Tuesday, June 18, 2019

Just a Reminder: Riding the Bubble Can Be Very Profitable

Last Friday we had a post linking to Albert Edwards' latest on bonds with this outro:

Whether you are using the 3 mo./5 yr; the 3mo./ 10 yr. the 2's/10's whatever, the period after the inversion can give you stupendous equity returns so we are faced with the decision whether-or-not to play a dangerous little game, riding the bubble knowing full well it is a bubble or retiring to the sidelines.
We'll have more on the time lags between yield curves going inverted and equity downturns and recessions later this summer but for now one of our favorite economists with one of our favorite stories.

Here's the version hosted at MIT:

This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems...
The two most important parts of the paper "II. Hoare’s Trading Performance" and "III. Causes of Success" are definitely worth a couple minutes.
We joke around a lot but this is deadly serious.
DJIA up 322.17 (+1.23%)  at 26,434.70
S&P       +33.83 (+1.17%) to 2,923.50    
Nasdaq 7,992.93 +147.90 (+1.89%)
And now Jackie Wilson with additional market commentary: