Author, "Money Mania: Booms, Panics and Busts from Ancient Rome to the Great Meltdown"
Bob Swarup was born in India, schooled in London, where he has two masters, a Ph.D in Cosmology, and is an expert on international financial markets, who has spent much of his career in the alternatives industry. His just published book "Money Mania: Booms, Panics and Busts from Ancient Rome to the Great Meltdown" is a sweeping account of the boom and bust economic cycles from ancient Greece (400 BC) to 2008. It identifies the common human failings that lead to these alternating and unavoidable bouts of euphoria and self-destruction. The book has won wide praise across the board, including Paul Tudor Jones, the Financial Times and the Economist amongst others. DrSwarup's new book is a must read for serious students of financial markets and its history.
In order for our readers to understand your perspective in writing "Money Mania" tell us about your studies at the University of Cambridge, your Ph.D in Cosmology from the Imperial College in London, and how that led you to the financial services industry.
My background is academic and in science. I did a degree in Natural Sciences, followed by two Masters in different strands of theoretical physics, followed by a PhD in cosmology. My area of specialization was studying the universe mere moments after the Big Bang and understanding how events unfolded to give us the structure and universe we observe today.
The experience was instrumental in forming my world-view in some key ways:
- The world is a very complex place. Our brain, however, is only three pounds.
- Think very hard about the long-term perspective and how small perturbations today lead to astoundingly large outcomes tomorrow.
- Equilibrium is a myth. Disequilibrium is the norm.
- All models are broken. Be skeptical of anything that promises beautiful answers. You can spend your life following one theory of the universe, only to find you were wrong all along at the end.
Following the PhD, I found that the path to a permanent position meant a decade of nomadic wanderings. That was not what I wanted, and so I became the latest brain drain statistic to leave academia and escape into finance. I initially went into hedge funds, then private equity, then pensions and insurance. It was less a meander and more a journey to wherever the interesting challenges were.
They were fun experiences. For example, I helped set up and grow a private equity firm that transformed into a $20bn insurance company. I seeded a hedge fund that grew to over $2bn in less than two years. I advised the regulators in the UK on designing the new regulatory framework for pensions schemes across the country.
Through it all, the lessons I learnt in academia have provided an invaluable set of guideposts.
In addition being an author, what are your other current business activities?
I currently run a strategic advisory company called Camdor Global. We advise our clients on key issues linked to investment strategy, risk management, business strategy and regulation, helping them to take the overwhelming wealth of information out there and distil it down to simple drivers and actions. We advise hedge funds, PE firms, traditional asset managers, institutional investors and policymakers, ranging from sovereign entities to large global players to small emerging managers. We do this through four key services:
- Economic advisory
- Investment and risk advisory
- Business advisory and product development
- Governance services and provision of independent directors
Outside of the day job, I am also a Fellow at the Institute of Economic Affairs and a Senior Visiting Fellow at Cass Business School, London. I am also deeply involved with the CAIA Association and serve on the editorial board of the Journal of Alternative Investments.
How does your academic studies and "real-time" experiences come together to generate your unique view of financial history of the world?
As mentioned above, my academic experience gave me a set of rules that heavily influenced my later decisions. My experiences in the real world confirmed and further evolved many of these. Most notably, I learnt that financial markets are not rational or efficient. They are not static entities.
Rather, they are collective nouns for the constant dance of human emotions – optimism, arrogance, greed, fear, and capitulation – around a central maypole of trust. What we call volatility is nothing more that different worldviews vying for dominance. These then coalesce into transient accepted wisdoms that ebb and flow over time, euphemistically creating the booms and busts we observe.
In the 4th century BC, Athens and nine other Greek city states defaulted on their loans from the Temple of Apollo at Delos. It was the first recorded financial crisis. Nearly 25 centuries of human evolution, progress and technological advancement later, the modern nation of Greece defaulted in 2012 as a sovereign debt panic seized Europe. It was the latest recorded financial crisis.
What that tells us is that the psychological mechanisms that drive us have not changed in thousands of years. This is a continual cycle.
On the face of it, every crisis is different – different eras, geographies, instruments, currencies, assets and so on. But this is only superficial. Underneath it all, they all involve people and a medium – money by any other name. The differences that do exist are about the story, with some being more memorable than others, because of the scale or idiocy of delusion in hindsight. The other difference that emerges is in their impact, with some being transient and great dinnertime anecdotes whilst others are far more scarring.
Why do you suggest that conventional wisdom is wrong in trying to fight Boom and Bust cycles, and that we should instead go with the cycle and focus on reducing the trends dynamics?
The roots to all our crises past, present, and future are to be found in the clash between our simple human nature and the complex societies and economies we create.
Boom and bust are different sides of the same natural phenomenon. They follow one another like night and day. As humans, we have a natural volatility of emotion. That is reflected in the markets and shows up in the ebb and flow of money and credit in an economy. This creates the business cycles we observe, the periods of growth, the recessions and so on. Short of excising human emotion, you cannot remove the cause of these perennial orgies of delusion.
Booms and busts are also vital to progress. If you take the example of the dotcom boom, there was enormous euphoria, which was built on entirely rational foundations (given the knowledge they had). There were ideas such as instant globalisation, hyper-growth, disruption to existing business models, enormous rises in the spending power of the consumer, and many other very good reasons that told you where growth was going to come from. Everyone got seduced by the ease of making money and before you knew it, we had a bubble. However, as reality sank in that this was not going to happen all at once, that businesses still needed to compete and make money, that not every contender will succeed, and so on, valuations adjusted to a growing more humble reality. This was the bust and when that bubble burst, it was painful for investors. However, it wasn't bad for society. In fact, society gained from this colossal expression of ego and hope. We had amazing technological infrastructure, and the internet became a lasting part of our lives.
It's also important to note that when you get a big bust, it's usually symptomatic of the fact that we have tried really hard to avoid it. There is nothing really so bad about a recession. A recession is very much an economy pausing for breath to re-evaluate where it stands and to assess where to go next. You need downturns to allow an economy to reallocate capital, get rid of what is not working and move ahead. That is creative destruction and it is a natural part of the capitalism we espouse. Of course, anyone who is in a bubble doesn't want it to end. We like to feel good, we like the idea of growth, progress is always an imperative.
We keep trying to perpetuate the boom and the arguments become even more fantastical to justify our core primal biases. But if we try to perpetuate markets for too long, the corrections can be far worse. What crises actually do is expose the underlying fragility and structural flaws within an economy and society. Some of this is endemic – financial markets are fragile because they are giant pools of sentiment and leverage at their heart. However, some of this is also self-inflicted and reflects poor planning and understanding on our part of the true complexity of an economy.
John Gallwas: What can our readers that are technical traders and trading system developers learn from your book that would be helpful?
The models we create to analyse markets and identify trends are at their heart approximations of human behaviour. As noted, the biases are ingrained in us all, so the patterns are repetitive. They are not, however, exactly the same. As Mark Twain would remind us, history rhymes. It does not repeat precisely.
That is why models degrade and fail. Human behaviour shifts subtly and our own biases are also captured in our assumptions. This means we need to understand the axioms of our models and understand what justifications lie behind them. Mathematically, Godel's theorem tells us that for every axiom we can prove, there are always others we never can.
Understanding the wider set of behavioural cognitive biases is useful, both in terms of developing systems and understanding their inherent limitations. Additionally, the book looks deep into the evolution of crowd behaviour and how complex order emerges from simple actions.
Again, understanding these external dynamics and influences are key to navigating the markets and their unpredictability. What we term rationality is actually bounded on all sides by our emotions, environment and peers. The example I always like to think of is geese flying in formation. Like them, we move individually through the world but never in isolation. Any change in course impedes on neighbours, affecting their behaviour and subsequent movements. Our bounded rationalities overlap and cascade through the flock till suddenly, the whole formation changes course – the new order emerging unbidden from an initial random movement.
John Gallwas: Are you working on anything new that would be of interest to our readers?
I am currently working on a number of papers examining what bubbles are currently being created and how one might deal with them from a policy perspective. I am also looking into the impact of key external factors such as the very human bias of policymakers (the urgent always trumps the important), the nature of regulation and social factors. The latter, in particular, is very important. Crises don't happen in isolation – they happen in cycles. And eventually, without addressing the structural frailties, a crisis of finance will become one of society. That is when complexity unravels and we all end up poorer.
On the professional front, I am exploring various new topics such as new models of asset allocation, emerging asset classes, the evolution of the hedge industry and its business challenges, the changing nature of investor dynamics, the importance of good governance and holistic risk management, and the impact of new regulation.