What Happens When Markets As We Know Them Cease to Exist - Odd Lots

Too much to listen and too little time...

My rating: ★★★☆☆ (3/5)

Pointers:

• 1:38 – On survivorship bias.

• 3:08 -- Guest Simon Hinrichsen, economic historian.

• 4:41 – Where do you find the best or biggest example of survivorship bias in the markets? Russia when the market closed at the start of WWI and then opened at the end with a 20% up but it only had 2 months of trading before the communist revolution expropriated everything.

• 6:11 – Just because something happened, it doesn’t mean you were an idiot for thinking the opposite.

• 6:38 – If you say things like “Equities will always outperform over the long run” then you end up having something like Russia in your portfolio if you don’t know how to correct for that.

• 6:51 – Unknown unknowns.

• 8:10 – Economic history is really important but it’s also important to have very long time series.

• 8:19 – How do you protect against Unknown unknowns? It’s about having a lot of risk drivers…

• 9:03 – About 60/40 portfolios. Equities and Bond have had negative correlation in the last 40 years, but if you go back and take England, then for 350 out of 400 years bonds and equities had positive correlation[1].

• 10:45 – Countries that have done pretty well are in general those who have had strong institutions.

• 12:16 – Watch out for countries with big institutional and lasting changes: Trump, Brexit and Eurozone.

• 12:53 – Rule of Law matters.

• 15:18 – It may be that the future will be like the past but the situation is different.

• 15:38 – Historical examples of market expropriation.

• 16:00 – Last hundred years have been represented by American exceptionalism in the Market but let’s go back a 100 years.

• 17:02 – It’s very important to look at big historical episodes and their effects in the markets and in our portfolios.

• 17:41 – Can we have a Reversion to the Mean to the Middle ages?

• 19:09 – On Bond returns and Pension Funds’ assumptions and required returns.

• 20:01 – Is this time different? Maybe in terms of technological progress, but not  in terms of political and economic cycles.

• 20:54 – Not unlikely to see hyperinflation and war.

• 21:30 – There are some things we can't measure in history because history is written by the survivors and victors.

Listen to it: https://www.bloomberg.com/news/articles/2017-04-17/odd-lots-what-happens-when-markets-as-we-know-them-cease-to-exist

NOTES:

[1]Using FRED data (which is from BoE and they only have 300 years of data) the results are quite different. I’ve calculated the 3,5,7,10 and 15 year rolling correlation between England’s Share Index (weighted by Market Cap MSPIUKM) and Long Term bonds (LTCYUKA) from 1711 to 1950 and from 1711 to 2015, and they have had negative correlation near or above 60% of the time. Data Source: https://fred.stlouisfed.org/graph/?g=dtTu