions about the crisis have been written with dozens of them qualifying as "bestsellers." There have also been scores of journal articles published, as well as countless articles and other commentary. Of course the crisis has also been a frequent topic on television, as well as in documentaries and movies. There have been a number of fictional feature films with crisis themes (for instance Wall Street: Money Never Sleeps, Margin Call, and Up in the Air), but focusing specifically on the crisis, there have been at least twenty documentaries (that I've come across so far), often based on crisis books or including crisis book authors among the cast. So Crisis Films is a natural additional to the Investor Home Crisis research collection. You can watch portions or trailers online of all of those I've listed and quite a few can now be viewed in their entirety for free, including several originating outside the US. Of course the primary causes and fixes of the crisis continue to be hotly debated and many of the films are tilted toward one narrative or another. Forthcoming this fall is The Bubble (with a freshly released trailer and cast interviews), which will present an alternative perspective to Oscar winner Inside Job (and PBS's Frontline: Money, Power, and Wall Street) from best-selling author Tom Woods with a cast that includes Ron Paul and Peter Schiff among many others.
- Some interesting debates this week include David Wessel's WSJ column arguing that The U.S. Housing Bust Is Over (which has drawn hundreds of comments), and Bethany McLean's reuters article and CNBC interview asking Should Goldman Sachs Go Out of Business? Noah Pinion focuses on the well documented general conclusion that "overconfident investors trade excessively" (citing in particular the groundbreaking research of Brad Barber and Terrance Odean) and makes some bold statements including "all financial news is a hoax" in How Zero Hedge makes your money vanish. I don't have any particular opinion of zerohedge (Matt Taibbi credit's zerohedge for their research in Griftopia), but there is at least some truth to Pinion's point.
- Following strong stock returns of 1Q12, 2Q12 generally resulted in losses for most balanced investors. While bond investors generally had gains in both the first and second quarter, most stock investors gave back part of their 1Q gains in 2Q. According to Morningstar fund data (which is published the day the quarter ends), Large Cap Blend funds gave back exactly one third of their 1Q gains in 2Q (+12.48 1Q, -4.16 2Q), while international funds gave back a majority of the 1Q gains in 2Q (+12.51, -7.03). REIT's have been the star performer of 2012 thus far with gains of roughly 15% (seen graphically here or summarized in table form here). Lipper fund data is published usually about a week after quarter end in the WSJ (2Q12 review is in today's edition). WSJ points out that money flowed into bonds (and international stocks to a lesser degree), while US stocks had outflows.
- Global Financial Crisis theories and research remain a hot topic as exemplified by Fortune's follow-up The 5 myths of the great financial meltdown: Round 2. Allan Sloan concludes "Instead of a discussion about what happened, we've gotten into a government-vs.-free-market shoutfest. These fragmented days, many people tend to see things in black and white terms, in ways that reinforce what they want to believe. The real world is more complicated than that. Black and white have their places -- but to understand the financial meltdown, you need to see some gray."
- Three highly qualified crisis experts offered advice to University graduates this year. I noted earlier Michael Lewis' speech at Princeton, and on 5/22 Robert Shiller offered My Speech to the Finance Graduates, in which he states that "Finance, at its best, does not merely manage risk, but also acts as the steward of society’s assets and an advocate of its deepest goals. Beyond compensation, the next generation of finance professionals will be paid its truest rewards in the satisfaction that comes with the gains made in democratizing finance – extending its benefits into corners of society where they are most needed. This is a new challenge for a new generation, and will require all of the imagination and skill that you can bring to bear." More recently, Michael Burry (of The Greatest Trade & The Big Short fame) spoke at UCLA Economics Commencement and describes the government response following his 2010 NYT oped.
- The American Enterprise Institute held a forum on Wednesday focusing on the role of Fannie Mae and Freddie Mac in the Global Financial Crisis featuring Oonagh McDonald and her recently released book Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare. The forum link includes the forum video (moderated by Peter Wallison) with presentations from McDonald, Edward Pinto, Josh Rosner, and Lawrence White, as well as links for the presentation documents from Pinto, Rosner, and White. Rosner co-authored Reckless Endangerment and warned in advance of the crisis. Pinto is a participant in the Crisis Survey and Professor White is one of the co-authors of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance along with Crisis Survey participant Viral Acharya.
- For an interesting and entertaining discussion of the "different universes" occupied by opposing political perspectives, check out Marco Rubio on The Daily Show with Jon Stewart (a 3 part extended interview).
- Congratulations and a round of applause for Gus Sauter on the announcement of his retirement at the end of the year. He is a true professional that I enjoyed meeting on several occasions and played a major role at Vanguard in leveling the playing field for investors. In a business where many so-called investment professionals make money at the expense of their clients, few succeed in tandem with their clients on a massive scale. Gus Sauter is one of those that helped millions get the most out of their investments. Congratulations Gus on an amazing career and thanks for taking good care of millions of people's investments (including some of mine).
- Weekend reading in case you missed any of these...
- According to Preqin in North American Endowments Step up Private Equity Investment (6/21/2012) private equity allocations rose from 8.4% in 2007 to 13.2% in 2012 (average target was 12.5%).
- In Religion and Research (6/21/2012), Dan Ariely discusses "the power of a moral reminder: Prime a person to think about ethics right before they have an opportunity to cheat, and they’ll avoid immoral behavior."
- Regarding the Global Financial Crisis, Andrew Haldane presented a paper Tails of the unexpected (6/8/2012) at The Credit Crisis Five Years On: Unpacking the Crisis a recent conference held at the University of Edinburgh Business School. The Speakers and Summaries of papers include additional presentations worthy of a browse. We're no safer on Wall Street than we were four years ago according to William Cohan, in which he points out that since Dodd-Frank we've had MF Global and JPM's whale sized loss.
- This is a really interesting graphic summarizing economic history of the major world powers in the last 2,000 years.
- On the topic of the Global Financial Crisis, John Hussman has some interesting commentary in The Heart of the Matter, where he writes "the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad" and "The ability to use the Federal government as a backstop for risk-taking was the central element in creating the housing bubble." Also, an article in Fortune titled The 5 myths of the great financial meltdown discusses the government's role and responses.
- Are successful mutual fund managers skilled or just lucky, and do they get better or less successful over time (a question I've touched on in several articles)? A new paper in the Journal of Applied Finance highlights some of the most successful solo managers, some of which I've had the opportunity to work with personally (and have seen the non-public evidence for myself). The paper is titled The Best Mutual Fund Managers: Testing the Impact of Experience Using a Survivorship-bias Free Dataset by Gary Porter and Jack Trifts.
- Wendy's or Subway? Depends which way you vote is an interesting discussion of how Democrats and Republicans differ on preferences in many areas including television shows, restaurants, and sports.
- Weekend reading in case you missed any of these...
- The drop in household wealth from 2007 noted in many articles is from this 80 page report from the Federal Reserve titled Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances (June 2012)
- A much debated 76 page report from Citigroup on the Growth of Hedge Funds asks how much hedge funds will be managing by 2016 and Felix Salmon comments on that in The future of hedge funds. Previously, the BBC noted the tendency of hedge funds to publish inaccurate figures about the success of their investments in Hedge funds: Do some mislead their investors?, which cites Change You Can Believe In? Hedge Fund Data Revisions.
- Speaking of Hedge funds, two recently released books have made chapters available online with Hedge Fund managers' interviews (Ray Dalio in The Alpha Masters and Ed Thorp in Hedge Fund Market Wizards).
- The WSJ has an interesting article today about The Las Vegas Sands and their Macau casino. They note that Macau's casino business last year did five times the gambling revenue of the Las Vegas Strip. China's population (1.3B) is about 4.3 times the US population (.311B), but Macau is only place in China where casino gambling is legal. The Economist earlier in the week (6/5/2012) had an interesting graphic that looks at Interactive as % of Gambling losses by country. US 2011 gambling losses (net of winnings) were roughly $100 billion, but the % over the computer, TV, or mobile phone is low in the US (and Macau with $34B) versus other countries. The reality is that most so-called investing activities are gambling or at least speculative and a few years ago I compared how much Americans spend on active management versus traditional gambling at SumGames.com, following-up on the work of Ken French.
- Cullen Roche has an interesting commentary on the Euro and Wynne Godley's comments (6/7/2012). Godley passed away in 2010 but was also credited with being one of the individuals that warned in advance of the Global Financial Crisis (for instance in 2006).
- Fareed Zakaria had an interview with Michael Porter on US competitiveness (6/4/2012). Porter is one of the world's leading experts (and a prolific author) on Competitive Advantage of Nations. See also The Looming Challenge to U.S. Competitiveness and Choosing the United States (March 2012) by Porter and Jan Rivkin in the Harvard Business Review.
- Another interesting read (or video) from Michael Lewis (Princeton Baccalaureate 2012) is Don't Eat Fortune's Cookie (6/3/2012), wherein he talks about quitting Salomon Brothers to write "Liar’s Poker" (for an advance of $40,000), which sold a million copies and is now heading for the big screen. Lewis also comments on the role of luck in our lives ("lucky in your parents, lucky in your country") as opposed to luck in the investment business.
- William Cohan is one of the sharpest commentators on the crisis, both in columns and in his books about Bear Stearns (House of Cards) and Goldman Sachs (Money and Power). In How We Got the Crash Wrong in the Atlantic, Cohan writes that leverage was not the problem—incentives were, and still are. In the article Cohan discusses the role a 2004 SEC rule change played in the crisis (which numerous prominent individuals fingered as a crisis cause). The discussion is not new, in fact Bethany McLean (coauthor of All the Devils Are Here) made the same point in The meltdown explanation that melts away (3/19/2012) and others have written about the topic, but Cohan has additional background on Andrew Lo's 21 Book Review and Summary and further commentary.
- Mary Meeker of KPCB has some interesting material in her over 100 page presentation discussing "then and now" of the internet and economy.
- The repeal of Glass-Steagall has been debated extensively regarding the Global Financial Crisis and more recently regarding JPMorgan's recently announced trading losses. In Reinstating an Old Rule Is Not a Cure for Crisis (5/21/2012), Andrew Ross Sorkin (author of Too Big To Fail) writes that when I called Ms. [Elizabeth] Warren and pressed her about whether she thought the financial crisis or JPMorgan’s losses could have been avoided if Glass-Steagall were in place, she conceded: “The answer is probably ‘No’ to both.” Crisis Predictor Dean Baker agrees that it played no direct role in the crisis, but furthers the debate about the relationship between the government and the financial sector, while Ryan Chittum suggests Sorkin’s Glass-Steagall discussion is a straw man (5/25/2012).
- Two new books about prominent Hedge Fund Managers are officially coming out next week (on the 29th). Both feature Ray Dalio, the founder of the world's largest hedge fund manager (Bridgewater) as well as many other successful managers. Jack Schwager, author of Market Wizards (which I cite in my discussion about the question Do Day Traders Make Money?) has Hedge Fund Market Wizards, while CNBC's Maneet Ahuja is releasing The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (see also story at ValueWalk).
- Charles Ferguson, Director and Producer of the 2010 Academy Award winning documentary Inside Job, has a new book out today titled Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America. Toxic: Wall Street's Culture and Governance During the Bubble (5/21/2012) and The Sellout of the Ivory Tower, and the Crash of 2008 (5/22/2012) are two excerpts posted by Ferguson at Huffington Post. See also Heist of the century: Wall Street's role in the financial crisis (5/20/2012) in the Guardian and Corporate criminals gone wild: The maker of the documentary film "Inside Job" has a new book excoriating Wall Street -- and President Obama at Salon (5/18/2012).
- Crisis Predictor Peter Schiff's latest is also out and titled The Real Crash: America's Coming Bankruptcy---How to Save Yourself and Your Country.
- The CFA Institute held it's annual conference this week and some of the sessions can be viewed online. In particular, Nobel Laureate Daniel Kahneman has a presentation Psychology for Behavioral Finance (or here) and he says he suffered during the 4 years writing his best seller Thinking, Fast and Slow. Celebrating 50 Years of the CFA Charter: The Evolution of a Profession includes legends Charles Ellis, Gary Brinson, and Abby Joseph Cohen.
- The Wall Street Journal ran an article on the 8th (Builder Is Constructing REIT for Home Rentals) about Beazer and KKR developing a REIT for rental homes. This is an idea I've thought about and wanted to investigate, but also assumed others must be working on. I think there would be plenty of demand for funds that own residential unmortgaged rental properties and pass the rents through to investors. Housing funds in theory could provide opportunities and uses for many investors and homeowners. The article notes the problems of amassing a large enough portfolio, as well as the maintenance and operating costs. I think those problems can be overcome and it would be really interesting if there were eventually funds of homes for specific cities, regions, and even countries.
- Maybe I watched too many cartoons as a kid, but I can't help recalling Big Top Bunny starring Bruno The Magnificent. Here is the two minute ending (or the full eight minute version), which seems to me to foreshadow current events.
- Should you Sell in May and Go Away (until Halloween)?
- Weekend reading/watching in case you missed any of these...
- Bloomberg had an interesting debate between "Liberal" Nobel Laureate Paul Krugman who wants to see the Federal Reserve do more (and who just released his latest book End This Depression Now!) and Libertarian Presidential candidate Ron Paul (who wants to see the Federal Reserve with significantly less power). More viewers believe Ron Paul won the debate according to Bloomberg based on Twitter voting. Krugman commented further in Don’t Know Much About (Ancient) History (4/30/2012) and On the Uselessness of Debates (5/1/2012) while Ron Paul followed up in the FT with Our central bankers are intellectually bankrupt (5/2/2012). A few of the many multi-link commentaries include these from Azizonomics - Paul vs Paul: Round #2 and Tim Iacono.
- CNBC's 'Squawk Box' Announced their Squawk Book Club. Early entries include Burton Malkiel's A Random Walk Down Wall Street (also one of my favorites and now in it's 10th edition) and Michael Lewis's first best seller Liar’s Poker. They interviewed Malkiel Tuesday and in this Thursday morning interview, Lewis talks about the Culture of Wall Street and about writing the Liar's Poker Screenplay (which follows the movie successes of The Blind Side & Moneyball).
- Frontline ran the second half of Money, Power & Wall Street on 5/1, so now all four episodes can be viewed online.
- Interesting chart of Global Real Bond Yields.
- Weekend reading/watching in case you missed any of these...
The answer to many important questions these days appears to be "it depends on who you ask."
- Two examples
- What caused the housing bubble and financial crisis?
- Do Hedge Funds add value?
On the first question, this week PBS' Frontline ran the first half of Money, Power & Wall Street, which features two of six FCIC Commissioners (Phil Angelides and Brooksley Born) appointed by the Democratic leadership of Congress. Apparently not consulted was Peter Wallison (one of the four Republican appointed Commissioners), who Dissented from the Final Report conclusions. Wallison and Edward Pinto just posted Free fall: How government policies brought down the housing market. Also of note, according to Gallup, Homeownership Hits Decade Low (see also historical graphs of homeownership from 1975 using data from the Census Bureau and from 1965 via CalculatedRisk). Philippe Bracke, Christian Hilber, and Olmo Silva write about Homeownership and Entrepreneurship. Some have also asked whether it is a coincidence that Lloyd Blankfein did an interview on CNBC the day after the Frontline special?
Regarding Hedge Funds KPMG reports on The value of the hedge fund industry to investors, markets, and the broader economy using 1994 to 2011 data. But Larry Swedroe is not impressed with Hedge Funds and in January Simon Lack released The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True. Previous research on the topic includes The ABCs of Hedge Funds: Alphas, Betas, and Costs from Roger Ibbotson, Peng Chen and Kevin X. Zhu (1995-2009 data) and Hedge Funds: Risk and Return from Burton Malkiel and Atanu Saha about hedge fund "attrition" (1994-2003 data). Also of note Hedge Fund Stock Trading in the Financial Crisis of 2007-2009 by Itzhak Ben-David, Francesco Franzoni, and Rabih Moussawi.
With news this week that the UK is apparently going into a double dip and Spanish unemployment worse than the great depression, Chinese Premier Wen Jiabao agrees with the crisis survey overwhelming opinion that the global financial crisis is not over.
- Weekend reading in case you missed any of these...
- These papers posted by the Russell Sage Foundation for a recent conference titled Rethinking Finance: Perspectives on the Crisis are required reading for Global Financial Crisis researchers. The papers will be included in a forthcoming book edited by Alan Blinder, Andrew Lo, and Robert Solow. Two of the authors (Hersh Shefrin and Robert Litan) have weighed in on the Global Financial Crisis Survey.
- Michael Lewis, author of The Big Short, Boomerang, Liar’s Poker (as well as The Blind Side & Moneyball) in an interview (with himself) (from the recently released The Occupy Handbook) suggests a boycott on the TBTF firms and writes "The chief cause of the financial crisis was what the government didn’t do (regulate) rather than what it did (subsidize homeownership)."
- The International Monetary Fund's 192 page Global Financial Stability Report: The Quest for Lasting Stability is stocked with interesting information, data, and charts.
- GMO/Grantham's latest Quarterly
- Roger Lowenstein on Derivatives & Regulators
- Werner Erhard & Michael Jensen on Putting Integrity into Finance
- Ruchir Sharma's The Next Global Crash: Why You Should Fear the Commodities Bubble in the Atlantic is an excerpt from his recently released book Breakout Nations: In Pursuit of the Next Economic Miracles.
- Hedge funds that profited from the meltdown by betting on various derivatives have been well documented (for instance The Greatest Trade Ever and The Big Short). But few have access to those hedge funds and most investors can and should focus on traditional asset classes and funds. Perhaps the best example of a manager with publicly available stock and bond funds that also foresaw the danger and guided his clients well by sidestepping many of the landmines that exploded during the crisis is Robert Rodriguez of First Pacific Advisors. In the years preceding the crisis, some of FPA's clients pulled money from his funds due to their increasing cash holdings, but by late 2009 the FPA Capital fund had the best 25 year annualized return among all diversified mutual funds and the firm's assets under management have now grown to over $19 billion. Rodriguez has been credited by Kiplingers, Fortune, and The Wall Street Journal, as well as Roger Lowenstein in his best-seller The End of Wall Street for warning publicly pre-crisis on many isssues including the following.
Robert Rodriguez is latest expert to weigh-in on the Global Financial Crisis Survey.
- Real estate and the home (historically the countries bedrock) had become a casino to many americans.
- Problems at Fannie and Freddie.
- Default insurance underpricing.
- Citigroup's balance sheet including $135 billion in difficult to value complex, structured-like securities, which had grave implications for the economy.
- Also of note, Richard Roll's paper The Possible Misdiagnosis of a Crisis was named winner of the Graham and Dodd Best Perspectives Award, recognizing timely, thought-provoking opinion. Roll's take on the crisis survey is here.
- The Wall Street Journal yesterday had an article about SEC actions against individuals related to the financial crisis, as well as a blog post listing settlements, and a poll asking if the SEC been too soft. WSJ voters are 7-1 one sided on that questions so far.
- In my review of Steve Keen's book Debunking Economics a few months ago, I wrote "it would be fascinating to see Keen debate some of the prominent economists he comments on" including Paul Krugman. Last week Krugman took the bait on Keen's take on Minsky and banking, which set off an online debate between the two, with numerous others commenting. For those interested, here are the links and a sample of some of the commentary I've seen.
- Keen A Primer on Minsky (3/26/2012)
- Krugman Minksy and Methodology (Wonkish) (3/27/2012)
- Keen Ptolemaic Economics in the Age of Einstein (4/1)
- Krugman Oh My, Steve Keen Edition with updates (4/2)
- Keen Oh My, Paul Krugman (4/3)
- Keen Krugman Apologises! (4/4)
- Krugman’s Flashing Neon Sign from Scott Fullwiler (4/1)
- Paul Krugman gets it (mostly) wrong again (4/2)
- Paul Krugman vs. MMT: The Great Debate Published by John Carney at CNBC (4/3)
- Classes of Macro Models: What Counts as a DSGE Model? from Mark Thoma (4/3)
- Hubris leads to incompetence: the Rowe & Krugman edition (4/3)
- Who is right? Krugman or Keen or / and 9 Central Bank economists? from Edward Fullbrook (4/3)
- Progress on the monetary policy and banking debate from Edward Harrison (4/3)
- Philip Pilkington: Nobel Laureate Paul Krugman Selectively Quotes Rival to Stitch Him Up After Losing Argument at NakedCapitalism (4/3)
- Krugman "Knocked out of Neoclassical Orbit" by Steve Keen's Meteoric Rise! video (4/4)
- Blog Brawl Bests Nobel Prize Winning Economist – and ‘gulp’ i’m dragged into Brawl from Andrew Lainton (4/6)
- The strange case of the Nobel economist who doesn’t understand how banks work (wonkish) by Josh Ryan-Collins (4/8)
- Paul Krugman And Steve Keen Got Into A Massive Fight On One Of The Biggest Issues In All Of Economics from BusinessInsider (4/6)
- Steve Keen Interview on the Debate With Paul Krugman by John Lounsbury (4/10)
- Reconciling Krugman and Keen using nef's model (7/25)
- The Benchmarks page has been updated with M* and WSJ 1Q12 links. US as well as intl stock funds were up about 12% (the Wilshire 5000 was up 12.9%) while the DJIA was up only 8% (yet the 994 point gain was the largest to start a year). Emerging Markets and Intl RE funds were up slightly more (>13%), but US Real Estate was only up 10.5%. Apple continued its run rising 48% and representing about 1/6 of the S&P 500's gain. Lesser followed BofA (last years worst Dow stock) was up 72%. Balanced funds were up almost 8%, while taxable bond funds rose about 2.5%, but long government bonds were down 6%.
- Along with the Tuesday (4/3/2012) release of White House Burning by Simon Johnson & James Kwak, and today's (3/30/2012) US release of Economics After the Crisis by FSA Chairman Lord Adair Turner, there has been a string of noteworthy book releases in recent weeks. Also recently out were The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy from Presidential candidate Laurence Kotlikoff and Scott Burns (3/23/2012), Why Nations Fail from Daron Acemoglu & James Robinson (3/20/2012), and Finance & the Good Society from Shiller (3/20/2012).
- Paul Singer deserves credit for warning (both publicly and to world leaders) in advance of the Global Financial Crisis. Singer and Jim Chanos warned G-7 finance ministers about the grave threat to the banking system in April 2007 and Singer publicy warned about subprime-mortgage securitizations at a Grant's Interest Rate Observer conference in 2006. More and links at Who Predicted the Global Financial Crisis?
- The Wall Street Journal had an article about success rates of foreign-exchange traders titled The Customer Is Too Often Wrong at FXCM (3/26/2012). According to the article, which sources the company, "In each of the last four quarters , more than 70% of FXCM's U.S. accounts were unprofitable for those trading them", which is consistent with over a decade of research on whether day trader make money.
- Howard Marks of Oaktree Capital has some interesting commentary in Déjà Vu All Over Again, while Burton Malkiel adds to his prior comments on US Bonds by arguing that At a yield of 2.25%, the 10-year U.S. Treasury is a sure loser in the WSJ (3/23/2012). Also in today's WSJ, on the topic of the Global Financial Crisis, plenty of people blame the Fed for the housing bubble, but Bernanke Says Low Rates Didn't Fuel Bubble. There is less debate about whether a 2004 SEC investment banking leverage rule change (that some argued) contributed to the crisis according to Bethany McLean in The meltdown explanation that melts away (3/19/2012). A few additional commentaries of note about GS's $150 op-ed include Goldman Sachs’s long history of duping its clients by William Cohan and Goldman’s ‘muppets’ need treating like true clients (3/15/2012) from Frank Partnoy. Partnoy had previously predicted continuing danger to the financial system arising from the increasing use of derivatives for over a decade. In his 1997 book FIASCO: Blood In The Water On Wall Street (he released an updated version in 2009), Partnoy wrote "Derivatives will continue to cause billions of dollars in losses by hundreds of derivatives victims, along the way destroying reputations, twisting lives, and emptying bank books." In his 2003 book Infectious Greed: How Deceit and Risk Corrupted the Financial Market, Partnoy discussed the long history of derivatives related blow-ups dating back to the 80s (Krieger/Bankers Trust, Niederhoffer, Leeson/Barings Bank, Citron/Orange County, Jett/Kidder Peabody, Long Term Capital Management, Enron, WorldCom, and Global Crossing) and in his updated 2009 version he argued that the Global Finanical Crisis was the largest of these connected dots.
- The latest expert to weigh-in on the Global Financial Crisis Survey is Peter Tanous, coauthor of Debt, Deficits, and the Demise of the American Economy, and President of Lepercq Lynx Investment Advisory, LLC.
- Weekend reading in case you missed any of these...
- Roger Lowenstein's The Villain is a must-read, although Vincent Reinhart suggests it is “five years too early.”
- GS links - Why I Am Leaving Goldman Sachs by Greg Smith, Goldman Sachs Response, Goldman Sachs Business Principle #1 - "Our clients’ interests always come first," 13 Reasons Goldman’s Quitting Exec May Have a Point, What Happened to Goldman Sachs? (Justin Fox) Some awkward questions about that letter…, What Brokers Call Clients Behind Their Backs, and finally actually, the Muppets ARE Goldman Sachs clients.
- Some very prominent people are starting to ask whether the bond bubble is finally bursting? Are Long-Term US Treasury Bonds "Risk-Free" or do they offer "Return-Free Risk"? See Bond Risk & Duration with links and quotes from Buffett, Rodriguez, Cooperman, Malkiel & the Jeremys.
- The latest expert to weigh-in on the "Global" Financial Crisis Survey is Kevin Dowd, coauthor of Alchemists of Loss: How modern finance and government intervention crashed the financial system.
- As the week (and winter) end approach a quote from John Wasik's Three ways to play a U.S. stock rally - "Market predictions come and go like snowflakes. It could all turn to slush tomorrow."
- Tim Geithner's op-ed Financial Crisis Amnesia (a frequent ReTweet on Twitter, but drawing pretty one sided "Comments" at the WSJ) was the Top Story at Bloomberg and discussed by Rick Santelli and Dick Bove on CNBC, while Mark Calabria turns the Amnesia argument around and James Pethokoukis suggests hubris is at play.
- A couple of other interesting debates include "Reelect or not" with The White House's Economic Case for Reelection in 13 Charts in the Atlantic, which drew a response from Pethokoukis titled The economic case against Obamanomics in 13 charts. In a related debate, earlier this month Bill McBride at calculatedrisk predicted The Housing Bottom is Here, which Michael Olenick attempted to Debunk, while Goldman Sachs pushes the "expected" bottom out from end-2012 to mid-2013.
- This week's interesting reads include Jeremy Grantham's latest quarterly on investing and capitalism (titled The Longest Quarterly Letter Ever) and Bill Gross' latest Defense, plus Self-reported happiness tends to be greatest in poor countries and The Worse the Economy, the Longer People Live from Peter Orszag (Miller, et al explained in 2009 Why are Recessions Good for your Health?). The WSJ had an article a few weeks ago about the health impact of the lifestyle of investment banking (2/15/2012), so perhaps the huge drop in US IPOs the last decade has a positive for some.
- Last week, the Economist had an article titled Over-regulated America in which they noted that "America’s share of initial public offerings fell from 67% in 2002 (when Sarbox passed) to 16% last year." Yet, the trend in dropping numbers of US public companies started earlier. According to Wilshire Associates, sponsor of the Wilshire 5000, there are only 3665 publicly listed companies in the US at the end of January, down from 7458 companies at the end of 1997. So, in the last 15 years the number of US listed companies has been more than cut in half. If we extrapolate, at that rate (about 250 fewer companies per year) by the end of 2014, there would be < 3000 - would the Russell 3000 get renamed? By the end of 2025, there would be < 500 stocks - would the S&P 500 get renamed? And by the end of 2027, there would be no more US listed stocks. Rick Ferri also noted the trend in The Incredible Shrinking Market (3/10/2011) and The Total Economy Portfolio (2/27/2010) and he points out that there are more mutual funds and ETFs investing in US equities than there are US equities. Which reminds me of the old pizza joke, which in the investment/hedge fund industry could go something like "An executive asks his staff if they should start six or eight funds: better make it eight - at least one is bound to get hot and attract a bunch of suckers.”
- The latest experts to participate in the "Global" Financial Crisis Experts Survey are Phillip Anderson, author of The Secret Life of Real Estate and Banking, and Clive Boddy, author of The Corporate Psychopaths Theory of the Global Financial Crisis (hat tip to William Cohan and his article "an explanation for the financial crisis we can all agree with.")
- Many have blamed the profession of economics for contributing to the Global Financial Crisis. But unlike many that have criticized Economics since the crisis, Steve Keen criticized the field in his 2001 book Debunking Economics and began warning about the pending crisis several years before it began. Keen updated and revised his book last year and I review the updated version of Debunking Economics and discuss The State of Economics here, including links to recent articles and books discussing economics and the crisis causes and prescriptions.
- When I started InvestorHome in 1996 one of the sites I linked to and found the most useful was Dr. Ed Yardeni's web site. Yardeni was a student of Nobel Laureate James Tobin and has held high profile roles at many firms including Deutsche Bank, but now heads Yardeni Research. It's been many years, but it's nice to see Yardeni blogging for free again and I've returned his blog link to the home page. Yardeni and Keen are two of the most consistently interesting economic bloggers.
- The Global Financial Crisis is widely considered to have started with subprime mortgage problems in the US, but the crisis impacted countries and people around the world. The latest experts to participate in the "Global" Financial Crisis Experts Survey are Michael Lim Mah-Hui and Fred Harrison and they add perspectives from Asia and Europe. Michael Lim Mah-Hui has both academic and professional experience, having worked for several decades at banks in the US and Asia. He coauthored Nowhere to Hide: The Great Financial Crisis and Challenges for Asia and his papers include The Impact of the Global Financial Crisis: The Case of Malaysia and Financial Liberalization and the Impact of the Financial Crisis on Singapore. Harrison (UK) has been credited with predicting the crisis (by for instance, Dirk Bezemer in No One Saw This Coming), often citing his predictions from his 2005 book Boom Bust. Yet back in 1997 (in The Chaos Makers) Harrison predicted frenzied activity in the land market with prices peaking by 2007, which would be the primary cause of and "presage the global depression." While many have been recognized for predicting the crisis, Harrison and Fred Foldvary appear to have been among the first, eerily both publicly predicting in 1997 a land/housing based bubble around 2007 to be followed by a major contraction/depression (also documented by Mason Gaffney in After the Crash).
- 4Q2011 was a good one for stocks and bonds, but US stocks were just roughly flat for 2011. US equity investors generally lagged balanced and bond investors, but still did well versus foreign stocks in general, Hedge Fund investors (which dropped an estimated 5% on average, and lagged for the third straight year), and even Buffett’s Berkshire Hathaway. USA Today discusses bonds outperforming stocks over the past 30, 20, and 10 years per the famous Ibbotson Associates SBBI data. Among the many year-end commentaries with interesting analysis and graphics are Schwab, the Economist, the WSJ's 2011 timeline, as well as Morningstar's Fund Category Returns.
- The latest experts (and prolific authors) to weigh in on the Global Financial Crisis Experts Survey as 2011 came to close were
- Some outstanding commentary on the Global Financial Crisis has appeared in the Financial Analysts Journal. To supplement the Crisis Links page, I've created a page of the articles that have appeared there. Most are free to the public (including numerous crisis book reviews). They include commentary from some of the most prominent individuals in both the academic and investment communities, beginning with a 2008 article by John Bogle. See Global Financial Crisis Articles in The Financial Analysts Journal.
- The latest expert to weigh in on the Global Financial Crisis Experts Survey is UCLA Professor and author of over 100 published papers (including many award winners), Richard Roll.
- Richard Koo (author of The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession) has a new paper out titled The world in balance sheet recession: causes, cure, and politics in real-world economics review (12/12/2011), which opens with this point. "Remarkable similarities between house price movements in the U.S. this time and in Japan 15 years ago, illustrated in Exhibit 1, suggest that the two countries have indeed contracted a similar disease." Koo previously made this point in How to Avoid a Third Depression (Koo Bio on last page) in presenting to the U.S. House of Representatives on July 22, 2010. Sadly, the Japan comparison is not a new observation. John Talbott wrote the following prescient comparison between Japan and US Real Estate Prices (as US prices were peaking just prior to the collapse and onset of the Global Financial Crisis) in Chapter 1 of Sell Now! (2006) roughly six years ago."the United States is becoming more and more like Japan every day."
"Even if you optimistically (and naively) believe our government is independent of political pressure brought on it by industry and the banks, the Fed may be very slow to force banks to recognize losses and thus push the problem out for years. In an attempt to protect some of the biggest banks and possibly avert a bank run on the entire system, the Fed may choose to punish the American economy for years as it struggles slowly out of the loan morass it created during the real estate bubble. No, the story Japan has to tell is not a pretty one, but unless we are expected to repeat their troubled history we had best do something differently with our future."
- Recent additions to the Global Financial Crisis Experts Survey include
- Les Leopold, author of The Looting of America
- Matthew Lynn, WSJ MarketWatch columnist and author of Bust: Greece, the Euro and the Sovereign Debt Crisis
- Yalman Onaran, Bloomberg News reporter and author of Zombie Banks
- John Train, investment professional and prolific author of over 20 books and more than 400 columns and articles.
- Discussions about Warren Buffett (who in 2002 called derivatives "time bombs, both for the parties that deal in them and the economic system") and Joshua Rosner (who wrote in 2007 "The feared outcome is nothing less than a 21st century bank run" among other warnings) have been added to Who Predicted the Crisis?
- The initial results for the Global Financial Crisis Experts Survey included 22 participants and 7 individuals that predicted the housing crash and/or financial crisis in advance. Three additional experts have weighed in and the latest results bring the sample to 25 (and 8 Predictors). The new participants are
- Roddy Boyd, author of Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide
- Aaron Brown, investment professional and author of Red-Blooded Risk: The Secret History of Wall Street
- Ann Pettifor, Crisis Predictor and author of The Coming First World Debt Crisis
- A new addition to Who Predicted the Crisis is Sir Andrew Large. Large is credited by multiple sources with warning about the coming crash at the London School of Economics in a 2004 speech (he was then deputy governor of the Bank of England - the UK central bank). He reportedly continued to make similar speeches and argue for another two years that the system was unsustainable (he reportedly gave up and retired in January 2006 before his term was up). See Steve Denning's Lest We Forget: Why We Had A Financial Crisis (11/22/2011) which cites Masters of Nothing: How the Crash Will Happen Again Unless We Understand Human Nature by Matthew Hancock and Nadhim Zahawi (not yet released in the US, but available in the UK)
- Interesting article today in P&I by Arleen Jacobius about publicly available REITs. Over the last 20 years REIT returns beat real estate funds, other alts (11/15/2011), and that's not just one study. She notes three including Morningstar's Commercial Real Estate Investment: REITs and Private Equity Real Estate Funds (September 2011), which found that REITs provided an annualized rate of return of 9.3%, compared with 4.4% for private equity core funds. Also noted is the fact that REIT fees and expenses averaged one-half to one-fourth of private equity real estate fees (which I would suggest is not unrelated).
- When the Global Financial Crisis began to spin out of control, a common phrase was used to imply that it was not predictable - "No one saw this coming." Many people have argued that is simply not true and a major effort to debunk that claim was published by Dirk Bezemer in 2009. It's title was "No One Saw This Coming": Understanding Financial Crisis Through Accounting Models. While many commentators have stated that only a few or a handful of people saw this coming, Bezemer documented 12 individuals that publicly warned in advance of the crisis. Since then there have been many Books discussing those that won big during the crisis and many articles, as well as a vote of thousands of economists to determine who was most accurate in predicting the crisis (the Revere Award - with Steve Keen winning along with Nouriel Roubini, and Dean Baker). I've summarized and linked to those that I've found on a new page about Who Predicted The Crisis? The number of individuals that I believe deserve some credit for sounding the warning bell is closer to 50 (including many outside the US).
- Given the split conclusions in the Final Report issued by the Financial Crisis Inquiry Commission, and the ongoing debate about the causes of the Global Financial Crisis, I decided to do a survey to try to clarify opinions and ask for simple prescriptions from the people that have studied and written about the crisis. I've surveyed 22 experts including crisis book authors (including several with bestsellers), published/cited researchers, and 7 that predicted the crisis (including Keen and Baker). Details of the Crisis Expert Survey are here and the initial results are here including one paragraphs summaries of Crisis Causes and Prescriptions for what needs to happen.
- I am finally starting to catch up to the modern internet world and you can follow updates to InvestorHome (including additional survey participants) via twitter.com.
- 3Q 2011 was a rough quarter for equities, while long bond holders (aside from high-yield) generally had gains. US stock funds were off roughly -17% on average, while balanced (stock/bond) funds dropped about -10%. Generally small caps lagged large caps and value lagged growth. Links have been updated on the Benchmarks page including in Morningstar's Fund Category Returns and Lipper/WSJ Yardsticks.
- 2Q 2011 had it's ups and downs, but in the end US Equity funds were generally flat (slightly positive on average per Morningstar, slightly negative per Lipper/WSJ). International stocks generally did better, although emerging markets were off roughly -1%. Large caps outperformed small and growth beat value, which is the opposite of the ten years numbers (as would be expected based on historical numbers and the three factor model). Taxable US Bond funds generally returned 1.5-2%, but high-yield returned roughly .6%, while municipals continued to recover from doomsday predictions and returned roughly 4%. Real Estate funds had strong returns, but natural resources and precious metals funds tended to have significantly negative returns for the quarter. The Benchmark page has been updated with new links.
- Senators Carl Levin and Tom Coburn released their extensive report titled Wall Street and The Financial Crisis: Anatomy of a Financial Collapse on 4/13/2011. Initial commentary and links have been added to the FCIC Report page. The official FCIC web site apparently has been taken down, but a back-up site is maintained by Stanford. On the topic of the Financial Crisis there is a new video of a presentation by one of the key players in the Big Short. See Michael Burry on the financial crisis courtesy of Vanderbilt University.
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