Recently I’ve been working on the part of my proposed course which covers insights – what they are, their value, and how to create a mindset which encourages their appearance.
Also recently, as a result of the release in the US of the film dramatisation of Michael Lewis’ tremendous book about the financial crisis, The Big Short, various pages on the interwebs have promoted this video of the commencement speech that Michael Burry, one of the investors discussed in the book, gave to the economics class of UCLA in 2012. You can read the transcript here.
Worth watching in full for itself, I found two parts interesting.
First, Burry discussed how he generated his insights into financial opportunities:
Again and again, I figured as long as I kept asking questions, working so hard to answer questions, I would eventually find my way … At Scion Capital, my job 24-7 was to ask questions and seek answers. I mostly examined stocks and bonds as long investments. But one day I came across a Sub-Prime Residential Mortgage-Backed Securitsation, and I wondered if I could figure out any of that. Other questions soon followed: why are home prices diverging, up and away, from the household income trend line? answer – if it’s not income, it’s leverage; what exactly are the incentives of lenders that make mortgages only to sell them through to Wall Street? answer – volume, at the expense of credit standards; when interest rates bottom, how far could lenders push mortgage terms, in order to keep refinancings, home prices and volumes rising? the answer to this question would put a ticking timer on the boom, and a date on the crash.
Back in 2005, other questions stood out: how much is consumer spending dependent on cash-out refinancings? what percentage of jobs are dependent on the assumption of rising home prices? won’t AIG have to start posting massive cash collateral for the first time if it were downgraded? isn’t it worrisome that Fannie Mae cannot find term sheets that describe perfect hedges against its massive mortgage portfolio? are the rating agencies so conflicted that they could be this blind?
In my letters to investors, I described a downturn that would be unprecedented, with no counterpart in the modern era. Wall Streets risk models would fall all at once. And every single CEO and every single politician would be disastrously wrong.
Questions and implications – a great way to pursue avenues of research and discover new knowledge.
And, secondly, the US government’s response to his criticisms of macroeconomic policy before the crisis:
In 2010 I published an op-ed in the New York Times posting what I thought was a valid question of the Federal Reserve, Congress, and the President. I saw the crisis coming … why did not the Fed? Never did any member of Congress, any member of government for the matter, reach out to me for an open collegial discussion on what went wrong or what could be done. Rather, within two weeks, all six of my defunct funds were audited. The Congressional Financial Finance Inquiry Commission demanded all my emails and lists of people with whom I conversed going back to 2003, and a little later the FBI showed up. A million in legal and accounting costs and thousands of hours of time wasted – all because I asked questions. It seemed they would pump me at gun point or not at all.
A rather disproportionately heavy-handed response. ‘Don’t question the narrative’ seems to be the message they are trying to convey.
As Voltaire teaches us, ‘It is dangerous to be right in matters where established men are wrong.’