Fearful Rise of Markets: a Short View of Global Bubbles and Synchronised Meltdowns

233 Pages·2011·3.913 MB·English

by  Authers, John

T A SHORT VIEW OF
Market bubbles are growing ever bigger
h
‘John Authers offers a refreshing, comprehensive, and easy-to-read narrative GLOBAL BUBBLES AND and ever more terrifying. As soon as one
about how fearless fi nancial markets got us in to the crisis, and why we must e ends, the next one seems already to be
put the fear back. A good read that draws important lessons.’ SYNCHRONISED MELTDOWNS infl ating.

-George Magnus, Senior Economic Advisor, UBS Investment Bank, and author F
of The Age of Ageing. e Multiple markets, once disconnected,
are aligning in ways that are increasingly
a
‘Concise, relevant, and perceptive…this book should be read by all those
unpredictable and uncontrollable.
interested in the way markets operate, be they investors, analysts, or policy r
makers.’ f
Something has changed. What can we do
-From the Foreword by Mohamed A. El-Erian, CEO and co-CIO of PIMCO, and u
author of When Markets Collide. about it?
l

‘This wonderful market history will be a testimony to all investors that the R The Fearful Rise of Markets explains how
effi ciency of markets is a very dangerous concept.’
the world’s markets became synchronised,
i
About the author -Russell Napier, Strategist CLSA Asia Pacifi c Markets, and author of Anatomy of s how they formed a bubble, how they
the Bear.
e all managed to crash together and then
John Authers was the Financial Times’
‘In a crowded fi eld of works on the fi nancial crisis, Authers’ work is unique in rebound together, and what can be done
investment editor and principal market o to prevent another synchronised bust in
both its insight and style.’
commentator from 2006 to 2010. Based in
-Robert R. Johnson, Ph.D., CFA, Senior Managing Director of the CFA Institute f future.
New York he watched the global fi nancial

crisis unfold and provided daily analysis, M
‘John masterfully drives a stake through the myth of global economic From post-Depression regulation and
in both written and video form, in his
decoupling one chapter and example at a time. A must-read in today’s the 1954 recovery from the Great Crash,
popular column The Short View. A veteran
economy.’ a through the innovations and mis-steps
of 20 years with the Financial Times, he
recently took over as head of its fl agship -Vitaliy Katsenelson, Director of Research at Investment Management r The that led to the collapse of Lehman Brothers
Associates, Inc, author of Active Value Investing: Making Money in Range-
Lex column. k in 2008, to the market rally of 2009, The
Bound Markets
e Fearful Fearful Rise of Markets details massive
shifts in the way our money is invested,
t
and in the global balance of economic
s
Award-winning Financial Times journalist John Authers explains the multiple power.
Rise of
roots of repeated fi nancial crises. He explains why it is that investment bubbles
now form all at once, all across the world and why so many markets that were
once considered disconnected are now able to collapse all at the same time. He A
U
offers a strategy for preventing future fi nancial disasters. J
TO Markets
HH
EN
R

S
BUSINESS
BUSINESS

Visit our website at
www.pearson-books.com
VViissiitt oouurr wweebbssiittee aatt JOHN AUTHERS
wwwwww..ppeeaarrssoonn--bbooookkss..ccoomm
CVR_AUTH1689_01_SE_CVR_Flaps.indd 1 5/5/10 09:20:02
The Fearful Rise of Markets
In an increasingly competitive world, it is quality
of thinking that gives an edge – an idea that opens new
doors, a technique that solves a problem, or an insight
that simply makes sense of it all.
We work with leading authors in the fields of
business and finance to bring cutting-edge thinking
and best learning practice to a global market.
Under a range of leading imprints, including
Financial Times Prentice Hall, we create world-class
print publications and electronic products giving
readers knowledge and understanding which can then
be applied, whether studying or at work.
To find out more about our business and professional
products you can visit us at www.business-minds.com
For other Pearson Education publications visit
www.pearsoned-ema.com
The Fearful
Rise of
Markets
A Short View of Global Bubbles and Synchronised
Meltdowns
John Authers
PEARSON EDUCATION LIMITED
Edinburgh Gate
Harlow CM20 2JE
Tel: [phone]
Fax: [phone]
First published in Great Britain in 2010
© John Authers 2010
The right of John Authers to be identified as author of this work has been asserted
by him in accordance with the Copyright, Designs and Patents Act 1988.
Pearson Education is not responsible for the content of third party internet sites.
ISBN 978-0-273-73168-9
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Authers, John, 1966-
The fearful rise of markets : a short view of global bubbles and
market meltdowns / John Authers.
p. cm.
Includes bibliographical references and indexes.
ISBN 978-0-273-73168-9 (pbk.)
1. Global Financial Crisis, 2008–2009. 2. Financial crises--
History--21st century. 3. Capital market--History--21st century. I.
Title.
HB37172008 .A98 2010
332'.042--dc22
2010010958
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise without either the prior written permission of the publishers or
a licence permitting restricted copying in the United Kingdom issued by the Copyright
Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. This book may
not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding
or cover other than that in which it is published, without the prior consent of the Publishers.
10 9 8 7 6 5 4 3 2 1
14 13 12 11 10
Typeset in 9/13pt Stone Serif by 30
Printed and bound in Great Britain by Henry Ling Ltd., at the Dorset Press, Dorchester, Dorset.
For Andie, Josie, and Jamie

Contents
Acknowledgements / ix
About the Author / xi
Foreword / xiii
The Fearful Rise of Markets: A Timeline / xvii

1 Introduction / 1
part 1 The Rise
2 Investment Becomes an Industry / 9
3 Indexes and Efficient Markets / 16
4 Money Markets Supplant Banks / 23
5 From Gold Standard to Oil Standard / 29
6 Emerging Markets / 36
7 Junk Bonds / 44
8 The Carry Trade / 50
9 Foreign Exchange / 57
10 Irrational Exuberance / 63
11 Banks Too Big to Fail / 69
12 Hedge Funds / 75
13 Dot Coms and Cheap Money / 81
14 BRICs / 88
15 Commodities / 95
16 Credit / 103
viii Contents
part 2 The Fall
17 Ending the Great Moderation / 109
18 Quant Funds / 118
19 Trust / 123
20 Bank Runs / 130
21 Bastille Day: Reflexive Markets / 135
22 Lessons from Lehman / 142
23 Politics and Institutions / 147
24 The Paradox of Diversification / 151
part 3 The Fearful Rise
25 Decoupling / 159
26 Banks Bounce / 167
27 A New Bubble? / 173
28 Conclusion / 182
Notes / 194
Select Bibliography / 203
Acknowledgements
I submitted the manuscript for this book on the twentieth anniversary of
my first day at the Financial Times, so I must first acknowledge my debt
to the news organisation where I have spent all my working life. I learned
substantially all that I know about the world of investment during my
career at the Financial Times, which has involved living in three countries,
traveling to many more, and reporting on many of the events in this book.
I learned much from all the many colleagues with whom I have
worked, and I am grateful to all of them. I thank Lionel Barber, Martin
Dickson, and Daniel Bogler for allowing me the time off needed to finish
this book, and Keith Fray, the Financial Times’s deputy head of statistics,
who suffers daily demands from me for graphics and information at the
best of times, checked all the graphics. In particular, I want to thank Philip
Coggan, my mentor and predecessor, who probably helped me more than
anyone else at the paper, and my current colleague in New York, Michael
Mackenzie, who might know more about markets than anyone else I know.
My studies at Columbia Business School, where I took an MBA in 2000, were
also formative. I want to thank all my professors there, but in particular
David Beim, Joel Brockner, Franklin Edwards, Paul Glasserman, and Bruce
Greenwald for the many lessons I learned that proved invaluable for writing
this book. It is also appropriate to thank the Knight-Bagehot Fellowship and
George A. Wiegers, for providing me with the funding to do the MBA.
This book is the result of my own conclusions, but these were formed
by talking to a lot of people. In particular, I wish to thank Robert Jaegar
for many invaluable conversations over the last two years, including one
that gave me the title for the chapter ‘The Paradox of Diversification’; Rob
Arnott, who does not agree with everything in this book but who provided
me with countless great insights and also gave me a great critique of an
early draft; and Tim and Jamie Lee, who took me through the full horror
of tight currency correlation. I must also thank Mohamed El-Erian for his
extremely generous Foreword. I thank the following for interviews that
helped in preparing the book: Antoine van Agtmael, Robert Barbera, David
Beim, Gary Gorton, Andrew Lo, George Magnus, Benoit Mandelbrot,
Rick di Mascio, Michael Mauboussin, James Melcher, Amin Rajan, Jeremy