The global-minded financial analyst talks about booms, bubbles, and busts, the power of thinking generally — and why there's 'enormous value in getting seemingly irrelevant perspectives into a meeting.'
There are two things Vikram Mansharamani really likes to talk about: financial bubbles and generalist thinking. And they're intricately connected, because Mansharamani is convinced that one of the reasons bubbles occur is that the people who might prevent them are overly specialized in their thinking and their training.
What does that mean for everyone else in the world? Mansharamani will explain at PCMA Convening Leaders 2014 next month, where he'll present a Masters Series program on “The Generalist Advantage: Going Beyond Expertise” and a Business School session on “Global Prosperity: Why Everything Is About to Change.” A lecturer at Yale University and author of Boombustology: Spotting Financial Bubbles Before They Burst, Mansharamani runs Kelan Advisors, which offers management consulting and research on “a wide range of strategic and financial matters,” according to his website.
Convene talked to the affable, enthusiastic Mansharamani in the middle of October, during the U.S. government shutdown — a convenient jumping-off point for a conversation about financial instability and narrowly defined thinking.
I feel like I'd be remiss if I didn't ask you to comment on the shutdown.
I believe it's a symptom of a much larger political problem. And it has to do with, I believe, an increasing polarization on the part of our political parties, and an inability to compromise toward a higher objective, namely the good of all. And that's very problematic.
How is it affecting us economically? Well, the government shutdown itself is having a very direct economic impact, as we all are aware, in numerous ways. We're seeing it very directly, because the government is a major participant in the economy. Second, you're seeing it in housing loans that are not being approved due to delays in governmental approvals, given that most lenders actually require IRS verification of tax returns, etc. Third, there is an enormous indirect cost. For instance, what is the cost of the extra friction on the economy due to a slower TSA screening experience at the airport? Although it's hard to be precise, I suppose we might estimate it by calculating average delay multiplied by the average value of the flyer's time multiplied by the number of flyers. Thinking about this one example helps me visualize the indirect costs and loss of productivity.
If we're not able to resolve the debt-ceiling issues that we're currently facing and default, meaning we do not pay interest or principal on the debt owed, I believe that's a serious problem that would have ripple-through effects on virtually every asset class, every business, everywhere. Everyone keeps assuming, hoping, and dreaming that it's not going to happen, and I do, too. But the underlying causes of the first problem, i.e., the shutdown, may in fact still be present and haven't been addressed. And so, is it conceivable that we would do something as disastrous as defaulting on our debt? It's unfortunately more conceivable, although I believe unlikely, than I would like to believe.
What kind of effect might that have on the United States’ international reputation?
Just think of what happened this past week. We don't even need to go further than that. This past week, President Obama canceled his trip to Asia, where he was supposed to go talk at the APEC [Asia-Pacific Economic Cooperation] summit and then the ASEAN [Association of Southeast Asian Nations] events. He canceled the whole trip because of the government shutdown, which is, again, because of the political polarization manifesting itself through Congress. So, he doesn't travel, but who does? The president of China had a grand old time making very important state visits throughout the region, ramped up Chinese government aid to numerous countries, and was very prominent at both APEC and the ASEAN events. It's sending a very direct message that the Americans can't get out of their own way, and asking if the region's historical image of the United States is still valid: How will the Americans help you if they can't help themselves? How can they help the world economy when they're not able to keep their government operational?
Let's talk a little bit about Boombustology, which looks at booms and busts, and explores how to spot financial bubbles. What made you want to write about that?
It comes from a background of 20-plus years of watching booms and busts transpire. I was on the international sales and trading desk at Bear Stearns, watching the Japanese bubble hit its all-time high in 1990. At the same time I was watching the Japanese bubble burst, I was reading the academic literature which implied that markets are efficient. There was something I couldn't quite reconcile there. And then, of course, the Asian financial crisis [in 1997] was followed by the tech boom-bust [in 2000-2001], followed by the housing boom-bust [in 2006-2007], etc. Financial bubbles became a major focus of my curiosity. I ended up designing and teaching a class at Yale on financial bubbles that was extraordinarily popular and oversubscribed, and the book is a written version of the class. It's my attempt to share the ideas that had come out of the seminar and my thinking about bubbles over 20-plus years with the rest of the world.
The other reason that I thought it was interesting is that most academics had historically believed that bubbles were not identifiable in advance of their bursting — that is, with certainty. That's probably a true statement, but it’s possible to tip the odds in your favor of having identified a bubble. Given a probabilistic exercise as opposed to a binary exercise — meaning that there are gradations of “bubbliness” — I believe we can label certain situations as highly likely, less likely, or not likely to be a bubble. And if you change your question from “Is it a bubble?” to “How bubbly is this asset?,” you can gain tremendous insight that is helpful in navigating uncertainty.
Many of the commentators that had indicated financial bubbles were not spottable before they burst were looking through a single disciplinary lens — most of the time, it was an economist. I personally believe that specialists are likely to miss some obvious things as they focus exclusively on the margin rather than seeing the whole. And so my whole approach was to bring a generalist approach to thinking about something that had historically been dominated by specialists. Just that mere shift of approach has the ability to generate powerful new insights.
Are there certain characteristics that all bubbles tend to share?
The book is organized around five key lenses, which in aggregate help force a generalist approach to thinking about bubbles. The first lens is a microeconomic lens and looks for dynamics that imply self-fulfilling and unsustainable price action. For instance, if higher prices, which usually incentivize supply, stimulate more demand — which in turn is likely to result in higher prices — then we have a bubble dynamic.
The second lens is a macroeconomic lens, helping us in looking more broadly than the micro lens. In particular, it looks for signs of misallocated capital and overinvestment. I love seeing signs of overinvestment in the face of overcapacity, meaning you see excess capacity and you still feel motivated to build more. If it's done with borrowed money, all the better.
The third lens I use is psychology, to look for signs of hubris, overconfidence, and what one might call new-era thinking: “This time it's different.” This can manifest itself in lots of different ways. One of the ways I have found particularly intriguing is to look at world-record