Monday, February 16, 2009

Getting It Right But Still Getting It Wrong

A writer named David Carr, who covers the media, has turned his attention to the media coverage of the financial mess. Glory be, he referred to the interview on CNBC between its anchors and two of the best "bears" around, Dr. Nouriel Roubini and Dr. Nassim Nicholas Taleb. The article, This just in: The market is still dead, has a choice part:

The two guests — known as Dr. Doom and the Black Swan, nicknames that usually land on people who do their best work with chain saws and thumb screws — were fresh off their appearance in Davos, Switzerland, where they were hailed as visionaries for having foreseen the financial crisis.

Griffeth started things out briskly by saying, "What would it take to make you bearish on this economy right now?"

You mean bullish, his co-host, Michelle Caruso-Cabrera, interjected. They cracked wise about Freudian slips, but the entire segment, it turned out, was about trying to somehow find the horns of a bull on two ferocious bears.

Roubini quickly pointed out that many big banks were insolvent — something that became more apparent as the week wore on — and went on to predict a brutal, U-shaped recession with no quick end. "It's ugly," he concluded, using the same term of art, minus a few oaths, that I use when it's my turn at home to open the latest update on our retirement fund.

"But that's not the end of the world, is it?" Griffeth asked plaintively. Roubini indicated it was sort of getting there, with a recession that will be three times as long and three times as deep as the previous two.

Sensing the thickening gloom, Griffeth pivoted away to Taleb and said, "You're not as bearish as Nouriel, are you?" Well yes, as a matter of fact he was. "We have the same people in charge, those who did not see the crisis coming," he said.

In studio, Dennis Kneale of CNBC broke in and said, "Let's get back to the real purpose of doing this, because we know the forecast is dark and continuing dark," and then when on to fish for one metric, any measurement, that suggested the economy was "turning the corner."

His guests did not play ball, and later they looked slightly aghast when asked what they would invest in and what was in their portfolios.

You may enjoy the interview at

To me, here's the punch line that prompted this blog: the author's conclusion that the first of the "fundamental lessons" of this crisis is to "have a diversified portfolio".

As did Betty Boop in the eponymous cartoon (1935): No! No! A thousand times no!!

Just as she rejected the villain, people should reject the idea that they should have a "diversified portfolio". Different situations call for different asset allocations. People in their 80's perhaps should no money in common stocks most of the time. Young people without many assets do not have much to lose, and can take more chances. People like yours truly who follow markets closely like to identify a major theme and maximize risk-reward rather than just having the financial assets move like the average asset in a diversified portfolio.

Nassim Taleb, for example, recommends that most people should have 85-90% of their assets in ultra-safe Government securities. Perhaps the diversification would be between Treasury bonds and bills, and Ginnie Mae bonds!

Getting back to Mr. Carr, he reported on Drs. Roubini and Taleb, and undoubtedly watched the interview at least twice, but he obviously did not hear what they were saying.

If a market falls 50%, then it must double to get back where it was. The Great Crash of 1929-32 had a number of 30% down, 28% up sort of moves, but the catch was the up-moves never got back to where the down-move started from. What Dr. Taleb preaches is that one should avoid big losses. Dr. Roubini has been screaming for some time that the risks in the real economy were horrendous, and he still states that there is a probability that the news on the economy will keep being worse than expected.

In that case, Mr. Carr picked the right topic on which to focus, but he missed the point completely. How many other Americans are focusing on the risks but are continuing to miss the point?

Copyright (C) Long Lake LLC 2009

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