Global Investing

Away from the flock

Companies need to actively encourage dissent and aspire to heretical rather than consensus views if they want to avoid being as unprepared as they were for the financial meltdown.

Noreena Hertz, professor of finance, sustainability and globalisation at Erasmus University in the Netherlands, kicked off the CFA Institute’s second annual European Investment Conference in Frankfurt with a wake up call for the assembled asset managers and bankers.

“This was not just a financial crisis – this was an existential crisis that exposed a faultline in the system,” she said. “The way we thought about the world was profoundly flawed.”

Hertz identified several major problems – a culture of intellectual conformity, the deification of experts like Alan Greenspan, and dogma superceding reason. She said the free-market economics that triumphed post-1979 should have been treated more as a hypothesis, not fact, but within economics debate was discouraged, and thinkers like Keynes and Minsky who didn’t fit the prevailing view were sidelined.

For their part, individuals and businesses had accepted orthodox thinking and allowed the proclamations of “experts” to go unchallenged. She urged delegates to think in a more holistic way – for example, rather than just focusing on rising house prices in the US, they should have given some consideration to the amount of credit cards the average household had.

Are you revolted yet?

Financial markets might be in distress and stocks are falling through the floor, but according to James Montier, global strategist at Societe Generale, we are not in the final stage of bubble burst yet. For one thing, the Financial Times is still too big.

At a fund managers conference in London today, Montier — a renowned bear — noted a thesis by economists Hyman Minsky and Charles Kindleberger that bubbles go through five stages — displacement, credit creation, euphoria, critical stage/financial distress and revulsion.

Currently, he says, financial markets are going through the critical/distress stage but we are not in revulsion yet.

“In revulsion, the Financial Times will be three pages long and we will all be ashamed to be working in finance. Stocks will be unambiguously cheap,” he told a group of financial professionals.