Weekend Reads for Global Investors: Return of the Bears

"Where are the bears?"

Early last month, I felt incredulous at the market's enthusiasm despite the lackluster economic performance worldwide. It turns out that the bears were just about to wake up from their three-year hibernation.

They came out in full force two weeks later. Global markets, as measured by the MSCI World Index in local currency terms, peaked on 19 September. (It was also the day that Alibaba went public.) At least one star manager has called a market top. Other folks are seeing plenty of red flags. And if nine ominous signals are not enough for you, here is one more . . . with the word "subprime" in the punch line. If you'd like some frame of reference to form your own opinion, it makes sense to take a closer look at the economic environment around the world — as well as the history of stock market volatility over the last century.

Also in the news last week was the announcement that French economist Jean Tirole won this year's Nobel prize in economics. Tirole's selection is well-deserved and has been widely applauded.

Nobel laureates are apparently an exceptional bunch. The best among them not only have a very high-level command of the subject matter but also can explain the intricacies of a complicated theory in amazing simplicity. Check out Nobel Laureate Myron Scholes's explanation of the intuition behind the famously difficult-to-follow Black–Scholes model and see if you'd agree. For the philosophers and analysts among you, check back next week for the second installment of the interview series with Scholes in which he explains why analysts fail.

The Nobel-winning theories are also often more relevant to the real world than people realize, even those theories generally believed to belong to the ivory tower. A good example is Nobel Laureate Robert Engle, who was named in the Economist article. In fact, his work on estimating VaR and systemic risk contributed significantly to our understanding of the global financial crisis. He's also published techniques that are very helpful in high frequency trading, among other things.

There are more examples. So much economic wisdom is poorly understood by policy makers, which is probably one reason why we are where we are today. For instance, what explains the slow worldwide recovery following the global financial crisis — despite unprecedented monetary stimulus by the major central banks? Could it be a classic liquidity trap? Keynes invented the term almost 80 years ago.

Return of the Bears

• "Gundlach: We've Seen the Stock Market Top" (Business Insider)
• "Nine Ominous Signals: Is the Stock Market about to Crash?" (SHFTplan.com)
• "Stock Market Since 1900" (The Big Picture)
• "The State of Investment around the World" (Philosophical Economics)
• "'People Are Buying Cars They Shouldn't Be': Subprime Autos Are the Next Crisis" (The Guardian)
• "Why Did the Stock Market Plummet Today?" (The Reformed Broker)

Weekend Reads: Nobel Prize Edition

It's a bit corny to check the Economist magazine for news on the Nobel Prize in Economics. The publication has indeed done a great job at keeping track of up-and-coming economists. I still recall that 20 some years ago they printed an article highlighting Paul Krugman, Gregory Mankiw, Jeffrey Sachs, and Larry Summers as the most promising young economists. "The Nobel Prize Goes to Jean Tirole" (Economist)

• Tirole's Nobel is well deserved, a point made passionately by a fellow economist in this blog post: "The 2014 Nobel Laureate in Economics Is Jean Tirole" (Marginal Revolution)
• Nobel Laureate Paul Krugman's recent column he touches on the liquidity trap: "Nobody Understands the Liquidity Trap, Cliff Asness Edition" (The New York Times)
• Does anyone read Keynes? "Global Signs of Slowdown Ripple across Markets, Vex Policy Makers" (Wall Street Journal)
• Repeat: Does anyone read Keynes? "World Economy So Damaged It May Need Permanent QE" (The Telegraph)
• Well, economists are human too . . . humans are not always right and have a problem admitting it: "Fed Critics Say ’10 Letter Warning Inflation Still Right" (Bloomberg)

Investing

• The legend continues: "Buffett's Stock Pickers Are Beating the Market" (Fortune)
• The author uses a concept called levered equity risk premium (ERP) to argue that we are not in a 1987 situation: "Why Do Stock Markets Crash?" (Macrofugue Analytics)
• "Cash: What Is It Good for?" (Vanguard) — I'll let you find out for yourself.
• The author highlights seven intelligencies, stuff that legends are made of. "Building the Perfect Investor" (Millenial Invest)

Environmental, Social, and Governance (ESG)

• "Pollution in China Hits 20 Times Safe Limit" (Mashable)
• "Three Big Economic Ideas in Waiting" (HBR Blog Network)

And Now for Some Truly Weekend Reading . . .

• "Maximizing Happiness Does Not Maximize Welfare" (naked capitalism)
• "What if You Just Hate Making Dinner?" (The New York Times Magazine)
• "New Battery That Charges Your Phone in Two Minutes Is Only Two Years Away" (Fast Company)
• "Masters of Small Talk Never Do These 10 Things — Do You?" (WiseBread)

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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