Five Years

There are a lot of media outlets marking the five year anniversary of the September 11 attacks. Barron's had an article by Michael Santoli that was a great read about the evolution of things, markets and otherwise, since 9/11.

The article specifically touched on whether fear is priced in differently today than before 9/11 because of the increased prices and interest in commodities, the explosive growth of the credit default swaps market, the popularity of hedge funds and he even ties in the real estate boom as being a by-product of investors looking for other assets to own, obviously low interest rates contributed to the housing boom as well.

Michael sort of addresses what strikes me as obvious, and something I have been thinking about for quite a while which is markets have become more efficient as investors are a little more respectful of bear markets for equities and that they no longer view trading stocks as a way to get rich quick.

One nugget from the article was that in April 2000 assets at Charles Schwab were $775 billion with 386,000 trades per day. Today Schwab as $1.3 trillion in assets but only 245,000 trades per day. Less people view trading stocks as a means to get rich quick (repeated from above purposely).

The portfolios I manage are structured to take in various types of assets with different correlations. There are now many more investors doing something similar. I personally know a lot more about foreign markets, commodities and currencies than I did ten years ago as the bubble was starting to ramp up, how about you?

We all know that the VIX index has been lower than normal, relative to its own history, for the last few years. Complacency is often cited as the reason and that could be why but perhaps a part of it is a greater understanding of risk and inter-market relationships by more participants. The growth in interest of derivatives speaks to a greater desire have some protection against terror or war or anything else.

Derivatives are a double edged sword and no doubt some fund or trading desk will blow itself up getting caught with too much of the wrong product on the wrong side of the market. In May I participated in an back and forth about derivatives in the WSJ Online with Michael Panzner. Michael felt/feels that that a major blow up, caused by too many derivatives is looming and inevitable, I do not. As I said someone will blow themselves up but the point of the debate with Michael is whether this poses a systemic threat.

Used correctly, and this obviously is the biggest variable, derivatives are a tool to manage risk. If the increase in derivatives is more about risk management than anything else, it is possible that there will be muted ups and downs in stocks like we have had for the last couple of years.

It's just a theory.