Archive for the ‘markets’ Category

House of Simeon

October 5, 2007

A fascinating photo-essay about building a house in Malawi. The post illustrates some of the economic challenges facing developing countries while conveying the richness of this ancient tradition.

The author is a friend of mine from college.

Me being a perma-bear

October 1, 2007

Since graduating college and joining the workforce, I’ve developed an interest in investing my earnings. Now, I’m certainly not an expert. I never set out to learn finance in any sort of organized way, and I have no idea what the Black-Scholes model is. But I do enjoy reading about the subject when I have spare time.

Of the books I’ve read, by far the most influential has been David Swensen’s “Unconventional Success.” Basically Swensen, the chief officer of Yale’s endowment, recommends individuals assume a diverse, equity-based, tax-sensitive, passively-managed approach to investing. In practice, this means use tax shelters, invest mostly in indexed stock funds, diversify (across capital-sizes, sectors, and markets), and basically ignore investments except for periodically re-balancing contributions to account for rates of growth and shifting priorities.

I’ve more or less taken this advice to heart. Outside of my Roth IRA, my 401K and my cash savings, effectively all of my money is invested in low-fee index funds managed by Vanguard. And thankfully, on paper I’ve done very well over the past 3 years, although I don’t attribute this to skill so much as to good fortune.

I’ve noticed something’s changed over the past year or so, however, and it’s unsettling. My sense is that there was a time, and not so long ago either, when markets responded in a relatively straight-forward way to economic indicators. GM would release a weak earnings report and the markets would fall. An increase in core-inflation would cause the markets to rise. And yes, the Fed would raise interest rates 50-basis points instead of the expected 25, and the markets would plummet. In short, once upon a time markets responded in predictable ways to events that influenced their equities’ core values. There was a clear connection between stock price and underlying economic principles. Nowadays, everything seems to be about managing expectations. Investors see core inflation dropping, they surmise that others will expect the Fed to hold off on raising interest rates, that as a result the investment banks won’t have to liquidate their consolidated mortgage holdings at a loss, that therefore the federal government’s less likely to provide some sort of bail out and, as a result, Countrywide stock should become less attractive. Not that Countrywide’s going to make less money, mind you, just that its stock price will decrease. All this reasoning is very technical and convoluted, and more than anything else it’s about psychology and complex systems. It’s also completely non-scientific in that there are no longer verifiable cause-and-effect experiments that can be performed. If you don’t believe this is true, then why are the markets soaring again today, despite no substantive changes? And why are the analysts’ supposed explanations for the surge so unsatisfying?

This psychology-based behavior is problematic for several reasons. Obviously, it hugely increases market volatility, which carries major costs. Of equal concern to me, however, is the way it affects the general, non-stock-owning population, which will be the topic of another post.

Of course, it’s entirely possible my supposed time of reason never actually existed. Maybe I was less observant a couple years ago, or I just extrapolated made-up trends from limited observations, or maybe I’m simply misremembering. Certainly the 90’s tech bubble wasn’t a calculated reaction to strong earnings. And certainly it’s worth keeping in mind that the majority of my savings is still in equities. On the other hand, a lot of my money is invested in foreign markets, particularly developing markets, where prices seem somewhat better-tied to core values.