Following the Heard Off the Precipice

I was fortunate enough to attend the 11th Annual Lynford Lecture at the Polytechnic Institute of NYU where GMO co-founder Jeremy Grantham gave an inspirational and thought provoking talk called Career Risks and Breaking Bubbles.

The net of his talk is this. The true value of most markets (stock, real estate, you name it) is pretty flat. Every now and then, the market experiences a bubble where perceived value sky-rockets way above then plummets down below and eventually settles back on its real value again. On the ascending slope of these mountains of market inefficiency, you always find analysts who claim that we have finally figured out how to run the marketplace so the value is just going to keep going up and up forever. Even with the market wildly over-rated, people stay in it because of the truly irrational aversion to making less money than your peers. That is why the heard of stampeding buffaloes plummets right off the cliff.

He had plenty of charts from past bubbles to back up his claims. This was a most charming and lucid speaker on a fairly abstract topic to a room full of academicians and budding finance engineers.

He made some interesting points in the Q&A session afterwards. This four decade veteran of finance has a complete lack of confidence in the Bush Administration and is hopeful for the Obama Administration. With regards to the bailout of the automobile industry, he said something to the affect that those jobs were lost when the demand for cars plummeted and no fiscal stimulus would bring those jobs back.