Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Thursday, October 12, 2006

Why Isn't the Lower Tail of the Future Priced?

Bob Rubin scares Felix Salmon:

RGE - Bob Rubin, Ultrabear: Robert Rubin had a long conversation with Citigroup economist Kim Schoenholtz on September 7, which has now been transcribed and released as a special report from Citi's Global Economic and Market Analysis group. Rubin's pretty downbeat about both the global economy and global markets, which he thinks are sticking their collective heads in the sand:

Most people seem to think that the problem is somewhere down the road. I think the markets are remarkably complacent.

Even economists, who are generally more bearish than markets, aren't necessarily bearish enough, says Rubin:

It's curious to me that economists, with an exception here or there, are as sanguine as they seem to be. They talk about a cooling off or a soft landing or whatever it may be, but generally seem to attach very low probabilities to really serious adverse developments. Most of the people I know in the national security world, and there are many seem deeply troubled about a variety of matters: nuclear proliferation, Islamic radicalism, the endgame in Iraq, instability in countries that mean a great deal to us in the Middle East, what's going to happen in Pakistan, and many other issues as well. And the markets do not reflect this.

He also doesn't think the IMF or anybody else will be able to prevent any kind of unstable global rebalancing:

I don't think there's a mechanism for international policy coordination. I really don't. It's a very good question actually that has come up in a lot of conversations. I may be wrong, but based on my experience, I would say that there's no mechanism for international policy coordination. There's a pretty good mechanism for telling a small poor developing country what to do. But there's no policy mechanism for bringing together the countries that really matter in the global economy.

To all of which there can only be one reaction: Sell! Sell now!

The lower tail--both in its economic and political aspects--is still ferocious and scary. But it is still the lower tail. And I can understand why finance professionals would rather not price it at all than price it into their forecasts and so run a high probability of lagging their peers' performance.


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