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Weekend reading: The Fed didn’t see it coming (and neither did me or you)

Weekend reading

Good reads from around the Web.

The further removed we are from the financial implosion of 2007 and 2008, the more you hear people downplaying the whole crisis.

Everyone, it now seems, knew something would go wrong. We all understood – newspaper columnists imply – how it would pan out. And as for investors, well it was obviously a buying opportunity!

Rubbish. Rubbish. Rubbish.

From our earliest days as toddlers reading about Hungry Caterpillars, we learn to parcel events into neat narratives where everything happens for a reason, and proceeds the only way it possibly could do.

But reality is not like that, and we’d do well to remember it.

A nice reminder was served up this week by the release of the 2007 minutes of the US Federal Reserve.

They reveal that the U.S. Central Bank was complacent about the tsunami heading towards its shores, even as the first sandcastles were crumbling:

According to the transcripts, the word “recession” wasn’t spoken until the summer.

A staff presentation described a highly unlikely, worst-case scenario that included a 10 percent drop in the stock market.

That still would not be enough to force the economy to contract, the staff assured senior Fed officials.

Er, not so much.

Lots of critics of Central Banks will use these minutes as ammunition against their influence on the economy. But that’s not my purpose here.

It’s more just interesting to remember that some of the best economic minds in the largest, most capitalist economy in the world – who even had confidential data that the rest of us don’t have access to – just didn’t see it coming.

These were human beings, being overconfident as all human beings are.

And funny, too:

Richard Fisher, the president of the Dallas Fed, expressed confidence during the October 30/31, 2007 meeting that investors were waking up to problems in the subprime market.

“Investors are coming home from lala land. To be sure, we’re not out of the woods quite yet, as President Plosser and President Rosengren mentioned. The situation remains real, but we’ve gone beyond suspended reality.

If you will forgive me, you might say we have gone from the ridiculous to the subprime.”

Boom boom!

(Actually, someone should have added a “boom boom!” It would have sounded pretty prescient a year later when Lehman Brothers blew up).

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Yorkshire Building Society is the latest to offer a fixed-rate mortgage under 2%. The Telegraph finds some pundits think two-year fixes could go to 1.5%.

Mainstream media money

Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site

Passive investing

  • Orlando the cat wins stock picking challenge – Guardian
  • How Vanguard amassed $2 trillion in assets – MarketWatch
  • Why iShares needs more competition in ETFs – Index Universe

Active investing

  • In hindsight, what P/E could you have paid? – Motley Fool
  • How low could Apple go? – Business Insider [or not]
  • Why growth plays don’t pay [Search result]FT
  • Where the stock market will be in 2017 – MarketWatch
  • Nikkei’s longest weekly winning streak since 1987 – Reuters

Other stuff worth reading

  • Investing isn’t the only risk in your life – New York Times
  • More thoughts on Bob the rogue self-outsourcer – Guardian
  • Why are your 20s so memorable? – Slate
  • Has technology really increased US income inequality? – New York Times

Book of the week: Re-reading You Can be a Stock Market Genius and loving it like always. Funny as well as a great framework if you want to turn to the dark side of stock picking. (Remember: You shouldn’t!)

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{ 25 comments… add one }
  • 1 Monk January 19, 2013, 2:20 pm

    I hate to disagree TI, but even my Granny knew something was amiss with the ease in which she could leverage up from the comfort of her warden controlled retirement home armed with only a Motorola DynaTAC and a State pension book…….!

  • 2 The Investor January 19, 2013, 2:42 pm

    @Monk — Well done granny. 😉 But the evidence is in those transcripts, as well as virtually every newspaper from the time.

    Monevator was only started in 2007 but I have early posts from then on unsustainable UK property prices and the global debt boom. I could cite anecdotal evidence I saw at the time, even overseas. (e.g. A friend who bought an $800k house in California in 2005 ish with a 100% mortgage despite having been in debt since the mid 90s).

    I could cite/link to this and ‘show’ how clever I was. But truth is I ended 2007 at least 75% in equities, and I’d only reduced to raise cash because I thought UK house prices might fall and I wanted to be ready to take advantage. If I truly half knew what was coming, I’d have gone to at least 50% cash.

    One bright note was I mainly sold financials, but this was again because I was worried about a UK house price slump hurting earnings and hence dividends, not a full blown existential crisis for capitalism.

    And ironically I actually even got that wrong from my local perspective, because London prices soon rose back to where they were!

    If Granny sits down and tells me her warts and all errors, and how she got some things right despite herself, I might listen.

    On the whole the more confident people are in investing, the less I listen to them. And when they say they we’re SO SO right years ago, I stop listening entirely!

    (Sorry, bit of a ranty response. Nothing personal! 🙂 Maybe cabin fever from the snow!)

  • 3 Retirement Investing Today January 19, 2013, 3:56 pm

    Even if you can see what’s coming I’m not sure as a personal investor that it is advisable to play the trading game and modify a portfolio heavily based on macro economic news. Maybe a tilt but certainly not putting it all on red. Market performance does not necessarilly correlate with macro-economic news. I say this for a couple of reasons.

    Firstly, two famous quotes spring to mind:
    – “The market can stay irrational longer than you can stay solvent.” – Keynes
    – “…in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.” – Graham

    Secondly, there is possibly more risk being out of the market than in it given that in the history of the stock market it seems to have always managed to reach a new high. This data is a bit out of date and admittedly it was a great time to be in the market but hopefully it reinforces my thoughts:
    – I remember reading a statistic that goes something like a person investing in the S&P 500 at the end of 1981 (assuming reinvested dividends) would have gained a 21% average annual return by 1998. Another person timing the market and missing the 30 best days, which is about 0.5% of the total market days, would have only seen an annual return of 9%. That is a big difference for being wrong a very small number of times.


  • 4 Monk January 19, 2013, 4:02 pm

    No worries TI, she’s pretty much immune to criticism as elderly people tend to be as they get older 🙂

    I wasn’t suggesting that she was an oracle or anything, or that the feeling in her water would manifest itself as far sighted financial decisions making the grandchildren all millionaires either this year or as Derek Trotter was fond of saying, this time next.

    I was thinking more that if my Granny and the shoe shine boy were saying something was wrong, the big brains at the Fed coupled with those elsewhere would have been looking to silence the alarm bells, given that they’re the experts and we’re just trying to make a few quid from the outside looking in.

    In fairness to our own CB’er he was saying as much, albeit in those careful terms so as not to upset anyone, yet still provide enough leeway to cover every eventuality. A bit like the BoE’s inflation forcast charts that look like the smoke trail from a Red Arrow display.

    That’s why Gran loves your site so much, she could KISS you for pushing the keep it simple passive investing mantra.

    Hmm maybe that should read KISPIM 🙂



  • 5 Willem de Leeuw January 19, 2013, 4:30 pm

    Yes, I agree. Wasn’t part of the rational behind the Lloyds/HBOS merger the idea at the time that there’d probably only be a mild recession, if at all…

    The “uh-oh” moment for me was a very short article in the Economist in mid-2006 that said you know something’s wrong when American banks are giving non-recourse, no deposit negative amortisation mortgages to people, i.e. you don’t make any principal or interest payments until the end of the loan’s term. I remember exactly where I was sitting when I read it, and then told everyone about it, but there were many smiles and nods.

    Anyway, I’m not saying I will call the next one, and I was more than six months early with my preparations, but I suppose the lesson is to read widely and not take anything for granted.

  • 6 Paul S January 19, 2013, 4:38 pm

    I am not Monk’s granny but I knew something was wrong. The stock market collapse after the dot.com bust was just not big enough (because of central bank intervention) and I spent the next 8 years waiting for the second shoe to drop. I did not know how or when it was going to happen but it looked like housing would be involved. I stayed out of equities from 1998 (it was crazy) until 2008. Now it has dropped I am very comfortable back in the market.

  • 7 mickyfinigan January 19, 2013, 4:56 pm

    I knew the crash was coming. I read heavily in the non-msm and it was widely talked about but of course it was ignored by the main stream as they usually consider it conspirational.

  • 8 The Investor January 19, 2013, 5:02 pm

    @mickyfinigan — That would be the non-MSM that has predicted total capitalist breakdown while the markets have gone on to surpass their old highs… 😉

  • 9 OldPro January 19, 2013, 5:03 pm

    MSM, eh? Isn’t that what Chinese chefs put into their sweet and sour?!

  • 10 Salis Grano January 19, 2013, 5:13 pm

    I reduced equity exposure in 2006/7 from 40% to 25% in order to fund home improvements. I didn’t see it coming, however; I was just lucky. On the other hand, I definitely remember talking to people about the idiocy of 100%+ mortgages from about 2000 onwards.

  • 11 ermine January 20, 2013, 11:18 am

    BTW the blog’s gone all plain Jane on me so the theme seems to be knackered!

  • 12 Neverland January 20, 2013, 11:48 am

    I agree with the posters who said you can see things coming and you can act appropriately

    I saw the crazy exuberance in 1999 (lastminute.com and 100+ PEs on technology stocks) and 2007 (booming leverage fuelled frenzy in house prices and leveraged buy-outs) and I did ratchet down my equity exposure a lot

    I did actually increase my equity exposure a lot in March 2003 and March 2009 and its been a huge boost to my returns

    (a lot of other wrong decisions have of course decreased it)

    Basically I think a rational skeptical person can see when the prevailing opinion is either too optimistic or two gloomy and just being passive and doing nothing at that time will lead to lower returns at the end of the day

    I remember there is a blog post of yours saying “sell everything you own and buy equities” from early 2009 as well…

  • 13 The Investor January 21, 2013, 10:45 am

    @OldPro — It’s Internet for “mainstream media”

    @Salis — Yes, clearly insane. I agree and didn’t buy in London accordingly. But here I am and my house I rent is valued at a new high (going on others in the street) and priced at 25x annual rental, as well as being well out-of-whack to historical norms on earnings. It dipped for maybe 18 months around 2009. So… were we really right? 🙂 (Bravo for the nod to luck, sir!)

    @ermine — Thanks as ever for the heads up. Terrible technical issues all weekend. Hopefully working now.

    @Neverland — Indeed, I was even selling expensive toys like SLRs and similar to get extra crumbs of exposure! I’d be lying if I said I thought the market would near-double in three years though.

    I agree with your general point — pragmatic tinkering with allocation is likely the best response to the combination of uncertainty and having “an inkling”…

  • 14 Simon January 21, 2013, 12:34 pm

    Thought-provoking stuff. I was too late to the party (I’d love to say too young) to have been invested in 2007, let alone 1999, so no amount of 20/20 hindsight will allow me to post an “I saw it coming” comment.

    Now I’m 90% in equities, and it sure makes you wonder. When you see the huge gains in markets in the last 12 months: five-year highs against a backdrop of doom and gloom on the one hand, and artificial stimuli from central banks on the other – is this really sustainable?

    If we’re actually heading into another bubble, will we have seen it coming?

  • 15 Mark Meldon January 21, 2013, 1:05 pm

    Dr Tim Morgan’s really scary report is now out:-


    Very interesting, quite sensible, I think.

    Time to head to the hills?

  • 16 gadgetmind January 21, 2013, 1:19 pm

    I did a lot of buying in 2009 and 2011 but this was only partly because I saw opportunities and mostly because I had the cash at the same time as opportunity beckoned.

    Dips from broadly sensible valuations (as we have now and have had over the few post 2008 dips) don’t really bother me as I can be fairly certain that there will be recovery. Dips from massive over-valuations *do* concern me. The dotcom crash was one of these but I’m less than convinced that equities really were that toppy in 2008 and that’s my excuse for missing that one. 🙂

  • 17 Willem de Leeuw January 21, 2013, 4:15 pm

    Oh yes, don’t forget about all of the M&A deals that were happening in 2006/07 e.g., Barclays and RBS fighting it out for ABN Amro (a bank that had always struggled to make good money). A lot of the financial newspapers and the like were warning that the top of a market often coincides with crazier and crazier deals, signalling irrational exuberance.

  • 18 Neverland January 21, 2013, 5:35 pm



    Being a saddo I remember this all quite well as it was one of my few moments of investing glory

    There had been two years of pure dumb-ass M&A frenzy which was only going to end in tears already by mid-2007

    The Bear Stearns hedge funds collapsed in the summer of 2007 and there were queues to withdraw cash from Northern Rock in September 2007

    The FTSE-100 was still above 6,000 until early March 2008

    There was plenty of time to look at what was happening, think about where it might end and make adjustments

    Whats very unexpected is how mild the recession was in the UK, given about half of our entire banking system needed to be rescued by the UK government

    This leads me to believe we aren’t finished yet

  • 19 Andy January 21, 2013, 5:37 pm

    Nice article. I’ve only just found your blog and if the rest of it contains the same sort of stuff I’ll be a regular reader.

    I imagine that the people who do comment are those that claim they saw the crash coming – not many people like to own up to the fact that they lost the shirt off their backs during the crash because we were told that house prices would keep on rising…Despite many people saying that they adjusted their portfolio appropriately it is a difficult thing to do. If you are taking a different stand to mainstream media for your investment philosophy then you are pretty brave as it is a difficule thing to do.

    @mickfinigan – wondering what non-msm you read? (Not questioning your comment, but would be interested to get some different opinions on things as to what is touted by msm and other blogs.)

  • 20 The Investor January 21, 2013, 7:32 pm

    There is always someone (or in the Internet era many people) proclaiming imminent disaster somewhere. Look at the last two years of bearish hysteria we’ve had to live through (and which I’ve occasionally done my modest bit to debunk). Europe must have died more times than certain Telegraph columnists have had hot dinners.

    I consider the failure of their cataclysmic post-2009 disaster to materialize as almost as bad as missing one that did. If the Bank of England was as hysterical as the average perma-bear, well, we’d not be in a better place.

    A few people will spot things first, and if you did good luck to you. But nearly all the private investors of my acquaintance — who I had watched make good calls for 5-6 years beforehand — and for that matter little old me — were not overly terrified in Summer 2007. Markets didn’t look too expensive on a P/E basis, and a lot of private investors carried on doing well from resource shares long after the main indices started to flag, which perhaps partly took their eye off their ball.

    The terror struck in late 2008, when the banking system froze. Ironically enough at that point the perma-Chicken Littles started protesting that Central Banks were intervening too much. I fully agree Central Banks would have done better to de-escalate the boom years earlier (which as I say I did identify FWIW), but the fact is if they’d done nothing in late 2008 we’d have a lot more problems than HMV going bust today…


  • 21 The Investor January 21, 2013, 7:38 pm

    p.s. Ah, Northern Rock. The difficulty of writing a blog is your past and what you say is accountable. 😉

    I went and took photos of people queuing outside Northern Rock. As some more evidence I wasn’t a clappy-happy Panglossian perma-bull, I warned that markets were cyclical, bad times could come, and that in my view people were behaving perfectly rationally from an individual point of view in withdrawing money, even if the combined consequence — a bank run — was undesirable.

    But as you can see I didn’t at that point think the whole UK banking system was threatened, let alone the global one:


  • 22 gadgetmind January 21, 2013, 8:00 pm

    Taking photos of them sounds jolly civilised; I cycled past them while shouting “Baaaaaa!” at the top of my lungs!

    Frivolous point: people are sheep.
    Serious point: people are sheep, and you can use this to your advantage.

  • 23 Monk January 21, 2013, 8:57 pm

    I agree with what you say about the BoE TI, poor old Mervyn gets it in the neck whichever way he leans. Probably deserves it, even if he is trying to save the economy from disappearing down the plug hole.

    Almost feel sorry for the Coalition too, trying to stage manage managing the economy, too frightened to tell the truth, too scared not to.

    All one can do is passively invest, spread the risk, intelligently diversify.

    Oh and pray 😉

  • 24 Neverland January 21, 2013, 10:47 pm


    You might argue that not having Andrew Mellon at the Fed in 2008 was a bit lucky (being the man who told the US president at the start of the Great Depression to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”). I bet he wasn’t a party person

    But interest rates have never been so low for four years in the 350 year long history of the bank of England

    This can only mean two things:
    – rates will rise back to normal levels soon
    – something is very wrong in our economy

    Neither outcome is very good for most any form of investment

  • 25 The Investor January 22, 2013, 10:18 am

    @Neverland — I think your two bullet points are correct, but would disagree about the degree. (I think rates will rise but to below normal levels *fairly* soon, and I think our economy is working off a lot of debt, but not a fatal amount of debt (starting from here, where there’s already been a fair bit of deleveraging)).

    As for the final point… watch this space! 😉

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