To FT Alphaville being the only news source worth its salt, assuming we're talking 15th century salt in the Sahara

I came across this old article today. It was published (though I hadn't heard of Alphaville at the time) on June 14th, 2007. This was about a week after I quit investment banking and took a job as a carpenter at the Met Opera because I was scared shitless about the future. It was also about the same time as when some idiot Private Equity guys, "Sageview," bought Guitar Center for (I'm not kidding you) $59.99... which just shows they can be suduced by a 99 cent sticker price as much as their average customer.

(I find this Guitar Center leveraged buyout especially precious because it epitomizes the era of cheap credit. This was some deal! Guitar Center, a business whose entire business model is predicated on making 0% interest loans to the least credit worthy segment of the population, "musicians," was bought by Sageview, which payed almost entirely with money they borrowed cheaply themselves!!! Amazing!)

It was also about this time, that my dad, my sister's boyfriend (ex-Goldman Sachs, then Private Equity) and I took a car ride together. We began discussing when we thought the crash would come. "Shit," my dad said, "I just barely broke even to where I was 7 years ago." David, my sister's boyfriend, stated "My colleagues think within 6 months," in his typical diplomatic fashion. "I'm going to apply to business school." I was more equivicable. "As soon as the first big private equity buyout falls through. I don't know. Soon."

Sure enough, six weeks later, financing for the biggest LBO in history, the buyout of Chrysler, fell through. And the turmoil began. "I feel queasy," I wrote to my friend Elizabeth, the morning I read the news. ("This sucker could go down" is what I ment to say)

Anyway, back to the point. On June 14th, 2007 FT Alphaville published this story: http://ftalphaville.ft.com/blog/2007/06/14/5207/you-know-theres-a-bubble-when/
the conclusions of which I will repeat now. (You can read the details yourself.)

You know there's a bubble when:

1) It’s not just Hedge-Fund Guy and his trophy wife demanding splendid isolation from cattle-class rubberneckers eyeing their chocolate-dipped strawberries. Revolution Air, a charter company, will fly more than 20 U.S. kids to summer camp this month, at about $8,000 a hop, the New York Post reported last week.”

2) “You have to get the price right, or it will come back into the market,'’ Hirst told Bloomberg News reporter Linda Sandler. “A lot of people buy things and flip them.'’ You know there’s a bubble when artists are trying to set their prices so high that there won’t be a secondary market for their work.”

3) The zeitgeist-defining product among the free-range bananas, organic spring water and corn-fed soup is a 60-year-old Vecchia Dispensa balsamic vinegar, costing almost $200 for a triangular 100 milliliter bottle stoppered with red wax seals. You know there’s a bubble when an overgrown US chain store can sell antique vinegar to Britons at 32 times the price of Nicolas Feuillatte champagne.” [I swear by their 25 year old vinegar, by the way. Why not? Its the same price as a good crappy bottle of wine and can be used with 50 times as many meals -Matty]

4) It was a rather special chair. Emperor Kangxi graced the gilt-incised brown lacquer throne when he ruled China between 1662 and 1722. Still, Ho could have picked it up for just $43,700 when it sold in 1994 instead of HK$13 million. You know there’s a bubble when a gambling mogul drops a couple of million dollars so that his buttocks can polish the seat of royalty.”

5) “Flip a switch and this feature will maintain your drink’s temperature up to 140 degrees. It can also cool to a refreshingly chilly 35 degrees.'’ You know there’s a bubble when the latest innovation in automotive engineering is a gadget to keep your bucket of Starbucks’ Costa Rica Tarrazu hot enough to guarantee third- degree lap burns when you brake for that road-running child.” [Invented by Chrysler by the way]

6) This week, the philatelist auctioned the set in New York for $9.1 million. “It’s four times profit,'’ Bill Gross said of the price. “It’s better than the stock market.'’ You know there’s a bubble when tiny, lickable portraits of Queen Victoria are a better store of value than stocks or bonds.

7) “The word “bubble'’ has appeared in 94 Bloomberg News headlines this year, up from 40 in the year-earlier period and from 85 in all of 2005. You know there’s a bubble when there’s a bubble in usage of the word “bubble.'’

Happy New Year, everybody!

The Gaussian Fallacy and Other Epistomological Failings in the Age of the (Aging) Bullshit Baby-Boomer

I've typically been skeptical of adherents to Nassim Taleb's "Black Swan" club. The events that have unfolded since the collapse of the Chrysler deal in late July 2007, are not black swan outcomes. [No one posited the existence of black swans. All swans were white, until they weren't.]

These outcomes are the wholly predictable results (in framework, if not in detail) of the moral bankruptcy of the Baby-Boomers and Generation X coupled with an unsustainable and untenable financial system. I believe there were extremely few people in the world who believed we could save nothing and borrow money at 0% forever without the bill ever coming due.

However, I think that this very lucid post on Ultimi Barbarorum (a Spinozist blog about finance) is an excellent summary of the ways in which financial innovation abetted the stability of the system for the first half of this decade until it didn't.

The only thing I would add, is that retail investors were also tricked by a Gaussian Fallacy. They were told that stock returns followed a Gaussian distribution... as long as you diversified, never paniced, and invested in low cost stock index funds, you could expect 10% a year and retire happy. This shiny ordure was sold to our parents by men under fifty who had begun their careers after 1980 and had never seen anything but a stock bull market. The ideological laziness and lack of intellectual curiosity on the part of our parents and their financial advisers is inexcusable. The "this time its different" argument, used to explain why it is not important to study the past, is the direct consequence of the self-indulgence, egoism, and narcissism of the Baby-Boomers and Generation X, both of whom were raised or came to believe that they were "special" and somehow their history would be as well.

With compassion for their sins, I nevertheless look forward to the rottenness being purged from the system. As a child I used to think a good name for my generation would be "Generation Why" but more and more as I become an adult I believe in Generation MGMT.