As I’ve sat on trains and planes over the last week, I sorted through my article archives. Among them I found one by Michael Lewis from January 2007 lamenting the doom and gloom in Davos. In criticising the pessimism, Lewis writes:
But the most striking thing about the growing derivatives markets is the stability that has come with them. More than eight years ago, after Long-Term Capital Management blew up and lost a few billion dollars, the Federal Reserve had to be wheeled in to save capitalism as we know it.
Last year Amaranth Advisors blew up, lost more than LTCM, and the financial markets hardly batted an eyelash. “The financial markets in 2007,'' some member of the global economic elite might have said but didn’t, “are astonishingly robust. They seem to be working out how to absorb and distribute risk more intelligently than any member of the global economic elite could on his own.''
Apart from how wrong this statement was shown to be, what scares me about it is how willingly I would have signed my name to a similar article. I am lucky I was not a financial blogger at the time. However, how many of my blog posts will I look at in five years and wonder what I was thinking? I am relatively confident that I won’t have anything as striking as the example above, as I tend to make less dramatic predictions and they are likely to be borne out over longer periods. However, that is no certainty.
The other interesting element of the article is Lewis’s closing remarks:
And if they really believe the markets mispriced risk, or were about to adjust, they must also believe they could make vast sums of money if they quit their day jobs and opened a hedge fund to take the other side of stupid trades. But they don't really believe that, or at least some of them would be off doing it, rather than spilling the beans to Bloomberg News.
Despite being wrong, I still believe that Lewis was fair to call the doom-sayers' bluff. Most of the doom-sayers did not make their billions (despite some notable examples such as those catalogued by Lewis in The Big Short: Inside the Doomsday Machine). How many of them believed they were right to the extent that they were willing to put their money on the line rather than taking the relatively safe bet that the media will forget about them if they are wrong? It is another advantage to betting on opinions. After the fact, you can separate those who believed what they were saying from those who may have been seeking to get in front of the cameras and happened to luck into the correct side of the debate.