First, there was Mathematics.
Slowly, Physics started expressing itself in the language of Mathematics with great success. Chemistry and Biology followed suit.
The subject of Economics was feeling left out. Its proponents wanted the world to start recognizing their line of study as a natural science. So they started expressing their research results in the language of Mathematics too.
Thousands of research papers later, it was pointed out that what mathematical Economics was describing was an ideal world without any anomalies factored in.
The high priests of Economics reacted by churning out a barrage of research papers which factored in all kinds of anomalies in an effort to describe the real world.
Where there’s money, there’s emotion. The average human being is emotionally coupled to money.
Either Economics didn’t bother to factor in the anomaly called emotion, or it couldn’t find the corresponding matrix in which it could fit human emotions like greed and fear.
And Economics started getting it wrong in the real world, big time. The Long-Term Capital Management Fund (run by Economics Nobel laureates as per their pansy and sedantry office-table cum computer-programmed understanding of finance) collapsed in 1998, with billions of investor dollars evaporating and the world’s financial system coming to a grinding halt but just about managing to keep its head above water. It was a close brush with comprehensive disaster.
The human being forgets.
The last leg of the surge in dotcoms in 1999 and the first quarter of 2000 did just that. It made people forget their investing follies.
What people did remember though was the high of the surge. Investors wanted that feeling again. They wanted to make a killing again. Greed never dies.
And Economics rose to the occasion. This time it was not only pseudo, but it had gotten dirty. Its proponents were not researchers anymore, they were investment bankers, who had hired researchers to develop investment products based on complex pseudo-mathematical models that would lure the public.
For just a few percentage points more of interest payout, investors worldwide were willing to buy this toxic debt with no underlying and a shady payout source. People got fooled by the marketing, with ratings agencies joining the bandwagon of crookedness and giving a AAA rating to the poisonous products in question.
All along, the Fed (with the blessing of the White House) had been encouraging citizens to “tap their home equity”, i.e. to take loans against their homes and then to invest the funds in the market. (The Fed creates bubbles, that’s what its real job is). And the Fed, the White House, the leading investment banks, the ratings agencies and the toxic researchers were all joint at the hip, a very powerful conglomerate creating financial weather.
So, from 2003 to 2007, there was liquidity in the world’s financial system, and a lot of good money was invested in CDOs. Nobody really understood these products properly, except for the researchers who came up with them. Common sense would have said that something with no base or underlying will eventually collapse as the load on top increases. And there was no dearth of load, because the same investment banks that sold the CDOs to the public were busy shorting those very CDOs (!!!!!), with Goldman Sachs taking the lead. So a collapse is exactly what happened.
This time around, the now pseudo and very, very dirty economics (almost)finished off the world’s financial system as it stood. It was revived from death through frantic financial-mathematical jugglery and a non-stop note-printing-press, with the Fed looking desperately to bury the damage by creating the next bubble which would lure good money from new investors in other parts of the world which were less affected for whatever reason.
That’s where we stand now. Certain portions of the world’s finance system are still on the respirator. Portions are off it, and are trying to act as if nothing happened, shamelessly getting back to their old tricks again.
I get calls reguarly from Merrill Lynch, Credit Suisse, StanChart and other investment banks. The only reason why Goldman hasn’t called is probably because my networth is below their cold-call limit. Anyways, it doesn’t matter who let the dogs out. Point is, they are out. And they are trying to sell you swaps, structures, forwards, principal protected products, what-have-yous, you name it. I remain polite, but tell them in no uncertain terms to lay off.
As a thumb rule, I don’t invest in products I don’t understand.
As another thumb rule, I don’t even invest in products which I might eventually understand after making the required effort.
As the mother of all thumb rules, I only invest in products that I understand effortlessly.
That’s the learning I got in the 2000s, and I’m happy to share it with you.