Gillian Tett’s book about how the credit default swap market became the monster that swallowed not just
We are certain that our quantitative-minded competitors will find this admission appalling, but hopefully not as appalling as the massive losses they have incurred over the years by placing undue reliance on investment models that are flawed in conception and execution.HCM believes that one must be a close reader of financial markets, and reading is a skill best learned through a thorough grounding in the humanities. Science and math have their place in the investment world, but too much emphasis on these disciplines has too often led to disaster (i.e. Long Term Capital Management). Investing is far more art than science. HCM long ago concluded that investors would be better served by studying psychology than economics in trying to understand the markets, and the school of thought known as behavioral finance has undertaken to combine these two fields very effectively. As Ms. Tett’s history of a good idea gone wild demonstrates, a familiarity with the irrational is far more valuable than quantitative and technical knowledge in evaluating the market landscape.
The ability to digest information and place it within any kind of meaningful context has been compromised by the constant stream of information that is overwhelming in its volume and underwhelming in its relevance. Nonsense has been elevated to the level of news, while news has been devalued to the level of nonsense.
Despite what the pundits would have you believe, nobody has the faintest idea whether the economy is going to experience sustainable growth once the government stops stimulating it. The Armageddon trade is clearly off the table, but the Return to Nirvana trade is nowhere on the horizon either. Second quarter earnings were impressively ahead of estimates, but like first quarter estimates were again based on cost cutting and balance sheet reparation, not revenue growth. In fact, revenues were sharply down in virtually every industry, suggesting that the economy is still shrinking. An economy can’t shrink itself to prosperity, so sooner rather than later either revenue growth will appear or there will be more trouble ahead.
Skeptics that we are, we have been bemused by the willingness of market observers to accept
Our concerns about the quality and sustainability of
While providing a short-term boost that offers hope for those around the world grasping for green shoots, China’s stimulus is more likely a recipe for inflation and ultimately for boom and bust. HCM has always believed that
Related book: Fool’s Gold