Betting your views, part II, Nouriel Roubini edition

John dePalma directs me to this article, excerpt:

…Just ask Nouriel Roubini
of New York University, who has a reputation as the most pessimistic
economist in academe. He deserves it. His most recent paper, published
last week, is entitled: "Can the Fed and Policy Makers Avoid a Systemic
Financial Meltdown? Most Likely Not."  Nobody is more aware of the
gravity of the financial situation, and nobody has done more to point
out the risks of a systemic crisis.  So how are Roubini's
own funds invested? They are 100 per cent in equities. In the long run
stocks do best and he is not yet close to retirement, so he keeps
putting more money into index funds each month. Fully aware of the
gravity of the financial situation, he is also aware of the futility of
trying to take action or to time the market. Those tempted to make the
investing equivalent of a goalkeeper's despairing dive should take note.

That's what I call taking mental accounting to an extreme.


"In the long run stocks do best"

No, in the 1900s, in the US, stocks did best. These two are not the same thing. The idea that there is one static rule for winning is naive. The meme that stocks are the best asset class has been around for a couple of decades, and its existence should guarantee stocks underperform because there will be over-investment in stocks so long as the meme dominates the landscape.

Two years ago the case shiller house price indices were starting to go down, but the pop financial culture mantra was that there had never been a national decline in house prices. By which it was meant that house prices hadn't gone done nationally in the past 50 years. In the US. When I pointed out to friends who were considering buying houses that over 350 years in Amsterdam the cumulative real return on housing was essentially zero (with tons of volatility), I was blown off. And these are smart, quantitative, analytical guys. I printed out the study at least half a dozen times and handed it to them. They all bought houses / apartments.

One side effect of this recession/depression is that millions of 50-62 year olds who had 1.2x their net worth in stocks and housing assets are not going to retire in the next 3 to 5 years. The system has effectively extended their working lives, and their incremental production will benefit us all. Even if some of it is in the form of papers about how the Fed is bound to screw up.

I think the thing betters demand is that predictors have 100% confidence, which is silly. Let's say Roubini has 60% confidence in his essay. I think very much has the right to make the case. But at 60% confidence he may still have reason to go long-term long on the markets.

Maybe a crash wouldn't play out in a way that is safely shortable. Maybe the horse will sing.

(But I agree with Tyler that 100% equities might be excessive. Better I think "his age in bonds.")

I think Roubini overestimates his longevity. Banging 20 year old models might have something to do with that.

How much wealthier has Roubini become from the corporate and D.C. speaking circuit as a result of his "prognostications"? That's the financial question I'm really interested in.

["In the long run stocks do best"

No, in the 1900s, in the US, stocks did best.]

don't claim someone is wrong about "the long run" unless you're going to quantify what you mean.

over the course of 15 years or longer (or if you're really an empiricist, look at mutual funds and watch the returns for 'the life of the fund') stocks are almost guaranteed to beat bonds and short-term investments.

obligatory keynes quote:

in the long run, we are all dead.


Try July 1966 to August 1982, a period of inflation I might add. The Dow first hit
1,000 on the first date and then promptly dropped below that number and stayed below
until sometime after August, 192, at which point it was in the 700s. I believe that
we are talking about a 16 year time period. That, and some other episodes, is why
those handing out these sorts of lines usually say "more than 20 years" rather than
"more than 15" as you just did.

Tyler, look into correcting this piece immediately. Unfortunately Nouriel gates his RGE Monitor, so I can't produce the link, but I do believe he said last autumn that he was going to cash, and iirc, he advised others to do so. I don't recall seeing recently that he has changed that stance.

"In the long run, equity does best." Only, surely, if shares are good value when you buy them? If they are lousy value then, as with anything else that's lousy value, they will let you down. I recommend the writings of Andrew Smithers who makes the case that Tobin's Q and Shiller's Cyclically-Adjusted Price-to-Earnings Ratio have agreed pretty well on when shares have been good value. He makes no claim that he knows when shares will change from being poor to good value, but he did a fine job of warning me that they were lousy value over that stretch that ended with their collapse. The fact that he didn't know just when the collapse would happen was far less important to me than the fact that he warned me that buying shares back in, say, 2006 was very unlikely to give a good long-term return. Last time I checked, he was of the opinion that they were about "fair value", with the caveat that historically they have usually bottomed below "fair value". Quite apart from Smithers' prognostications, there is the fact that an awful lot of people dip their spoons in your broth before you, the investor, benefits from a company's growth.

Bonds have beaten stocks for the past 30 years:

He's simply hedging.

Went to Stern, have seen him speak many times. He feels that being an active trader is not what he is good at, so prefers Index Mutual Funds as his long term investment; he does not have the expertise, nor the time or the inclination to be an active investor. The comments are right on that his new found celebrity may allow him to shoulder more uncertainty in the short run. I am sure he has no shortage of options for generating cash.

With the type of prognostications that Roubini makes, why not have all of your money in equities?

If his predictions are wrong, he profits, if they are right, it doesn't matter what he loses...conventional national money will be worth more in nutritional value, anyway...

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