Reader Leisa asked how I prioritize risks that confront the market. This is not easy to do or articulate.
Part of it is understanding history, whether you have lived it or studied it. Very rarely are things truly different. The details might be different but things that threaten liquidity one way or another are going to cause some amount of problems. Terror matters. War matters. One way trading matters.
A good microcosm about how to get started might be with the yen. I have been studying and writing about currencies for quite a while. The extent to which currencies are important to stocks ebbs and flows. My guess is that it is not that important, for US stock prices, that often. I perceive it is more of a regular issue for foreign equity markets. But when it does matters it really matters.
Part of how I view my job is to always stay in touch with currencies which gives me a better chance of being out in front of a problem.
The yen carry trade was/is extremely popular and given the extent to which the economic and stock market recoveries have come from cheap and easy to access money it seemed logical that it could go the other way. That and it did not seem like enough people were worried about it.
So perhaps this is a function of experience? This blog attempts to dissect what can go wrong before it happens when this is possible and to relay the importance of looking forward. I have been concerned with the inverted yield curve for ages, the first time I expressed concern that it would invert was in early 2005 on CNBC Asia, sorry no link. I thought it was clear it would happen.
Is the slope of the curve playing a role in the sub prime issue? It does disrupt liquidity.
There are always risks, how to triage those risks also involves gut feelings. You take in the data, assess it the best you can and draw a conclusion.
I realize this is not definitive but its all I've got.
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2 comments:
Roger, thanks for taking a stab at my question. I suppose the articulation and rating of risks is part art/part science. I don't think that your answer surprises, but I had to take a shot at discovering something more definitive.
FWIW, I find myself to be quite impressionable by others that sound smarter. Someone, here or elsewehre, remarked that the bears always sound more intelligent. Some of us are more prone to assimilate the contrarian view and since the mkt is downmore than up, it's the bear's view. And, I personally think that we/I allow them to do us a disservice. I do wonder when they are offering "cautious" advice and making it sound like a 10plus percent correction is around the corner, just how much money do they exposed to equities. I'll bet ya its a lot more than it sounds. If Kudlow was smart, rather just Eeeemotional, he would ask this of Larry R et al.
To Roger's credit, for someone so balanced, his blog is not boring.
RE money managers using managers, there was a storyin the wall st journal about this over a decade ago. Ralph Wanger was mentioned as the most popular mgr among mgrs being used. He's of acorn fame.
Last, there's a story going around that Paulson is bringing back the Plunge Protection Team. Legal manipulation. This is a reality based story.
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