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Saturday, June 22, 2013

William Cohan, "At Long Last, Stocks Get a Jolt": Non Sequitur

In a New York Times op-ed entitled "At Long Last, Stocks Get a Jolt" (, William Cohan exults over the recent decline of the stock market:

"The Dow Jones industrial average has nose-dived more than 500 points, or over 3 percent, since the Federal Reserve chairman Ben S. Bernanke’s somewhat upbeat, if ambiguous, statement on the economy on Wednesday. Hurrah!

. . . .

What happened to change the mood so dramatically, so quickly? Is the panic selling justified — or is it just the first glimmer of hope that the Fed will finally take the metaphorical morphine drip out of the arm of the capital markets and allow the forces of supply and demand to set long-term interest rates?"

No question about it: Given that people could no longer expect any reasonable rate of return on their savings at the bank, they flooded stock markets with funds and created yet another bubble that would ultimately burst.

But Cohan's conclusion leaves me scratching my head:

"The good news is that, finally, the artificial high might just be coming to an end. No addiction is healthy and this one is no exception. Weaning ourselves off the Fed’s cheap money will hurt. Between the sudden collapse of bond prices and the sharp drop in the stock market, investors are now feeling some pain. Good. A healthy economy demands that the price of borrowed money be set by the market to correspond with risk, not be distorted by a half-decade’s worth of interventions from a central bank.

As we saw throughout much of 2007 and 2008, when markets badly misprice risk it can have disastrous consequences for economies throughout the world. The sooner we get clean, the better."

Okay, half a decade of intervention from a central bank might well have caused investors to underestimate stock market risk.

But prior to 2008, underestimation of real estate risks by banks and their gullible customers also created a bubble, which eliminated many leading banks and financially crippled those who took loans to buy housing at inflated levels and those willing to buy derivatives backed by housing loans.

As long as I can remember there have been "bubbles" of different kinds involving mispriced risk, and there always will be.

Consider what has happened to the price of gold over the past nine months.

Consider Facebook's 2012 initial public offering of stock at $38 per share.

Consider the dot-com bubble (1997-2000) prior to the real estate bubble, which brought on the 2008 calamity.

Okay, Jeffrey, there will always be mispriced risk and bubbles. Smart ass that you are, how do you manage your finances?

Or stated more kindly, how do I seek to mitigate risk in an ever changing world?

Fortunately, I don't have so much money to throw around, so I buy what I want at a price that I can afford. I bought the real estate that I wanted and built my house with a loan which was limited in amount and could not lead to repossession.

Regarding investment in shares, experience has taught me to invest in companies where I am actively involved by choice, have my finger on the pulse, and can seek to influence management. Yes, I realize this is not practical for many investors, who alternatively seek to spread their risk, but with the passage of the years, it has become axiomatic for me. I only work and invest with people whom I trust.

My purchase this past week of an MRAP (Mine-Resistant Ambush Protected vehicle) in Afghanistan (see: and I didn't say that I was free of foibles.

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