The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How To Prevent Them in the Future Hardcover – Apr 16 2010
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As seen on C-Span Book TV, CNBC Street Signs, and in the Financial T imes , The Wall Street Journal, Forbes, The Motley Fool and The Globe and Mail .
“ Authers has the curriculum vitae and the confidence to go where no other author has thus far been . His goal … is to make understandable why financial markets failed, how investors should protect themselves and what national authorities should do to correct some of the problems. His mission is happily met.” - Financial Times
Carmen M Reinhart, co-author with Kenneth S Rogoff of ‘This Time is Different: Eight Centuries of Financial Folly’
“This new book is a must-read for every investor....I'd urge anyone with any interest in investing to read it as soon as possible. It may well stop you losing your shirt in the next meltdown!” Cliff D’Arcy, The Motley Fool
From the Back Cover
“This enjoyable, fast-moving book is concise, relevant, and perceptive. My bottom line is a simple one: This book should be read by all those interested in the way markets operate, be they investors, analysts, or policy makers.
From the Foreword byMohamed A. El-Erian, CEO and co-CIO of PIMCO, and author ofWhen Markets Collide
“This book is a must-read for anyone concerned about how we can avoid recurring debt-induced busts in the years ahead, or anyone who wonders how to invest if (when!) the crisis returns. Authers' insights on the global financial crisis are profound.
Robert D. Arnott, Chairman, Research Affiliates, LLC, and author ofThe Fundamental Index: A Better Way to Invest
“This book illustrates the dangers to investors who fail to recognize that global asset markets have become more synchronized over time. In a crowded field of works on the financial crisis, Authers' work is unique in both its insight and style.
Robert R. Johnson, Ph.D., CFA, Senior Managing Director of the CFA Institute
“John Authers has combined his journalistically honed FT skills with great insights. Serious investors and policymakers should read this book.
David R. Kotok, Chairman and Chief Investment Officer of Cumberland Advisors
“John masterfully drives a stake through the myth of global economic decoupling one chapter and example at a time. A must-read in today's economy.
Vitaliy Katsenelson, Director of Research at Investment Management Associates, Inc, author ofActive Value Investing: Making Money in Range-Bound Markets
Are we barreling toward another massive global financial catastrophe?
How can so many bubbles form all at once? Why are so many “disconnected markets now capable of collapsing in unison? In this remarkably readable book, award-winningFinancial Timescolumnist John Authers takes on these critical questions and offers deeply sobering answers.
Authers reveals how the first truly global super bubble was inflated--and might now be inflating again. He illuminates the multiple roots of repeated financial crises: a massive shift in investing power from individuals to big institutions; the migration of key decisions from banks to capital markets; the wholesale financialization of many asset classes; and fundamental failures of both theory and policy.
The Fearful Rise of Marketspresents a truly global view, avoiding oversimplifications and ideology as it outlines how we got here and where we stand. Even more valuable, it offers realistic solutions--for decision-makers who want to prevent disaster and investors who want to survive it.
•The herd grows ever larger--and more dangerous
How institutional investing, indexing, and efficient markets theory promote herding
•Cheap money and irrational exuberance
Super fuel for super bubbles
•Too big to fail: the whole story of moral hazard
Banks, hedge funds, and beyond
•Danger signs of the next bubble
Forex, equity, credit, and commodity markets move once more in alignment
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Most Helpful Customer Reviews on Amazon.com (beta)
Without describing all two dozen chapters, here are some of the topics (besides indexing) the book addresses: How money markets disintermediated banks, the role of junk bonds, the "oil standard," carry trades and their effects, the impact of increasingly professionally dominated investment markets (e.g., herd behavior and "closet indexing"), reflexive markets, the limits of diversification, quant trading, and modern-day bank runs.
The author's analysis is pretty good, actually, and given some of the prominent theoreticians and practitioners he consulted in preparing the articles (sorry, chapters) in this book, that's understandable. People like Robert Arnott, Benoit Mandelbrot, Michael Mauboussin and Jeremy Siegel, for example. These guys have written some very interesting material on market behavior. (Two of my favorites are Mandelbrot's "The Misbehavior of Markets" and Mauboussin's "Think Twice.")
In short, you could read this book is just a few sittings, or you could digest one or two chapters at a time if you are pushed for time. Either way, it covers a lot of ground, can be easily understood by most readers, and delivers some important analysis. If you are looking for a good summary of many of the important developments in markets over recent decades (with an emphasis on the last 10 years and the recent market turmoil), I'd say this is a very fine choice.
Authers posits that there have been a number of factors that have made financial markets more volatile since the late 1990s until today (as opposed to the end of World War 2 until the late 1980s). The most important of these have been greater accumulation of financial resources into the hands of "financial professionals (i.e., fund managers)" as to individual investors (after world war 2, for example, over 90% of investment funds were held by individual investors as opposed to fund managers - today the figure is more like a third), the accumulation of wealth into focal points consisting of index funds, the rise of money markets, the oil replacing the gold standard, the rise of emerging markets, the rise of junk funds, foreign exchange rising as another "asset", the rise of the carry trade, increasing bank concentration, the rise of hedge funds, the rise of the BRICs and commodities as another investment asset. Each of these is discussed in terms the layman can understand.
The accumulation of the financial assets has facilitated herd behavior and hence has increased cyclicality. The rise of index funds has caused financial assets to become more concentrated around focal points such as S&P 500 stocks hence decreasing diversity in investment funds. In addition, the rise of these funds has further lead to herd behavior as it forces the fund managers to compete primarily on benchmarks relative to each other. This, according to Authers, leads to more "herd" behavior as any deviation from fund returns from the benchmark norm leads to fund manager unemployment. Money market funds have lead to more market risk as they are not guaranteed and, even worse, portray an image of being so. Emerging funds have lead to more investment in more volatile and cyclical economies. Junk funds have also lead to more investment in similarly characterized markets. Foreign exchange and commodity investment opportunities have also lead to investment funds entering a very volatile investment class. Increasing banking concentration has lead to moral hazard in that banks have become large enough to not be permitted by the government to fail. Hence they, too, can take more risk than would otherwise be prudent. In addition, all asset classes have become more closely correlated with each other. This makes diversification much more difficult if not impossible. In short, risk today in financial markets is considerably greater than it has been for most of the Post War period. Even worse, many of the traditional risk reduction strategies such as portfolio diversification are not as effective as they once were due to greater correlation among asset classes. All and all, risk today is much higher than it has been with investors being less able to mitigate it.
The book is slightly weak in the areas in its recommendations regarding how to prevent or mitigate future meltdowns. This is of some importance as the book's full title is "The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How to Prevent them in the Future". This is the reason this reviewers gives this book only 4 stars instead of 5. Some of Auther's ideas are quite good. For example, he recommends that banks should be forced to hold some proportion of housing CDOs they sell. This would lead, in his opinion, to an improvement in the quality of these products in the markets. Most of Auther's other ideas, however, do not seem practically feasible. For example, increasing bank reserves would lead an outflow of capital from those banks and nations with the higher capital requirements to those with lower. For a more comprehensive discussion of mitigation strategies, this reviewer recommends "Reforming U.S. Financial Markets: Reflections Before and Beyond Dodd-Frank (Alvin Hansen Symposium on Public Policy at Harvard University)". This contains a transcript of discussions held amongst leading academicians on the topic (i.e., Schiller).
Hence the reader comes out after reading the book, very justifiably, with the view that we now (and in the future) will be facing much greater market risk with little in the way of mitigation strategies. The message for the investor is clear: a greater share of one's investment portfolio in relatively lower risk and lower yielding investments such as high grade bonds.
This is a highly detailed yet simple read which provides a look at our past and current global market structures and the forces that move them. If you wish to review or, for the first time, effortlessly understand the actual market forces from a holistic point of view (currency, government finance, monetary policy, financial engineering, foreign markets, investor sentiment/confidence, etc) with concrete examples from recent history (depression, post WW and the impact of indexing and institutional investing), I recommend Authers work.
To shorten my own review, I recommend reading the review by AdamSmythe's as he has summarized the book well. I personally do not see this book as another book on "current crisis" as much as it is a detailed historical account of where the global markets are today, how they are connected more than ever and, finally, how we arrived at the current, if not historic, market conditions of 2010.
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