Fascinating quote regarding some problems in the markets.

“One possibility is that those investing in financial markets expect economic policy to be so dysfunctional that the global economy will remain more or less in its current depressed state for perhaps a decade, or more. The only other explanation is that even now, more than three years after the US financial crisis erupted, financial markets’ ability to price relative risks and returns sensibly has been broken at a deep level, leaving them incapable of doing their job: bearing and managing risk in order to channel savings to entrepreneurial ventures.”

-The Perils of Prophecy, J. Bradford DeLong

I love the alliteration — Delong used “Perils of Prophecy” which works as well as “Folly of Forecast.”


Category: Apprenticed Investor, Markets

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9 Responses to “QOTD: Pricing Risk/Reward is Broken”

  1. NoKidding says:

    Re: Your other QOTD by WSM
    “Life is too short to do anything for oneself that one can pay others to do for one.”

    I believe the Greeks are now in the process of learning that life expectancey has increased since the French had an African colonial presence.

  2. rd says:

    It seems like the financial markets have taken the Central Bankers at their word that they will do whatever they can to protect asset and commodity prices. Until that current truism is no longer true, it is unclear how else the markets would price relative risks and returns.

  3. ellwood2011 says:

    I love the passive voice on possibility number 2! “has been broken”

    Broken by whom or what? Extensive government interventions with conflicting objectives, I propose.

  4. GeorgeBurnsWasRight says:

    I kind of favor the idea that BOTH possibilities are correct. We’re in a lengthy semi-depression with broken markets.

  5. 873450 says:

    False Prophets Predict False Profits

  6. boveri says:

    I like Folly of Forecast best.

  7. wally says:

    This gets at the issue raised in your earlier post about the error of ‘reaching for yield’. Your notion was that higher yield puts you higher on the risk curve… but as we’ve see in the last decade, nobody can truly measure risk. To measure it as a ‘percent’ is nuts… it isn’t a graduated thing. When something fails, it is total failure and there is no math formula to make that come out OK. In fact, that is the biggest investing delusion of professionals in the world today.

  8. algernon says:

    Modern macroeconomist manage to sound profound when they can’t see simple fact.

    Fiat money has encouraged/enabled the world to borrow grossly more money than it can pay back. And then central banks continue financial repression–to wit, print money willy-nilly–to further hide the truth.

    DeLong is so smart; maybe he can tell us how to price the risk.

  9. wally says:

    You can’t price the risk for the reason that modern failures are chaotic in nature… you can predict them in aggregate, but not specifically.