Sunday, December 13, 2015

The Big Short: An Almost Great Movie

I often get emails from young readers asking me what Wall Street is about and what books they should read to find out. The pickings are slim. But now that the movie The Big Short is out, I am going to tell them to see this movie and read, Street Fighting at Wall and Broad: An Insider's Tale of Stock Manipulation and The Professional Commodity Trader, along with Peter Lynch books.

But I am going to emphasize that this movie must be seen before the books are read. It captures the true flavor of Wall Street and the very tough place it is. It also highlights the research that needs to be done to find the great opportunities and how that will often mean standing alone. It also shows the pain that will be experienced when a trade goes against you short term, even though you know the facts are on your side long-term. And it shows the way Wall Street traders, on the other side of trades, will try to screw you if you don't have every angle covered. 

In other words, this movie is a great inside look.

That said, there are problems with the movie. It tends to look at the mortgage securitization (and CDOs) isolated from the Federal Reserve money pumping that provided the money for the securitization madness. By keeping the focus away from the Fed, a picture is painted of Wall Street and banking as evil, without separating banksters and central banking from the important role finance plays in an economy.

It will not be hard to understand how many walking out of this movie will form the opinion that Wall Street is a flaw of capitalism. Indeed, the film closes with clips enhancing that impression.

The film also has some odd appearances and mentions from those I would classify as having had no understanding of the financial crisis as it was developing, or at best a distant second-hand understanding. Most remarkably, Richard Thaler somehow ends up in the film. There is nothing from the papers he wrote prior to the crisis that suggest he had any inkling it was coming.

To be sure, the film does not say he did. He is used as a prop to explain CDOs but why use him? There were plenty of economists (mostly from the Austrian school) that warned about the housing market, (BTW Chapter 2 of my book, The Fed Flunks is the critique I wrote in 2004 of a then published Fed paper that said there was no housing bubble).

But overall, in the nitty gritty, the film is great, but the big macro implication of a failure of capitalism is just terrible.

I want to close this comment on one note about the audience that was in the theater watching the film. A couple of times I heard "knowing" chuckles from the crowd as though they could have actually spotted the dangers in the mortgage market in real time, themselves. Give me a break.

I can remember seeing the Mark Cuban film in 2005, Enron: The Smartest Guys in the Room and hearing knowing chuckles in that audience and thinking to myself,"I wonder if they will be letting out all knowing laughs when the Fed's money tightening tanks the real estate market." Most certainly were caught in the bubble.

Almost everyone gets caught on the wrong side of the major moves. It takes a lot of research and study and you have to be tough. It is a lonely place to be when you are on the opposite side of the major trend. the movie conveys this very well. The next major moves are going to be super acceleration in price inflation, that few expect, and climbing interest rates, that even fewer expect, even many Austrians, who think the Fed is never going to raise interest rates. As I have noted in the EPJ Daily Alertt, interest rates have bottomed and we are at the start of a multi-year climb (possibly multi-decade climb).

Most of us will never see interest rates this low ever again. Owning long term bonds right now is about the dumbest investment you can make. It is probably dumber than owning mortgage-backed securities in 2006.



1 comment:

  1. Hello author. You say that you heard "knowing chuckles" from theater goers. I don't understand how you know they were "knowing"? I will give you that however and my follow up question would be; are you the only person that is allowed a knowing laugh? If the laughs were from criminal bankers, who happened to be there, and the "knowing laughter" was sinister, i would allow your resentment, but I doubt that was who was laughing. Don't resent people for laughing. You're creating more enemies for yourself. The stakes are too high to pick and choose your allies against the edifice that is criminal banking.