Book Review

The Fearful Rise of Markets: A Short View of Global Bubbles and Synchronized Meltdowns by John Authers

“The Fearful Rise of Markets: A Short View of Global Bubbles and Synchronized Meltdowns” by John Authers is a very useful book for investors and regulators alike. In 27 clearly written chapters, Authers explains why financial crises occur and how to avoid them in the future.

In the past, the Federal Reserve Bank has countered every crisis by relying on bailouts. The financial history of the United States is replete with booms and busts, which required larger and larger bailouts over time. The combination of government interventions and investors following trends to the extreme produced wide distortions in asset prices. Share index funds were created in the belief that share prices reflect all available public information.  Authers describes how investing became a huge industry in which fund managers boasted about beating the market while their true objective was to maximize the funds they managed. Investors were reassured that they could always buy stocks on the dips as the market mostly was rising in the 1980s and 1990s. The popular media published many articles about people who successfully rode various booms to the top. Anyone could become an investor as long as the Federal Reserve stepped in to support the market by lowering interest rates or bailing out various entities. One attractive investment trend was gold. Authers tells how the US abandoned the gold standard in 1933 in order to inflate away the nation’s debt and how the metal gained in value due to the devaluation of the dollar. Investors also learned about using oil as a hedge against inflation. “Emerging markets” was another trend, despite their well-documented boom and bust histories. Investors borrowed money in countries with low interest rates and invested in countries with higher interest rates, causing exchange rates to fall or rise sharply in market corrections. Quant funds, utilized similar strategies or crowded trades, causing certain assets to correlate strongly. If one big fund had to unwind its position, it would cause losses for other funds, leading to further liquidation of positions. “Asset allocation” was billed as a safe investment strategy that offered diversification benefits. However, small investors had little idea that once they crowded an asset trade, it lost most of its benefits. 

Authers demonstrates that there is little de-coupling between markets and that most asset classes are strongly correlated. He points to the danger of future bubbles if the Federal Reserve does not start to unwind its easy money policy. Most important, he reiterates that diversification benefits are applicable over various sorts of risks and not over asset classes. Thus, governments should monitor the developments in asset markets exposed to bubbles in order to protect investors from the worst excesses of investors and fund managers.