An Open Letter to Doomsdayists, by Victor Niederhoffer
Is it possible, worthy sirs, that you credit the existence of palfreys, damsels-errants, serpents, dragons, giants: all the wonderful battles, furious encounters, enamored princes, witty dwarfs,--- in short all the absurdities which books of chivalry contain? Miguel Cervantes, Don Quixote
Dear Composite Doomsdayist.
For more than eight years you have been proclaiming, hoping and averring that the end of the Dow and the American economy is near. You have adduced and set forth innumerable reasons, hopes and fancies for this downfall, as far from truth as the rise of the S&P to 1240 is from Dow 5000 itself.
Is it possible that human reason can credit the existence of black swans, can make comparisons to the Bronze Age when interest rates were twice their current levels, can countenance fears about the growth and quality of jobs, savings, current balances, outsourcings, competition from our Asian brothers, unsustainable levels of real estate prices, P/Es above 10, declining risk premia, evidences of speculative enthusiasm in IPOs, excessive debt levels, returns to the golden age of feudalism because of the energy crisis, imminent earthquakes, jihads, viruses, el Ninos and other natural disasters set off by the age of tsunamis, terrorism, conspicuous displays of excessive earnings and pay of high executives, defaults by our leading remaining industrial manufacturers, conflicts of interest between investors and investment bankers at the major brokerage houses, evidences of impropriety in the accounting and ethics of corporate leaders, ugly and grotesque yield curve shapes, Fed tightenings, negative views from ascetic noble investors -- in short, all the absurdities and fears about imminent collapse that books by academic economists such as Bodie, Graham, Krugman, Shiller, Sornette and Soros contain?
I confess that I have read all your books and listened to all your fears, and find that they do not contain any reason to think that the conditions of today are considerably worse than they ever have been before -- or, if they were, that this would be bearish. When you consider the record of the proponents of these views, who have been proclaiming them since S&P 300 in 1987, all through the regularly occurring implied volatilities of 25 in 1998 and the 30s in 2002, and their hopes and wishes that America will be doomed unless we scale down consumer spending and retaliations against those who would destroy us, increase our funding of the United Nations and support of the Kyoto agreements, I would commit their books to the flames and indeed insist that they return to the monastic and austere existences and sabbaticals that many of them have threatened to retire to since the falsity of their views has been made manifest -- for they want common sense and do not take into account the resilience of the enterprise system nor the many good things that counterbalance all their misinformed emphases and hopes for the negative.
Nay, the very prevalence of your views, the extent of the belief that comparisons of the present times to the 1920s and 1970s when there were crashes, without reference to any other decades, might be predictive of anything, is evidence that the prospects for future returns are even greater than they have been during the 20th century when markets throughout the world scored a 1.5 million percent return.
As the canon said to Don Quixote, who suffered from similar fancies and disturbances and was carried from place to place in a cage like some lion or tiger exhibited for money, in a fashion very similar to the way you exhibit yourself at the endless round of seminars, and fund raisers for hapless investors in funds of funds that you endlessly entertain at, I would urge you to have pity on yourselves, shake off your follies, leave your proverbial and literal monasteries and employ the talents that heaven has blessed you with in the enjoyment of your wealth and the opportunity that others might have to duplicate the great feats that you have obtained in the past through the investment in equities on high leverage during a period of declining interest rates with favorable sheltered rates of sharing with the Service.
It is true that you are a man of great talents. You teach many multidisciplinary classes at the greatest liberal universities, you do not initiate public appearances or submit papers to academic journals but only respond to scholarly requests from editors of major academic or intellectual sites, you collaborate with great scholars and self-proclaimed Nobel Prize manqués who share your envy of those who have been making fortunes on the bull side of real estate, buyouts or buy and hold; you stoically demur from investing in stocks or running your previous hedge funds or citing your results for the last 5 or 10 years because of the embarrassment of invidious comparisons concerning the amount of money lost directly in most cases or indirectly through the concept of opportunity costs, and most of all you read books only in the languages they were originally written in, for example, the Iliad and Zorba the Greek in Greek, the Aeneid in Latin, and the path-breaking work of Bachelier in the original French of that great nation of risk takers , international diplomats and devotees of leisure time from work, and abhorrence of hot deterrence.
If a strong natural impulse still leads you out of a feeling of lost opportunity and reduced wealth to books about the good old days, read The Triumph of the Optimists or its updates, in which Dimson, Marsh and Staunton document the 1.5 million percent-a-century returns in all markets, including that of the great United Kingdom, which during this period lost its empire, moved from a free market to a socialist economic system, was exposed to terrorism from its enemies on a unprecedented scale, was almost destroyed by two world wars and lost its position as a leading financial center among other disasters which make the woes of our current time look tame.
I would also commend you to the works of such heroes as Julian Simon in such works as The Ultimate Resource, where he documents the inevitable tendency of commodity prices to fall relative to equities, for standards of living and environmental quality to rise, and the work of Sidney Homer in A History of Interest Rates so that you can see that the current level of long-term interest rates, which are the best estimates of those with trillions on the line as to where they will be in the future, at which all future cash flows should be discounted, are about two-thirds the levels of those that have prevailed in the past.
My friend, these exercises would lead you to become well instructed in history, aware of the economic principles that determine value, able to apply the lessons of decision-making under uncertainty that are used in every other field where uncertainty reigns, enamored with the prospects for the future and improvement in your financial fortunes; and would enable you to acquire, in the words of Cervantes, "improvement in morals, valor without rashness, actions without cowardice,” and would at the same time redound to the glory of the muse of markets and your own profits.
A Major Quant adds:
Bravo. Yes, the resilience of the system makes such analyses entirely static. And add to that the endlessly accelerating, entirely unpredictable pace of innovation within the free world. unfathomable to the intelligentsia.