Ygal Schuller's  Instablog

Ygal Schuller
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As a Strategy & Operations Consultant with a credit background and degrees in Finance and History from the University of Texas, I remain dumbfounded by the lack of rational thinking that exists in today's world. Whether you prefer to examine implications of politics or financial markets, i find... More
  • Opinion: To Burst, Or Not To Burst... That Is The Question!  1 comment
    Apr 23, 2014 2:55 PM

    Fred is a 14-year old boy standing in the mirror deciding whether his sophomore crush is more likely to notice a white head or a red dot in geography class...

    Although the healthy choice for Fred's skin would be to leave the white head alone and let it naturally subside (perhaps dousing it in Proactiv cream), he does not want to take the chance of the pimple developing into a monstrosity that will haunt his yearbook picture for years to come... So Fred pops the pimple.

    Unfortunately, his sophomore crush notices the unsightly consequences and Fred's date-stock declines. However, Fred's yearbook picture is not ruined and thus he is uninhibited from chasing many more crushes over the next three years of high school.

    I apologize for drudging up old suppressed memories... This vignette illustrates the trade-offs faced by Janet Yellen and the Federal Reserve: whether to continue the QE-Infinity policy or slowly let the air out of the proverbial balloon.

    QE-Infinity has proven to be tremendously effective in the short-run; providing liquidity to banks and corporations during a time of extreme precaution following the latest market crash. Although its long-run effects remain unknown, the expansionary policy has repeatedly driven the stock market exchanges to all-time highs in 2013-2014 and it has re-whet investors' appetite for risk.

    Now the reactionary questions begin -

    Is the bubble fully inflated? Will it pop? When will it pop? What will be the trigger event? Should I short the market?

    The rational investor asks himself a different set of questions -

    Am I well positioned to capture gains from capital appreciation? Am I sufficiently diversified to prevent unique or event risk from destroying my portfolio? Am I hedged appropriately in case of catastrophe? What is my contingency plan in case of a market crash?

    In case you were wondering, I am not a hedge-fund manager with a doomsday agenda. Any economist will tell you about the boom and bust cycle, but only brave historical theorists are able to describe how the cycle's oscillations have been amplified and sensitized over time by the increasingly availability of credit, the globalization and interconnectedness of markets and the securitization of tangible assets. Only adequate regulation of financial markets and major industries can mitigate the amplitude of the oscillations that will inevitably make corrections when the market is irrationally exuberant. Unfortunately, this adequate regulation is a concept rather utopic in nature given the modern political construct.

    SO WHAT SHOULD YOU DO?

    1. DONT PANIC. Talk to someone who is actually knowledgeable, but don't follow anyone blindly

    2. Don't pretend to be more knowledgeable than you are

    3. Be prepared for any scenario regardless of the perceived probability of that event happening

    4. Live within your means and focus on living a meaningful life

    "Tough Times Don't Last, Tough People Do."
    - Floyd Mayweather Jr.

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    Great analogy! And welcome to the Instablogs!
    25 Apr 2014, 10:04 PM Reply Like
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