Atlantic, Dec. 2008

The Atlantic is a magazine that I’ve never been comfortable with. Some years I’ve subscribed to it — and, as each trivia-filled issue turned up in my mailbox, wondered why — until, every now and then, they would publish a piece I was really glad to have read, and I would grit my teeth and sign up for another. Their December 2008 issue (as you see I don’t read them as fast as they arrive), is one of those, only this time it isn’t just one piece that I keep urging people to have a look at. There are two of them.

The first is by a former fund runner, Henry Blodget, and it is called “Why Wall Street Always Blows It.” Blodget should know because (as he says in the article) “I was a famous tech-stock analyst at Merrill Lynch. I was famous because I was on the right side of the boom through the late 1990s…. By late 1998, I was cautioning clients that ‘what looks like a bubble probably is,’ but this didn’t save me. Fifteen months later I missed the top and drove my clients right over the cliff.”

And so, Blodget says, will people in his position always do because that sort of bubble — in which the price of securities gets bid up way beyond their real value is bound to happen … and bound to burst.

What’s the solution? Why, you want to buy and hold as long as the bubble is bloating, but get out before it pops. That’s good advice, and it could make you really, really rich if followed … but you can’t follow it. Blodget tried to. He cut back, and advised his clients to cut back, on the high-performance tech stocks that fueled the boom.

The damn things kept going up — way up — anyway.

You can see the stocks you’ve dumped going way past the point you sold them at for just so long before you begin to think they’ll keep on doing it and you’ve missed the boat. For Blodget that point came when, “in early 2000, weeks before the bubble burst, I put a lot of money where my mouth was. Two years later, I had lost the equivalent of six high-end college educations.” Because, as he also says, getting out of a bubble too early causes almost as much trouble as getting out of it too late.

 

The other piece in the same issue is called “Be Nice to the Countries That Lend You Money,” and it is the text of an on-the-record conversation between financial writer James Fallows and Gao Xiqing, who is the manager of a significant chunk of the money China has loaned to the United States. Gao is a pretty Americanish Chinese with a law degree from Duke and an American employment record that includes working for Richard Nixon’s Wall Street law firm.

I’m not going to try to synopsize what he said to Fallows, only to tell you that if you read it, you’ll be glad you did — even if he makes your blood run cold when Fallows hints at the “too big to fail” principle as applied to the American debt, implying that it would cost China too much to call it, and Gao agrees, “Yes, in the short run, not in the long,”

3 Comments

  1. Jeff says:

    Paul Krugman has written some interesting things about the dollar trap that China is in. They can’t really do anything about all that American debt they own without crashing their own economy. That’s one reason why China is pushing for a world trade currency to replace the dollar.

    Krugman has also written about China’s environmental problems, specifically CO2 emissions. http://www.nytimes.com/2009/05/15/opinion/15krugman.html?_r=1&partner=rssnyt&emc=rss

    In my opinion, China is sitting on an environmental time bomb. They are poisoning their land, water and air at an unsustainable rate. They may be an economic powerhouse today, but in the long run their country will become uninhabitable. The cost of cleaning up the mess they have made in their drive to become an economic superpower will ultimately hamstring the Chinese economy, which in turn will further steer the rest of the world away from the very consumption-driven economic model that has created the Chinese superpower.

    My opinion – the next 20 years are going to be… interesting. The world will change as much in the next 20 years as it changed in the last 100. The change is inevitable, but how it changes remains to be seen.

  2. Doug K says:

    James Fallows is not really a ‘financial’ writer per se. He’s worth reading on any subject, though. Find his weblog at
    http://jamesfallows.theatlantic.com/

    I’m havering on subscribing to the Atlantic, and it’s mostly because I’d like to help support his writing..

    We are all Keynesians now..
    “The market can stay irrational longer than you can stay solvent.” John Maynard Keynes

  3. Tina Black says:

    I pulled out all my market holdings when the DOW was at 14,000. Good move.

    :)