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

233 Pages·2011·3.913 MB·English
by  AuthersJohn
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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: +44 (0)1279 623623 Fax: +44 (0)1279 431059 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

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