“Double, double toil and trouble” is an apt descriptor of what the average hedge fund manager has been going through the past couple of years. To be hedged in a roaring bull market is indeed a witches’ curse. According to the Business Insider the average hedge fund was up 6% the first nine months of 2013, while the S & P 500 scored a 25.3% gain with even the average mutual fund up 24.8%. This makes the average hedge fund’s 2% of assets/ 20% of profit fee structure a bit hard to defend. “The Tragedy of Macbeth” has nothing on this tale of woe.
“Fire burn and cauldron bubble.”
Did someone say, “bubble?” Oh yes, thanks to a front page article on MarketWatch.com Monday morning we were peppered with “bubble” references the rest of the day. The article quoted Nobel Laureate, Yale Professor Robert Shiller, who is “most worried” about the “boom” in the U.S. stock market. Now, Shiller did not actually say the market was in a bubble (he still owns stocks), but he hinted around the edges. The door was opened. MarketWatch, CNBC and others took the opportunity to remind us of professor Shiller’s outstanding record of calling bubbles…the housing bubble (he wrote a book about it prior to its bursting–”Irrational Exuberance”) and the “Dot.com” bubble. Ergo, Shiller knows BUBBLES and he may have another spotted.
Now, it really did not take a Nobel Laureate to spot either of these bubbles. The tech bubble was a no-brainer. Most experienced investors saw that one coming long before it hit. Remember economist/ Fed Chair, Alan Greenspan, he coined “Irrational Exuberance” back in 1996, four years be fore the actual bubble burst. By 2000, “John Q. Public” was all in…you know ‘stocks for the long-term.’ Greenspan was eventually right, but if you pulled up stakes when he first sounded the alarm, you would have left a lot on the table. Well a stopped clock is at least right twice a day.
The bursting of the “Dot.com” bubble was not a life threatening event for portfolios where investors had not guzzled the ‘Cool-Aid’. The “Housing Bubble was also pretty predictable. It was the pervasive nature of that bubble and the mass destruction that it would wreak on the U.S and World economies most (including Dr. Greenspan) totally missed. Those conditions do not seem to exist today. Now, many see bubbles around every corner and the public is, shall we say, “twice burned.” The bubbles that are plainly seen by the masses are not the ones that usually get us.
The Dueling Economists (a great audio clip).
“What’s A Bubble?”: Planet Money, NPR is a short interview segment featuring Nobel Laureate Shiller and his co-Nobel Laureate, University of Chicago Professor, Eugene Fama. Fama is a polar opposite to Shiller believing Bubbles are impossible to predict and that the two Shiller is given credit for are basically flukes. In the interview, he says he’d give Shiller’s case more credence, if Shiller would predict another 10 bubbles successfully. Shiller seemed to balk at this challenge.
Interestingly, a third economist, Lars Peter Hansen will share the Nobel Prize with Shiller and Fama. Supposedly Hansen has mathematical formulas that are designed to settle arguments between the likes of his co-laureates. Hmmm, wonder if Lars is using “fillet of fenny snake…the eye of a newt and toe of a frog” in his formulation?…What A Hoot!
What’s your take?
P.S. It is now Wednesday December 4, 2013. The cauldron continues to bubble with bubble mania and today’s surprisingly strong ADP employment data (report commentary). Of course, good news is bad news because, as you know, a strong economy indicates an end to Quantitative Easing (QE) and the beginning of “TheDreaded Taper.” Since Monday, in light of all of this, the Dow Jones Industrial Average has lost a tad over 1% with the ten-year U.S. Treasury jumping up a mere eight basis points in yield from 2.75% to 2.83%…Ho-Hum.
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