耶鲁大学金融市场英文文本Financial-MarketsLecture-21-Transcript.doc

Financial Markets: Lecture 21 Transcript Professor Robert Shiller: I wanted first to just think back a little bit about the lecture we got from Steve Schwarzman on Friday. Before he came, I talked with him in my office and I had the audacity to ask him if he thought there was any chance that his fortune was just due to luck. I said, why we have this efficient markets theory in finance that says that nobody can beat the market. So, what do you think he said? Well, obviously he believes in himself, but Im inclined to believe in him also. Efficient markets theory never sounded right; one thing about efficient markets theory that has always bothered me is this idea that the so-called smart money sets prices in the market. The thing that bothers me about it is, who is the smart money, anyway? Its as if its all or nothing thing; theres the smart money and then its the dumb money and the smart money rules. Arent there all different gradations of intelligence and insight? Its not like-why should there be just one level of smart money? So, I think he probably exemplifies a higher level of smart money than smart. I think a lot of mistakes people make in judging financial markets is being easily impressed by someones stockbroker or someones analyst who seems very smart and is very smart, but may not be enough to outsmart the markets. Thats the lesson of efficiency, especially when youre young. I think you may not realize how many smart people there are in the world, so when youre dealing in a-trying to win in financial markets-you have to take account of who is really out there and how much insight and effort and research are they putting into their trading. Do you really think you can beat that? Thats the lesson of efficient markets. I dont think the lesson is that you cant-its impossible for anyone no matter how smart to beat the market. Now of course, Albert Einstein never made any money in the stock market. In fact, TIAA-CREF, the pension fund, had an ad campaign in which they pointed that Albert Einstein left all of his pension investing to TIAA-CREF. He was a professor and theyre a pension fund for professors. Einstein didnt think he could beat the market and Mr.Schwarzman very candidly pointed out that he didnt have the greatest math scores. Isnt that how he put it? He said he was no math genius and you think finance requires a lot of math, but I think that its something about practical intelligence. Psychologists have talked about different kinds of intelligence-this is all supposed to be coming up here now. At least were seeing something now. This is why I dont like Powerpoint, actually; this kind of thing happens it always seems to happen. So, thats it. Im not going to use this for a few minutes.-But, remember Carl Icahn, when he talked to us, said something about he always just had some-he was always just good at making money. I think that there are separate talents. I mean, some people love markets and they like to think about them and figure out how they work. If they have the right kind of intelligence and the right kind of spirit to do the work, they ought to be able to beat the market. Ive talked to Icahn a number of times and I have the idea that hes a very down-to-earth, solid, inquisitive sort; he wants to know whats going on. When Ive talked to him, sometimes hell ask the same question of me; hes trying to get information from me. He asks the same question from me three different ways because apparently my answer isnt satisfactory and he must think I might know something because he keeps asking. But, I think thats the kind of persistence-certain personality traits-persistence at trying to figure out what really makes things work is important in these markets. I think its just relish or inclination to keep thinking about them, so maybe thats why I went into economics as a professor. I dont know that I really was someone who wants to watch the markets all day; so, you have to judge your own interests. Anyway, it was very nice that we got-that Steve Schwarzman came and told us about his lifes work. Anyway, I want to talk today about futures. One more thing I wanted to say about Schwarzman. At one point, he said very confidently, I thought-and I dont know if you heard this right-that this current financial crisis ought to be over in a year. He said something-and maybe it was a little vague-about investing in distressed securities now as an opportunity because I think he pointed out that AAA mortgage securities are selling for eighty some cents on the dollar and it cant be that bad. This is the same theme that we got from David Swensen and Ive heard it from others-that thats the opportunity now. When I hear Steve Schwarzman proclaiming that he thinks this-I thought he said something like that, that this business crisis will be over before long. It made me wonder, do I know more than he does about that sort of thing because I dont think its going to be over soon? Then it gets back to, I think, you have to put all these people in perspective; there are so many different kinds of expertise. When you listen to someone you always have to ask, well what does he or she know that is specific to their expertise? I dont think Schwarzman is a macroeconomist, so I dont want to say hes wrong, but he might be wrong. The good thing is to listen to everyone and not accept that anyone has the whole truth. Anyway, I want to get on to futures markets. That is a very important topic in finance and the important thing to understand is, when I put an s on the end futures, that refers to a marketplace with a particular characteristic, as traded on a number of exchanges. Notably, in the U.S. the biggest exchange for futures is the Chicago Mercantile Exchange, which just merged with The Chicago Board of Trade and they are now called the CME Group. Futures, since it has its origin in agriculture, is a Chicago thing rather than a New York thing. Chicago is the second city, or it was the second biggest city, hog-butcher to the world, farmers marketplace in the Midwest; so, futures in the United States started there. Actually, futures didnt start in Chicago; it started in Japan on an island in Osaka called Dojima in the 1600s. Im sorry, did I-yeah it was the 1600s-1673 is the date for the first futures market. I was just in Osaka again a few months ago and I again asked, can I please see Dojima because its such a historic place. Again they said, theres nothing to see there, its all-anything from long ago is gone. That was where these markets started. Lets go back-and Im not sure how well-developed it was in 1673, but lets say early 1700s in Dojima-what was happening? Well, it was the rice center for Japan. The people-rice merchants would bring their rice to Dojima and sell them there. Naturally, as you would expect, there were big warehouses for rice, which would store it; it would be a natural thing to see at the center of trade. It was a big and thriving trade center. People, when they buy-so incidentally, lets talk about the fundamental problem. Agricultural commodities like rice are harvested typically once a year. Actually, I think rice has more than one harvest, but lets just simplify it; lets say its harvested once per year. People depend on it for their lives, actually, because they need the food for the whole year. That means theres a storage business; rice has to be stored; you have to keep it away from moisture and rot and away from rats and vermin. Thats a business and its a very important business for any country. If it werent rice, it would be some other grain, which is stored. When people buy and sell grain they know its-theyre thinking out at least a year because thats how long the cycle is for one harvest-one cycle. So, lots of contracts are signed to buy and sell rice, but typically at some future date. We talk about spot contracts, which means buying and selling something right now. If you show up at the warehouse and say, Ive got my wagons, I want to load rice in. How much do I have to pay to get rice? That price would be called the spot price-on the spot, right now. But often, you would show up at the warehouse and you would say, I have some trucks, wagons coming next week or next month and I want to arrange now to buy the rice. If you say-if you agree on a price today for delivery in one month, thats called a forward contract, not futures. Theres an important distinction between forward and futures. A forward contract-let me explain what a forward contract-its very simple. Its a contract between two parties to exchange something at a future date for a price in the future thats predetermined today. For example, a forward contract will be between a rice merchant and the warehouse that in two months I will come and take delivery of so many bushels of rice and then I will pay such and such a price; thats a forward contract. Before 1673, there were lots of forward contracts and lots of people trading in these, so someone in Dojima thought, why dont we set up a big market for these because people have trouble knowing what the price is for a forward contract. People would travel around from one warehouse to another and theyd get a different price from one or the other; theyd kind of wonder what the price is today, so someone said well why dont we kind of create a market for forward contracts. But, we dont call them forward contracts; I dont know what they called them in Japan, but I just want you to get the idea. The idea is, lets create a marketplace, a central marketplace so that all these different-you dont have to go around to a hundred different warehouses to try to find the best price; you find out what the real price is. What they did was they created an exchange in Dojima and the exchange had a lot of modern features; it had a trading floor. There was a designated area where people who wanted to trade in rice futures would congregate and all trades were supposed to be done there, so it became a central marketplace. So many people came to the exchange floor that it got very noisy and traders can be very noisy people-shouting and getting upset; trading rapidly back and forth. So, they developed, in Dojima, a set of hand signals so that it was so noisy and loud that you couldnt talk sometimes and it was hard to-especially to communicate something to someone on the other side of the room. So, they invented hand signals so the traders would be-I dont know exactly what they were, but typically when the-if you had something like this-you hold your hand with your palm out, that means I want to sell and if its four fingers up, that means four contracts. If you put it this way, it would be buying; I want to buy four contracts. Those hand signals developed in Osaka and they became a mainstay of futures markets after that. Another thing they did in Japan to create the central market was to standardize the rice. Now, this is very important; if you go shopping around to different warehouses to try to buy rice, youll get some warehouse who says, well Im charging a higher price but my rice is better then that other guys rice. His has some worms in it sometimes; dont trust that other guy, or whatever it is. Rice isnt all the same; there are different varieties and some of them taste better than others. So, how would you ever know what the price of rice is; its just a mess. What they did in Osaka is they made a standard form of rice for delivery in their contract. Thats important because it-there are many kinds of rice, but they picked one thats maybe the most common and then they said, thats what all of our contracts are about; so, you would be taking delivery of a standard rice. Moreover, at the exchange, they had experts on rice who could tell whether it was that contract. Its not the best rice; its the most common rice. I visited the coffee, sugar and cocoa exchange in New York once and jokingly I said, can I have a cup of coffee? This is the coffee, sugar and cocoa exchange; surely I can get a cup of coffee here. Then the guy said, who was showing me around, he said, well we could give you a cup of coffee but its not what we trade here. He says, you wouldnt like the coffee we trade here; its not Starbucks; its the most standard. So, they set up a standard for coffee at the coffee-maybe he was being too candid. I dont know if they would say that officially. They set up a standard for coffee at the coffee, sugar, cocoa exchange and then no one would ever deliver better coffee than that, right? Well, I have to explain that. Everyone-well, they wouldnt even be allowed to; the whole idea is the contract has standards. What actually happens-if you have a contract to deliver rice or coffee or anything like that and theres some expert there whos going to judge whether what you delivered was up to quality standards and you are a smart businessperson, you will deliver exactly the minimum quality to fulfill the contract. Itll never be below the minimum quality because no one can deliver it; the testers will not allow that. And it cant be above the minimum standard because youd never do that; youd be stupid to do that. So, you always-it always becomes the standard variety. What they did at the futures market is they then not only had standardized the rice, but they standardized delivery dates and delivery locations. What would you trade in these futures markets? You would be trading-youd either be buying or selling rice for future delivery on a standardized delivery date at a standardized location-probably one of the warehouses that they designate. That might not be the rice you want or the date you want and yet, somehow the market gets going and gets very big. This is the reason: what a futures market does thats different from a warehouse market is it sets up a standard price and a liquid market. So, people end up using the futures market to lock in the price or to hedge price risk and they know that the price in the futures market is the meaningful price. You hear all kinds of prices of rice; there will be rumors here and there that someone will say, I saw rice sell for such and such-so many Yen or whatever it is. Dont believe any of that nonsense. Who knows what was sold or what terms there were or what exigencies there were. Only look at the futures market because the futures market is absolutely standardized. You know the terms of delivery, the location, and everything else. What ended up happening is that everyone wanted to trade in the futures market and it became a huge market and then everyone started watching the futures price. Thats what we now have; thats what is in a futures- I wanted to tell you one other curious thing about the-well, two other things about the Osaka market. They had trading hours, just as do today. In other words, only certain hours of the day the floor was open and then it was shut off. People would get very excited and trade very actively; you have to somehow let people know that the trading time is over and all trades have to stop at the end of the day. So, they had a burning fuse, which they would light in the middle of the trading floor just a few minutes before the end of the day and you could see this flame and that meant you better finish your trades right now because when the flame goes out, its over. We dont have fuses anymore; we have clocks and a bell that announces the beginning and end at an exchange. Theres one other thing they had, which I think is kind of curious that hasnt been copied. They had people called watermen, who after the fuse went out they carried buckets of water onto the exchange. If anybody was still trading, they splashed them with water. That was to douse the-the fuse is out; everything is doused for today. We dont do that in modern futures exchanges. Of course, its all electronic now; theres no-well, its getting increasingly electronic. The CME and the CBOT still have trading floors like Dojimas and theyre still using these hand signals, but its getting lonely there because everything is moving away to the electronic markets. Youll still see on CNBC, Bob Pisani will be standing at the T-bond trading pit and hell give his little-they focus the camera right on where all the people are at and theyre still out there jostling each other and shouting at each other. So, its still going on, but its increasingly becoming an electronic market. I guess the most important thing to realize about futures markets is that theyre different from forward markets in that it-with a futures market, when you buy and sell a contract you are buying and selling with the exchange or the clearing house of the exchange. You do not know the counter party; you do not know whos on the other side. With a forward market, you know very well whos on the other side; youre going to a warehouse and theres this warehouse whos going to take your grain. In the warehouse, you better trust the other side because suppose the other side doesnt work. Suppose you have your-youve loaded up all your rice and you come to the warehouse and then the guy says, I dont want to honor the contract. I signed it, but Im just not going to take it; Im going to lower the price on you. Then you have to sue this guy and its a big mess. The problem with forward contracts is that theyre not standardized; youre not dealing with a reputable exchange. With an exchange, there is of course a counter party. If youre selling rice and someone else is buying it, theres an intermediary between you and thats the exchange. Since the exchange will honor any contract, you dont have to worry about the other side. Thats another reason why futures prices are so much more meaningful than spot or forward prices because theres no counter-party