Monday, October 20, 2008

What I learned on Wall Street in the past two decades

Learners: fill your thimbles...

As cowardly old world overtakes brave new world

Ken Lewis still has it wrong
Ken Lewis, CEO of Bank of America, who says a golden age of banking has ended somehow does not seem to have captured the 'magic' of the moment. The perspective of history has been so rudely thrust upon us he has not yet let it sink in to absorb its lessons. He will. That was no golden age. That was the age of septic tank filler. Fools gold at best.

When Greenspan ruled Camelot
Perhaps we can go back to that thrilling day of yesteryear by referencing Alan Greenspan as the best central banker ever (the best of the best of the best). Well, at the time he may have seemed to have been that. And some did designate him as such. But history is a dangerous thing to play with. And just as creators of fancy-pants securities thought they had licked the issue of risk some thought Greenspan had helped us to usher in a new age of prosperity built on less government and more reliance on the private sector and the discipline of the market. For a while it played as a first run movie in Peoria as the trailers were a smashing success and built anticipation. But the full feature film fell short of its promise. It fell way short. The free popcorn and soda that filled the theaters only left a bigger mess when everyone finally walked out in disgust.

When Greenspan sold camels in an empty lot...
Now, with everything we have discovered, the praise for Greenspan is turning to criticism or outright scorn. He is trying to defend his clearly bad decisions instead of taking his medicine. The plaudits for financial engineering (once called Zai-tech by the Japanese) have tuned to lessons of what not to do. The government has come to seize banks or to take a large stake in them. Greenspan's world has ended even as he tries to explain and defend his actions. AND he is not alone in being left alone... So many drank the Kool-Aid. They are now just backwash in another of those Schumpeterian waves of creative destruction. The last one was really creative and boy was it destructive.

Cheating history
We find that heaping praise on something we are doing while we are still doing it is cheating history out of its perspective. And history does not like to be cheated. So now history is teaching us a lesson. Many of the things we knew and that we learned and that we came to depend upon have turned out be not just flawed but totally wrong. It's as though we have been told in no uncertain terms that the world really is FLAT and all our advances in finance are similarly wrong.

Stealing time for our own
We are back to square one with heavy regulation and the burden of (help from??) government involvement everywhere. It is not a brave new world. It is no golden age of finance and it never was. It was a golden age of excess; an age of over-promising, an age of over-paying and an age of under-delivering. It was aided by computers that moved so fast we did not give time a chance to render its verdict. But that's OK since we could always SIMULATE what we could not or did not wait to see. Cyber investing, cyber sex, cyber EVERYTHING... Who needs reality anymore? Who needs the test of time when you have STATISTICS (all kneel, bow or face East, as your respective preference dictates). Statistics can SIMULATE the travails of TIME. Thus they can save time and money and make bigger profits. Or maybe not...

Cheating time
You can never cheat time. Time has plenty of time since that is all it is. It will always catch up, no matter how much you try to rush ahead of it. Like in the tale of the tortoise and the hare you, like the hare, might gain on it, or seem to, but it will always be there in the end. We only have time warps, well, in cyberspace. Greenspan, financial innovation, Zaitech, nothing, beat time. Time ruled all. AND when time restored order we were back where we had started with the lessons of the past unlearned. All the books on investing and the 'learning' of the past 15 years or so are now officially rubbish.

No Degree On Line
You cannot get a PhD on line from the university of close-cover-before-striking in what I learned from the markets' collapse. The conservative movement has been dealt a severe blow by this collapse. But not even liberals are chortling too much since no one wants the heavy hand of government to run things. Government intervention is a stop-gap policy. Getting government OUT eventually out will be delicate. In the meantime a lot of energy will be spent in designing the new financial architecture. In the meantime there is a big mess to clean up and some people's lives -literally - have been destroyed in the process. It is not clear what this period of time has taught us other than what we thought we learned was wrong. At least that is something. We may have gotten to a point where central banks will no longer ignore bubbles. I'm not sure it is a lesson we have learned. But I do think it is a promising place to start.

End: what I think I learned in the markets in the last two decades.

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