Truly Diversified?

Farnoosh Torabi this week interviewed TheStreet.com's metals writer Simon Constable about the issue of whether Greenspan is to blame for the sub-prime debacle (by keeping interest rates so low for so long). Constable's answers make for poignant consideration (VIDEO HERE):

There's two things here: first of all, everyone in this episode is seemingly saying, "not me, not this, this isn't my fault, it was the other guy, it was my predecessor, it was my mother, it was my mother-in-law ... but it wasn't me." That seems to be what's happening all over the market and it goes all the way back to Enron. It's been a decade of people blaming each other. However, I talked with some economists this morning and what they're telling me is that it was probably a policy decision on his part to say that it was OK, because even though there were going to be some abuses, we'll keep the economy rolling.

Indeed, this seems to sum up neatly the attitude towards economic fundamentals over the preceding 20 years. There are two economic conditions that have made markets amenable to the sort of volatility we experience these days. The first is the focus on growth, above all else, including but not limited to fundamentals, accounting, and even value. It's for this reason the private equity market has burgeoned so much: a singular focus on driving growth as quickly as possible -- with the least amount of hassle.

Added to this, the mass democratization of capital markets, to include numerous retail speculators who now have access to unprecedented levels of margin and credit stimulates this growth like steroids in a professional athlete.

The new economic climate challenges the meaning of the "diversified portfolio." A lot of financial institutions and market commentators like to promote the concept of such diversified portfolios as a safe way to access economic growth, but in reality when the above two conditions are in full swing, diversification becomes much harder to achieve, to the extent that whatever you're invested in - be it commodities, securities, bonds or real estate - is unavoidably at some level a leveraged bet on  the growth of more speculation.   

Comments

[MattJ]

Nice to see you back.