In the Press… How to Spot a Bubble?

Howard Marks, FT, Wednesday, January 8, 2025: In this article, Howard Marks, co-founder and co-chair of Oaktree Capital Management, argues that “US stocks are frothy, but there seems to be no outlandish bubble.” The methodology used to make this assessment is particularly insightful. Howard Marks suggests that, when identifying a bubble, a psychological diagnosis is often more effective than relying solely on valuation parameters. This may appear as a provocative claim, but we, too, have often argued that “fundamentalists” frequently […]

In The Press… Why Does the Cost of Capital Seem so Rigid?

Soumaya Keynes, FT, Friday, August 30, 2024: In this clear and well-informed article, Soumaya Keynes discusses a very important and puzzling observation: the rigidity of the hurdle rate used by companies to determine whether or not to invest. This is an important phenomenon for two reasons. First, it makes monetary policy less effective in stabilizing the economy, as investments appear to be less sensitive to changes in interest rates than they should be. Second, there is a form of economic […]

In The Press… Why do banks suffer from heavy discounts on the stock markets?

Patrick Jenkins, FT, Wednesday, December 5, 2023: In this interesting article, Patrick Jenkins wonder why price-to-book ratios are generally rather low in the European banking sector. He argues that under a favourable scenario, “Europe’s banks may one day make it back to book value, finally expun­ging the zom­bie phe­nomenon”. In a letter to the FT, that was published, we added that banks’ high cost of cap­ital may also be related to share­hold­ers’ know­ledge that they would be the first vic­tims […]

In The Press… What happened in October in the US Treasuries market?

Mike Dolan, Reuters, Friday, October 20, 2023: Between the end of June and the end of October, the yield on the 10-year US Treasury increased by more than 100 bps to reach levels not seen since the summer of 2007. In this interesting article, Mike Dolan reviews the explanations for this sudden movement. He quotes our note that attempts to explain this impressive increase, using the original tools we developed. A good understanding of what is happening can help predict the […]

In the Press… Neil Woodford and the Liquidity of Mutual Funds

Jonathan Ford, FT, Monday, June 10, 2019: The collapse of the Equity Income Fund managed by the former stat stockpicker Neil Woodford illustrates again all the dangers of open-ended funds that promise instant liquidity while investing sometimes in hard to sell financial assets. In a fund penalized by large outflows, whatever the underlying reasons, remaining investors have a strong incentive to run since it becomes more and more difficult and costly for the fund manager to provide the expected liquidity. […]

In the Press… The Debt Machine

Joe Rennison, FT, Tuesday, January 29, 2019: I always thought that the large-scale securitization of risky debts was among the least understood and most dangerous financial innovations, and thus I read with strong interest this balanced article on the “debt machine”. Joe Rennison explains very well the mechanic involved in the securitization of corporate leveraged loans. On the one hand, it stresses that the risks may have increased in the leveraged loans market, and as a result in the CLOs […]

In the Press…. Tail Risk

Robert Smith, FT, Friday, November 23, 2018: Robert Smith describes very well how some reforms designed to protect the banking sector – at the core of the 2008-2009 crisis – may carry the seeds of the next crisis, this time maybe in the fund management industry. To protect the banking sector, some liquidity risks have been transfered to mutal funds which invest in potentially illiquid assets while offering generous redemptions rules. These  potentially illquid assets may be bonds issued by […]

In The Press…. The Rule of Three

The Economist, May 26, 2018: Interesting article that explains one of the reasons why the risk premia on long term bonds can be negative. If bonds rise when equities fall (a big if), investors may buy bonds as hedging instruments. This article shows that 10-year bonds are better heddging tools than 2-year bonds. In other words, when we compare two hedging instruments, the more volatile, the better! Risks and volatilities are two rather different concepts (see also our discussion of […]

In The Press…. Economics Failed Us Before the Global Crisis

Martin Wolf, FT, Wednesday, March 21, 2018:   Martin Wolf draws some robust conclusions relative to the priorities for macroeconomic research after the recent financial crisis. According to him, it is vital to focus on two tasks: “The first is how to make the body economic more resistant to the consequences of manias and panics. The second is how to restore it to health as quickly as possible. On both counts, we need to think more and do more. These […]