I first worked with Yale economist Robert Shiller in connection with a conference called the CFA Institute Risk Symposium, which was held in New York in February 2006. I had recruited Peter Bernstein to speak and to serve as an adviser on the program. “You’ve got to get Shiller,” Peter told me, and Bob was kind enough to accept our invitation to speak.
It was a wonderful conference in what seems now an almost innocent age in the investment world. Standard deviation was still a metric of considerable importance, and volatility seemed, well, more theoretical than it does now. Over the course of a day and a half we examined risk from numerous angles, and Bob Shiller ended the conference with a brief overview of the biggest financial bubbles over time, comparing them with statistics from the U.S. housing market.
“Does it look like a bubble?” Shiller asked the audience, showing a series of hockey stick graphs. The one plotting the relationship between housing prices and rents was particularly damning.
“It looks like a bubble to me,” he said. “But don’t ask me when it’s going to pop. Bubbles can last a long time, far longer than we could imagine possible.”
He laid it out for all to see, and the rest is history as the bubble did indeed pop in spectacular fashion only 18 months later. Thanks to Bob, everyone at the conference saw it coming from a mile away (and some of us look back and wonder how it is we’re not as rich as John Paulson).
Of course, the financial crisis that began with the housing collapse continues in many respects to this day, held only partially at bay through unprecedented central bank intervention. “Quantitative Easing” and “QE2” have become part of the popular vernacular, as have many cynical descriptors like “kicking the can down the road,” “extend and pretend,” and “delay and pray.”
The prescription is easily enough described: cure the illness of excessive leverage by flooding the financial system with liquidity until the business cycle turns and economic growth ultimately allows outstanding debts to be settled without (cough) restructuring.
Whether or not this is an appropriate or successful strategy is something we’ll be debating for a long time. As an interested observer I will note, however, that one consequence of the ZIRP (zero interest rate policy) and other can-kicking measures is that they have cast doubt on the work of analysts who had made convincing cases that calamity was imminent but failed to account for the extraordinary measures taken to hold things together. For now, they can be said to be “wrong.”
Meredith Whitney is an example, having predicted numerous and massive defaults in the U.S. municipal bond market, which have failed to materialize within her stated time frame.
So is Marc Faber, though he has been circumspect with regard to the timing of his particular calamity. Faber, editor of the Gloom, Boom & Doom Report, has been at this a long time. My predecessors at CFA Institute first recruited him to speak at the Financial Analysts Seminar in the 1980s, and he’s been a fixture ever since, as well as a popular capital markets speaker with our CFA member societies. I don’t know what he talked about in the 80s, but in 2006, when I saw him speak for the first time at our Annual Conference in Zurich, he looked at worrisome U.S. debt trends and monetary policy he considered overly accommodating and declared that they must inevitably lead to the demise of the U.S. dollar.
Three years later, with the U.S. dollar very much still intact, I sat next to Marc at dinner the night before his talk at our inaugural CFA Institute Middle East Investment Conference in Bahrain. Marc had recently done a spate of financial talk shows in which he had mentioned that he had been advising clients to invest in farmland.
“Why did you tell them that?” I asked him.
He said that with every central banker on earth desperate to debase their currencies, it was essential to own real assets as a store of value in the event of a currency collapse. Then he leaned in a little closer.
“And if it gets really bad, you can go live there and grow food on it,” he said to me with a wink.
Marc’s most dire forecasts have not yet come to pass, but when does “late” become “wrong”? Clients following Faber’s advice to buy farmland in early 2009 have done pretty well, even if they have not been forced into subsistence farming just yet.
If the 25% year-over-year returns on 2011 farm prices published by the Kansas City Fed are to be believed, my guess is Marc’s clients probably forgive him for being wrong about the end of the world. That leaves me with two questions: Does he still think it’s coming? And has Bob Shiller seen this farm price data?
You can meet Shiller and Faber and ask them yourself by taking one of the remaining seats at this year’s Financial Analysts Seminar, 23-27 July at the Gleacher Center in Chicago, Illinois.
European bank notes overlaid with white clock face illustration from Shutterstock.