Based on the book of the same name by Michael Lewis, the Big Short is a movie about several hedge fund managers who identified cracks in the mortgage market in 2005-2007 and attempted to bet on a collapse in the market for mortgage-backed securities (MBS). In particular these managers noted that underwriting standards on mortgage… Read more

Written by Bill Watkins Previously published January 19, 2016 at Every now and then, something happens to cause California’s comfortable establishment to celebrate the state’s economy.  Recent budget surpluses and jobs data have provided several opportunities, never mind that these are hardly summary statistics.  They don’t tell the complete story. The celebrants conveniently ignore… Read more

What is the right amount of debt for a particular borrower? This depends on the borrower.  Are we talking about a corporation, a bank, a household, a government entity, or an investment fund?  At a very high level, it seems that some debt can be beneficial, while too much debt can be detrimental.  Sort of… Read more

At the ASSA economics conference on Sunday, I attended a session on the equilibrium real (inflation adjusted) interest rate.  This topic was being discussed in particular as a metric relating to sluggish U.S. economic growth since the Great Recession. First, some presenters documented empirically that real interest rates since 1860 has had episodes, some of… Read more

Houston, we have liftoff!  That is not what Fed chair Janet Yellen said, but we can say that the Dow closed up 224 points at the end of trading today.  The Fed had telegraphed this move, markets had priced it in, and this market reaction is consistent. I am pleased with this move, as I… Read more

Asset management is an extremely competitive industry that offers extraordinary wealth building opportunities to those managers who are successful in generating market beating returns, or at least in bringing in large amounts of assets to manage. This opportunity draws lots of really smart people to the business. The problem is that the average performance of… Read more

We have shown in prior blogs how do-it-yourself investors can achieve reasonable investment returns through the use of low-cost highly diversified passively managed funds. How can non-do-it-yourselfers obtain these same benefits? There are financial advisors who specialize in these services, but often not at an acceptable level of cost. Recently, a marriage of technology and… Read more

Previously published on October 29, 2015 on   California has a long history of boom and bust cycles, but over the past 25 years or so, California’s cycles appear to be becoming more volatile, with increasing frequency, higher highs, and lower lows.  The fast-moving business cycle may not provide the time necessary for many… Read more

John Cochrane is professor of finance at the Booth School of Business at the University of Chicago and is an expert on the theory of asset pricing. You can take (or audit) his free online course through Coursera. In this course he starts out by briefly summarizing the state of the art in asset management… Read more

In late 2008, U.S. banks accelerated consolidation driven by intense Federal government pressure (many failing banks were “saved” by being acquired by a larger bank). This yielded a banking structure where today the largest five U.S. banks control over 44 percent of the nation’s banking assets. The five largest U.S. banks held assets of $6.7… Read more

Previously published on September 2, 2015 on Fox and Hounds As California weathers its fourth straight year of extreme drought, policy makers and their cheerleaders continue to scapegoat California’s agricultural industry. Writing in the Sacramento Bee, economist Christopher Thornberg, for example, refers to the industry as “feckless” and advocates using eminent domain to seize farmers’… Read more

The Federal Open Market Committee began its two day September meeting yesterday, where it will consider raising the short-term policy rate, or the guidance on that rate. It has been nine years since the committee has raised this rate. The prospect of higher rates has financial markets and their commentators very nervous. The rate-raising event,… Read more

John C. (Jack) Bogle graduated from Princeton University in 1951 and founded The Vanguard Group, Inc. in 1974. In 1975, Vanguard introduced the first so-called “Index Fund” based on the Standard and Poor 500 (S&P500) stock index. The S&P500 is a market capitalization weighted average of 500 of the largest stocks that trade on the… Read more

Previously published on August 29, 2015 on I recently made a couple of tweets/Facebook posts pointing out that market declines threaten California’s budget surplus. I referenced articles in the WSJ and Bloomberg, and I thought the observation was non-controversial—almost banal. So I was surprised at the feedback. One person asked why. Another said it… Read more

In general, we expect that a beginner or novice in a field is likely to be out-performed by a seasoned veteran. We would be surprised if a beginner could build a better house than a skilled carpenter, or if an amateur boxer could knock out a pro. Yet, something like this may be true in… Read more