Monday, October 06, 2008

Another Good Financial Podcast

There is very little media on finance that is both accessible to a general audience, and comprehensive and thorough in its reporting.

"This American Life" has done a second finance podcast, and it's pretty good: Another Frightening Show About the Economy, which is a follow-up to The Giant Pool of Money.

Thoughts on today's market melt-down:
  1. The stock market has demonstrated clearly that it is ludicrously irrational. Who in their right mind liquidates their holdings when the Dow is down 400 points? (And yet clearly a lot of people thought that that was a good idea today...) A series of financial melt-downs (1987, 1998, 2000, etc.) have made academics question the idea that the market prices stocks efficiently. Hopefully today put the nail in the coffin of an academic model that was pure, simple, and pretty much wrong.
  2. Stocks have to occasionally go nuclear. If they didn't, we'd all buy more of them (since they return more than bonds), driving the price up until the yield was the same as bonds. That extra money you get from a stock is payment for being first in line to be kicked in the nuts when things go bad. Occasional spectacular crashes have to be expected.
  3. If these first two points seem to contradict each other (in point 1, I argue that markets are not efficiently priced, in point 2 I argue that they are), the contradiction comes from time. Over fairly short amounts of time, the markets can do just about anything. The kind of equilibrium of supply and demand that I describe in point 2 can easily be overwhelmed by massive panic, per point 1.
  4. Finally, if you are young and thinking "this bail out is going to cost me", there is a silver lining...stocks have been overpriced, for a while now; the out-sized returns delivered from 1982 to 2000 are due to people being willing to pay more for stocks (and thus the value of stocks being driven up by increased demand). That kind of growth is not sustainable forever - think pyramid scheme. The end result of stock returns due to "demand growth" is overpriced stocks. Stocks have to fall in order to be able to return decent returns. (During the fall, as demand evaporates, stock prices will fall, producing negative returns, even if the economic fundamentals behind the underlying companies are solid.)
I heard a scary statistic on NPR: 50% of equities are owned by people over 50. (This may not be true after today...who knows.) Stocks can be a great investment vehicle for people with a long time horizon, but I fear that too many years of smooth sailing has caused us all to collectively forget just what a stock is and how it behaves.

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