Friday, February 26, 2010

The Business of Bears

by Matt Malick

Over the last two years, the press has obsessed over stories about and interviews with the experts that “predicted” the financial crisis.  In most cases, “predicted” is a relative term.  After all, many of these forecasters were anticipating a financial crisis for five, ten or even twenty years.  The analogy that “a stopped clock is right twice a day” is apropos. 

Presently, it is interesting that many of these same commentators have not changed their views.  They are now predicting a double-dip recession, a debt crisis, persistently high unemployment, a governmental breakdown, and unsustainable national debts and deficits.

Because markets and economies generally move in cycles of boom and bust, it would seem likely that our economy will recover, just as it has historically done over and over again.  More importantly, the majority of the economic evidence is showing stabilization or growth, which has been the trend for more than six months. 

So, why would a cadre of analysts remain so vocally negative and bearish?  The answer: it pays.  Let us take a look at two of the most prominently negative commentators.

The Atlantic Monthly’s website in early February reported on the perks enjoyed by one of these economists.  “Nouriel Roubini . . . was christened ‘Dr. Doom’ by no less an authority than The New York Times.  The notorious nickname has helped Roubini become a global economic rock star, recently seen partying with models in St. Barts.”

When not painting the town red with fashion models, Roubini works with economic models as a Professor of Economics at New York University’s Stern School of Business, as a columnist for, and as the cofounder and Chairman of economic consultancy RGE Monitor. 

According to a March 30, 2009 article in the now defunct Portfolio Magazine, RGE Monitor successfully monetizes its prognostications: “Subscription prices range from $10,000, for ‘reading rights,’ to more than $100,000, which includes personal meetings and consultations with Roubini or his staff.”

So, is the persistently negative Roubini more right than wrong?  That is difficult to ascertain, but a review of his many predictions indicates to us that his record is highly spotty. 

The London Times reported on October 4, 2008, during the height of the financial crisis, that he “told a London conference that hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale . . . He said: ‘We've reached a situation of sheer panic.  Don't be surprised if policymakers need to close down markets for a week or two in coming days.’” 

In hindsight, neither of these predictions materialized.  Very few hedge funds failed and markets across the world remained open throughout the crisis.

Another persistent naysayer is Nassim Taleb, the author of two highly successful and critically acclaimed books, Fooled by Randomness and The Black Swan

The fundamental point of Taleb’s Black Swan framework is that highly improbable and unforeseen events happen more frequently than experts acknowledge and that these events have a disproportionate impact on outcomes.  Therefore, according to Taleb, predictions are nothing more than a fool’s game. 

Hypocritically, for someone who does not believe in predictions, Taleb has spent most of his career in the investment management and trading professions. 

In August of 2009, on the cable financial news network CNBC, Taleb predicted that “choking debt, continued high unemployment and a system that rewards bad behavior will hamstring an economic recovery,” according to 

Recently, Taleb had an interview published in ai5000 Magazine, where he revealed a fabulous calculation about investor Warren Buffet: “George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does.  Soros is vastly more robust.  I am not saying that Buffet does not have skill – I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.” 

Like any other successful person, Mr. Buffet has had luck on his side, but we are doubtful that Mr. Taleb can quantify such good fortune.  This made-for-media comment just happens to (randomly) correspond to the launch of the paperback edition of The Black Swan and also helps to promote Taleb’s next book, for which he has received a multi-million dollar advance.

In The Great Crash 1929, John Kenneth Galbraith astutely observes, “It requires neither courage nor prescience to predict disaster. . . Historians rejoice in crucifying the false prophet of the millennium.  They never dwell on the mistake of the man who wrongly predicted Armageddon.”

Our current view of the market and the economy happens to coincide with that of hedge fund manager Barton Biggs, who described his framework in a recent Bloomberg interview: “I am often wrong, always in doubt.”  But Mr. Biggs presently feels that “People are nervous and apprehensive . . . and if you are an optimist, as I am – that things are going to work out – that’s what provides an opportunity.”  And as a professional “go anywhere” hedge fund manager, Mr. Biggs has a significant financial incentive to be correct, not just blindly optimistic.

Oscar Wilde believed that, “The basis of optimism is sheer terror.”  While Wilde viewed the glass as half empty, Winston Churchill expressed a similar sentiment when he said, “I am an optimist – it does not seem to be much use being anything else.”

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