The wisdom of Alex Tabarrok

From Lisa Abramowicz on Twitter:

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping:” Thaler [link]

Alex on Twitter:

It’s funny that the behavioral critique of the market is now that it is not volatile enough!


Maybe these are simply not terribly risky times?

They are not, but if your self-esteem was slaughtered on 11/8/16, it sure feels that way!

I thought the same thing. That's quite a claim that this is the "riskiest moment of our lives". Riskier than 1987, 2000, or 2007?

And then you read his rationale, which basically boiled down to risks posed by Trump, Republicans and Brexit, revealing he has no idea what he's talking about.

There are good arguments that there are elevated risks for investing in the market right now, but he didn't provide those.

1983-1993 in Canada proved the prevailing economic wisdom wrong, dangerously wrong. Trump by curtailing or even limiting the increase in regulation is having an effect that is unexpected by everyone except people actually doing things in the market place.

Hahahaha. Nobels... am i right?

Things are indeed unusually calm, and yes, there are a lot of risks, but politics aside, Trump and the Fed essentially want to create inflation.
Stocks could do well with a bit more inflation. Bonds, well, not so much.
But we're also almost assuredly laying the groundwork for the next crisis: the perception of very low risk leads to excessive risk-taking behavior.
Such is the moral hazard.

It is funny, but that in itself doesn't mean it is right or wrong. Splitting the difference, we can't use old "the price is right" rational market rules to say that a 22,000 Dow is "fairly priced." Neither can we use behavioral finance rules to say that the Dow should be any other number in particular. Or the VIX.

I would imagine the smart money knows this, and the risk in stocks is offset by broader portfolios.

I bet no matter how pro-market or pro-EMH you are, you aren't going to tell anyone older than 30 to be all in stocks.

Why does age matter?

Market cycles last decades but generally they resolve in 30 (as a guess) years. And so traditional advice is that you can always buy the market in your 20's and come out ahead. A 60 year old may not have 30 years for portfolio recovery.

An old piece of advice was "your age in bonds" a 25 year old has 25% bonds, 75% stock. If you search "your age in bonds" you can see great debate along these lines.

As you approach retirement age you need to start protecting principal / reducing volatility.

With people living longer and longer after retirement age, the balance of volatility versus return should also be shifting. And, I hasten to add, at any age you should try to judge your own risk tolerance, which is at least as important as age and doesn't get nearly enough attention. There are 25-year-olds that will panic at any sign of market volatility and 65-year-olds that do not.

That really depends on whether you will (at some point) depend on drawing down your principal. Otherwise all that matters is the level and volatility of your income stream, not the volatility of the principal from which it derives.
Since dividends are obviously much less volatile than stock prices and likely to rise at least in line with inflation, and the yield on a well diversified portfolio of decent quality dividend paying stocks much higher than on bonds, then I would stick with a good allocation to stocks.


Not sure if you misunderstood me, since I was arguing for a shift to more stocks for early retirees, i.e. we may be in partial agreement.

As for your distinction between income and principle, I regard that as partly artificial when the investments are held in a tax-deferred account. Obviously when they are not in a tax-deferred account, differences in tax treatment come into play. (Or, more simply, in an IRA or 401K you can sell some appreciated stocks, or you can have dividends, and it's really all income when it comes out of the IRA.)

Age doesn't matter. What matters is how much money you have vs how much you need to live on. If you need, say, $40k / yr from your investments & you have over $600k, it would take a long slump to create unrecoverable problems. Best to just stay in stocks and earn the higher return.

Seeing where bond valuations are, and while I'd rather use a scalpel than a sledge, I'd tell 30 year olds to be all in stocks. But specific ones. And I'd tell a 40 year old to be in all stocks, or at least
have no bonds. Of course, not highly risk averse ones, or ones with very substantial means that mostly want to protect their capital.
I'm nearing 50 and have no bonds at all, and I'm a investment counselor (+CFA) and I'm not at all a believer in the 100 - age as an asset allocation. (Should most 25 year olds have anything in bonds? No!)

There are endless variations, and data sets to run them against. I am not recommending gold, but the page below has a chart called "Dow Jones in constant 1920 dollars."

A high stock allocation is a bet that Dow performance 1960 to 1980 will never happen again. I have no idea how an investment counselor should approach that. Do we assume a new regime? Or that anything that did happen could again?

Anyone under 40 should massively prefer stocks over bonds right now.

A surprising number of folks are making statements which amount to assurance about future performance.

Anyone who has spent any time with 100 year market histories knows a lot can happen, and no portfolio allocation is "best" or "massively" preferred for all time periods. No one can tell you a best approach for the 2020s, until maybe 2030.

We allocate because we are unsure, have humility, and experience.

The EMH, of course, says nothing about what the long-run rate of return on stocks will be, or how much risk there is in the market. It only addresses whether active managers can beat the market index.

This is the economist equivalent of the campus snowflakes complaining that hearing ideas they disagree with makes them feel "unsafe."

So there is no risk, while America loses ground, Congress is grindlocked, the economy is being hollowed out by the Chinese, America can not Stop Russia in Europe and Asia and the Ship of State is shipwrecked?

All of those things predate Trump.

So the risks continues. But America has been anesthetized by a presidential conman. Jingoism is the opium of Americans - and opioids of course.

Trump is the voters collectively handing everything over the the radicals in the GOP who promised the biggest free lunches for the longest and loudest, blaming their failure to deliver free lunches even after years in in elected office on Obama, Pelosi, Ried, Democrats, liberals, and at least 50 million people with zero power.

So, now the free lunch promising GOP controls the White House, the House, the Senate, everything in two dozen States, and two thirds in another dozen with the only check on the GOP being reality and TANSTAAFL.

For example, cutting government spending is supposed to unleash the economy, create more jobs, and make everyone richer.

OK, so, Texas cut government spending and played a significant role in cutting Federal government spending with the reward being homes flooded, businesses disrupted, thanks to spending cuts to make people richer on wasteful paying of workers to fix dams and levies.

Texas has the opportunity to recover from and build better by not paying any workers by individualism, doing all the work yourself, because working for free puts money in your pockets, making you richer and richer.

The fundamental GOP principle Forrest three decades is forcing everyone to pay workers to work is poverty causing, and you end up with more money going into your pockets by cutting of ending payments to workers. Even workers end up richer when they lose their job because their costs are reduced by twice as much and puts twice as much money in the now unemployed worker pockets. According to GOP economic talking points which adhere to free lunch economics.

Every payment you make to workers is bad for you and the economy, according to the GOP.

Paying workers to work costs too much.

Fixing levies costs to much because workers must be paid. Making bridges safer costs too much because too many workers must be paid. Educating kids and workers costs too much because workers must be paid.

Paying workers harms the over all economy.

The economy will be far better when gdp goes entirely to profit.

America losing ground:

i) yes, but countries are always losing ground somewhere, and making it up elsewhere.

Or, ii) yes, but America was always going to lose ground vs. Asia/China because of

iii) no, not really losing ground.

Congress gridlocked:

i) is this new and especially, is this worrisome?

America could not stop Russia in Europe.

i) maybe it did stop Russia. ii) maybe there's no point in stopping Russia in eastern Ukraine. iii) maybe the cost of losing eastern Ukraine is worth the Europeans realizing what Russia under Putin is? iv) maybe it's the job of America to stop Russia in Poland, Estonia, Germany etc., but not in eastern Ukraine.

The ship of state is shipwrecked:

i) no, the ship of state is merely listing slightly because a loud jackass is barking orders, from time to time, the results of which we cannot see yet, but which might not be completely horrible. ii) at least the other jackass didn't get herself anointed President, a position from which she could also do damage, but of another sort ... perhaps worse.

because of demographics, etc.

White people are stupid in thinking it's better to have families with income/consumption of $2000 per month per person instead of families with income/consumption of $500 or less per family member.

It's like Thaler is trying to confirm every cliché about intellectuals and Nobel laureates, in just one interview.

People are surprised that stock markets keep going up during the greatest period of wealth creation in human history. The amount of people entering the middle class globally is unprecedented, but if you read the news it's OMG TRUMP IS GOING TO START A NUKELAR WAR.

Both can be true.

The best of times, the worst of times?

People are worried that people aren't worried enough.--Matt Levine

Plus ca change.

As a trader there is a simple explanation.

Algos, quant funds, etf's, monetary policy, and a long bull market (meaning capital allocators have been trained for now almost a decade to just be long) all contributing to reducing volatility.

Algos are very efficient at reducing short-term volatility. I would argue they are inefficient at reducing volatility when a real event occurs. They have significantly damaged the profitable of a lot of human traders or human driven prop desks. Those guys were most likely to be the bid in the equity market when normal investors are freaking out (Doctors, lawyers, etc). IMO we are likely to have low volatility and gap volatility. When an event like brexxit or trump election occurs the overnight limit down markets are going to be very common, but on a day to day basis volatility will be low.

Quant funds are sort of like algos; plus they may be trend chasing. May have common portfolio strategies like risks parity etc. Those may increase volatility at times, but a lot of the time lower volatility.

ETF's. Passive money just constant bid in market. When people owned individual equities; individual equities have a lot more vol than the broad market so that leaked into the broader indexes.

Long-bull market - the allocators that would be tactical and jump out of the market have either been replaced or they have learned to be long and stay long. Less short term trading from those types.

Monetary policy has gotten much closer to sumners ngdp targeting (even heard a fed member propose level targeting today on the squawk). NGDP targeting should lower equity volatilty and have a more stable economy.

Well stated, sir.

Behavioral econ suffers from "thrust and parry" disease:
In other words, the problem with behavioral econ is not that we all have human quirks; the problem is that our human quirks move in opposing directions.

We need more "fresh bread."

Historically short term volatility was a pricing anomaly.

The rise of high frequency trading and instruments for shorting the Vix have both driven down volatility and reduced the volatility discount in the market.

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