The latest New Yorker has an interesting profile of Paul Krugman, and it contains this fascinating nugget:
Krugman and [wife Robin] Wells pulled out of the stock market ten years ago and never went back.
"It just takes a lot of work to think about it," Krugman says, "and at no point—except maybe early 2009, if I'd been really feeling daring, stocks really did look cheap—"
"We bought a couple of things," Wells says. "We bought muni bonds and some Ford Motor bonds. The thing is, if you look at it on a historical basis, even back in the two-thousands, stocks are not cheap."
"They were a good deal when the average price-earnings ratio for stocks was thirteen or fourteen, but now, except at the very bottoms of recent swings, it's been over twenty, which means that historical rules probably don't apply anymore. Stocks used to be undervalued."
"I made some money and lost some in the Internet bubble," Wells says. "You told me to sell and I didn't sell, and I should have sold, and I never want to go through that feeling again."
"Let's put it this way. I can have fairly high confidence—it's a personality thing—that a market is overvalued. Somehow I never have the same confidence in saying that it's undervalued."
So the most influential progressive voice in America on matters economic thinks it's a bad idea to invest in stocks. Good to know.
This reminded me of an interview Terry Gross did last March with Frank Partnoy, an author and law professor who had been a derivatives trader in the mid-1990s. Gross asked Partnoy whether, knowing what he knew about derivatives, he invested in them himself. This was his reply:
Well, I don't invest in derivatives. Most of the people who sell derivatives wouldn't touch them. One of the things I was so struck by, working at Morgan Stanley, was that when you went to the traders of the most complicated instruments and asked them what they invested in, they all invested in just one thing. They bought Treasury bills. They knew what the markets were like. There was no way they were going to speculate based on these complicated assets that they were trading all day.
To summarize: The Nobel-winning economist won't invest in the stock market, and the people who actually trade financial instruments put their own money in T-bills, the safest, most boring vehicle in existence. Very reassuring.
-- Paul Waldman
