Friday, October 19, 2018
Wednesday, September 12, 2018
In this November 2016 paper, the authors - Robin Greenwood, Andrei Shleifer, & Yang You of Harvard University,
"[E]valuate Eugene Fama’s claim that stock prices do not exhibit price bubbles. Based on US industry returns 1926-2014 and international sector returns 1986-2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases do predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up can all help forecast an eventual crash; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in US and international samples."Download the complete paper here
Friday, March 23, 2018
The severity of the 2008 crisis suggests that either the scope or nature of the regulations, or their implementation, failed. The US economy incurred the costs of regulations year in and year out for more than 50 years, and then, when a crisis occurred, several ad hoc initiatives were needed to forestall the implosion of asset values. Perhaps regulation reduced the cost of the crisis. Or perhaps the costs were larger because the regulation had led to a sense of security that proved unwarranted.
Various regulatory initiatives have been adopted to forestall the next crisis or reduce its severity, even though there does not appear to have been a systematic review of why regulation did not allay the 2008 crisis.
This leads to the primary questions addressed at the 2016 Leir Conference. What are the key issues and major trade-offs associated with the financial regulation initiatives prompted by the 2008 global financial crisis? Have the myriad of new regulations reduced the likelihood or severity of future crises?
Download the complete conference proceedings here.
Friday, February 2, 2018
I think the attached analysis of whether we are in a bubble is worth close attention. Two points raised which I find particularly important are the concentration in a few large momentum stocks in a few industries, mostly technology and finance related. This reminds me of the auto sector bubble at the turn of the 20th Century where only auto stocks were involved.
Secondly while there may not yet be euphoria from the Chicago Fed Forecasting Conference I can confirm that there is tremendous complacency and overoptimism along with willful blindness of anything economically negative such as the apparent weakness in the housing sector for both resale and new housing which the new tax law and higher interest rates can only have exacerbated.
Indeed one critical question is what the non-deductibility of high property taxes for owners of those homes does to their cash flow coverage projections and whether all prime mortgages in those areas will remain prime.