selling bonds to europeans -- 3/27/18

Today's selection -- from Liar's Poker by Michael Lewis. A young Michael Lewis, soon to be the best-selling author of Liar's Poker and The Big Short, started his investment banking career in the early 1980s, selling bonds to European investors. Here he comments on those investors' penchant for using charts, however meaningless the analysis and conclusions from those charts might be:

"Euro­pean investors (I shall refer to them collectively as 'investors' or 'customers' even though most were pure speculators and the rest not-so-pure speculators) wanted to place their bets on the Ameri­can bond market from eight in the morning until eight at night.

"There was good reason for their eagerness. The American bond market was shooting through the roof. Imagine how crowds would overwhelm a casino in which everyone who plays wins big, and you'll have some idea of what our unit was like in those days. The attraction of options and futures, our specialty item, was that they offered both liquidity and fantastic leverage. They were a mechanism for gambling in the bond markets, like superchips in a casino that represent a thousand dollars but cost only three. In fact, there are no superchips in casinos; options and futures have no equivalent in the world of professional gambling because real casinos would consider the leverage they afford imprudent. For a tiny down payment, a buyer of a futures contract takes the same risk as in owning a large number of bonds; in a heartbeat he can double or lose his money.

"When it came to speculation, European investors didn't require a great deal of encouragement or instruction. They'd been doing crazy things with money for centuries. The French and the Eng­lish, in particular, shared a weakness for get-rich-quick schemes. And like a crapshooter who has a pretty lady to blow on his dice, the speculators in both countries had an amazing array of irra­tional systems to help them win money. They had to guess which direction the American bond market would take: up or down. The systems usually involved staring for hours at charts showing the history of bond prices. As in Rorschach ink blots, an unlikely for­mation, such as a human head and shoulders, made itself privately known to the viewer. The chartist -- for that is what such a person called himself -- would then use his ruler and pencil to draw the future of bond prices based on the assumption that the historical pattern could be projected forward. Miraculously, in a bull market, the resulting forecast was usually that the market was going up.

"Actually there was one good reason for using the charts: Every­one else did. If you believed that large sums of money were about to be invested on the basis of a chart, then, as dumb as it made you feel, it made sense to look at that chart; perhaps it would enable you to place your bet first and get in front of the coming wave. Many of our French and English speculators, however, hon­estly believed the charts contained the secrets of the market. They are aboriginal chartists. They would have used the charts even if no one else did. They communed with their charts as if they were Ouija boards. The charts were speaking to them.

"Now I admit, even for a geek, it was a little embarrassing to let investors believe their white magic. But as long as the chartists placed their bets with me, my jungle guide explained, the reason­ing of our customers was not for me to question. Just the oppo­site. Only days after landing in my new job I found myself praising such statements from investors as 'I was looking at the ten-day moving average last night, and it is a perfect reverse duck tail and pheasant. Let's bet the ranch.' At this juncture my role was only to shout encouragement: Yeah! Do it!"



Michael Lewis


Liar's Poker


W.W. Norton & Company


Copyright 1989 by Michael Lewis


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