You may or may not have heard that a few years back the world’s economy was, well it was in the dumper, and that is putting the situation lightly. I was in college for the beginning of one of the worst financial disasters the world has seen, so I was not that worried about it. When I finally graduated I realized just how bad things were, as something going on in the world was actually affecting me, which is very frightening when it happens to you.
What happened was a perfect storm of stupidity, greed, and well just plain (I hate to be redundant but) idiocy. While all this madness was taking place there was one man that bet against everything, the market, the government, everything, and came out on top. His name was Michael Burry and he is the focus of the movie The Big Short and the book with the same name. During this time of almost total economic collapse he made quite a lot of money because he saw that what was happening was not sustainable and was creating a massive bubble, because of this he was there to collect when it burst, which I think is pretty awesome.
I have not seen the movie, but I want to say that I do not like movies that put a political slant on anything. I am not sure they do that but the previews are insinuating this. Present the information and let the audience decide what they want to believe. I would assume they paint Wall Street as the bad guy who was just concerned about making truckloads of money. While that may be the case, what is wrong with that? Aren’t most people in business to make money? I would argue that they are and I doubt anyone would argue against that idea. When something like this happens everyone is ready to dish out blame like it’s going out of style. The problem is that it’s easy to blame those that got rich off this mess.
While I certainly do not think they (Wall Street) are innocent, I certainly, and would need God, Buddha, Allah (insert deity) to tell me they deserve the sole blame. Even then I would lay down my best argument to convince said deity my point. Look, I was a finance major, have worked in the industry since I graduated, and actually enjoy reading and learning about the market, investing strategies, what have you. I would say that I have an above average knowledge of finance in general, but I am certainly not an expert by any means. With that being said, I honestly have the very faintest idea of what the hell happened to cause the financial collapse. BUT, I know enough that it was not totally Wall Street’s fault. If you are interested in what happened do a quick Google search and do a little research, you might learn somethin’.
When something like this happens everyone thinks there is one bad guy that is behind it all, kind of like in a movie. There is one guy that is the leader of the bad guys, and its always his fault. This, on the other hand, is real life. I liken this disaster to the sinking of the Titanic. There were thousands of small little things that all fell into place to create this disaster. The government played their part, Wall Street did theirs as well, banks played their role, and believe it or not the American citizen had a large role in this mess as well. That is right, I am talking about you!
Again I am not an expert, but I would argue that the bulk of the problem took place with the average person. If you make $30K a year why would you buy a $300K house. Common sense would tell you that you cannot afford that house. At its base this is what happened. People bought houses they could not afford, albeit with perhaps a lot or little coercion, with the mindset that they would eventually be able to refinance because home values were going to rise, perpetually. So Joe Nobody makes $30K a year and when he goes to the bank the loan officer tells him, “O sure you can afford this $300K house no problem. What we will do is put you on a 30 year ARM (Adjustable Rate Mortgage) Interest Only loan. Your payment will by $300 a month.” “O wow that is really great Mr. Loan officer.” Now Joe Nobody is, for lack of a better word, ignorant. Obviously something is not right with this. Common sense would tell you that there is something fishy about this. Basically, the loan Joe Nobody is getting is just to pay the interest. Its like just paying the minimum on your credit card, only this is with a house. So again if Joe Nobody said, “You know what I don’t think I can afford that house, I think I will buy a $120K house instead.” The whole problem would have stopped right there.
Back to the model that said housing values would rise perpetually. Now I am no genius, but that is impossible. I do not know of any asset whose price will rise perpetually in value. Even gold goes up an down in value. Yet this was the other problem at the base of the collapse. But I would argue that if Joe Somebody used just a little common sense and realized that he could not afford that mansion on his minimum wage job then the whole collapse would have collapsed before it got started. I will say that the banks as well as the government made this money easily available and as I said Wall Street certainly played their part, collecting these loans as CDO (Collateralized Debt Obligations) and selling them as collateral to investors. But to put the blame on one person and or entity is a bit rash in my opinion.
So what now, after all that what now? In this article Michael Burry talks more about the collapse and what I find the most interesting part about the article is what he says about water.
If you skim and or read thought this article it is very interesting, albeit hard to read as Burry seems to try and use every large word in his vocabulary, I get it you are smarter than the rest of us. Still it is an interesting article. As for his comments about water I find them fascinating. I can remember watching a show a few years back and a hand full of “experts” were talking about what is the most immediate threat to humanity and some said nuclear war others said climate change, and one guy said water. Having clean available drinking water was the most immediate threat to humanity.
At the time I did not give this thought much credence. However, the recent mega drought in California it has for the most part made me think twice about this potential problem. Because of the changing climate, fresh available drinking water has become a very important commodity. I found that the drought cost $1.8 billion and 564,000 acres were affected in California. So yeah, that is a massive impact on the global economy, not to mention all the water rationing that was going on as well.
In all honesty I do not really understand what Burry is talking about for the most part, but I guess he is investing in food. He explains:
What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. A bottle of wine takes over 400 bottles of water to produce — the water embedded in food is what I found interesting.
I understand what he is saying, but still am not sold on this idea. I guess he saying buy stocks and or investments in food that is grown in wet fertile areas? Which in around about way I guess is investing in water? Somehow I am not really sure that is the best way to go about that investment. To me it is like investing in a gold mine, instead of investing in actual gold.
But it has also dawned on me that perhaps he is trying to hedge his bets that food prices will skyrocket as an effect of global climate change (that article is a little dated, but you get the idea). That I think is a safe bet for a variety of reasons. Beef prices are the highest they have been since WWII. One reasons is because there is less product available, meaning less cows out there. The other reason is because there are more people eating meet, not just in the US but in developing countries as well. Which again feeds right into what Burry is saying. It takes an enormous amount of water to grow a cow, so the drought again plays a factor in the rising beef prices.
I find it interesting that one of the greatest “think outside the box” investors in the world has been buying food “investments” for the past 15 years. Again I would like to talk to him to understand what the word “investments” really means. O well, there are certainly people in the world that can see the future or more simply can take a situation and extrapolate what may happen down the road, and Michael Burry seems to be one of them.
I honestly have no idea what my point of this rant was. Maybe to show that Burry is a smart dude, or that there are certain things that will affect us all whether we realize it or not. I also want to point out that despite what you are lead to believe you, as a consumer has power, mucho power! I firmly believe that had just a fraction of common sense been used back in 2008, the whole financial collapse could have been averted. Still I am not sure what to make about the future of food prices and what impact climate change will have on them. What I am fairly certain of is that it appears for the immediate future they will continue to rise. The conflicts and wars of the future may not be fought for complicated political reasons, but for food and fresh drinking water.