Derivatives expert Satyajit Das, sits in the Toula Restaurant at The Westin Harbour Castle, in Toronto.Ashley Hutcheson
A leading authority on the complex, opaque world of financial derivatives, the Sydney-based risk consultant sounded the alarm about the dangers they posed to the global system years before the Great Meltdown. In his latest book, The Age of Stagnation, he pours cold water on any bulls still roaming the volatile markets.
You seem as cheerfully gloomy as ever. Aren't there any bright spots?
Almost every asset market is now overvalued in different ways. The most important reason for that is these markets have become completely artificial, because they're based on this shot of [central bank] liquidity. Effectively, these are now policy-driven markets. The whole idea, which was initially sensible, was to force people to take some risks. But the problem is they took not risks in terms of the real economy, but through buying financial assets—which boosted asset prices to ridiculous levels. The classic example is the flood of money that flowed into high-yield debt in the energy sector. That's not going to end well.
There is one investment you favour in this environment, though.
The asset class I really like is volatility. If you look at how investment markets have worked, most of the time you get a certain return around what you expect the long-term average to be. We don't live in that world any more.
How does an ordinary investor pursue that idea?
I'm sure you can find a combination of hedge funds and so forth to do that. I tend to use options, mainly because of my background as a derivatives trader. But there are many roads to Jerusalem.
What should investors be paying the most attention to? Do you ignore the economic news, earnings and day-to-day market gyrations?
Probably in a normal world, some of those indicators are more meaningful than they are in this sort of world. The crucial thing you need to understand is what policymakers are going to do, what their options are, what the pressures on them are and how they're going to react. Because that's going to drive markets as much as anything else. This is not a world of fundamentals.
What's the best investment or trading advice you've received?
Forget about what you think. Try to work out what other people are likely to think and do.
What's the worst investing decision you ever made?
I used to work in a bank, and bankers like to eat out a lot, which leads them to think they know a lot about restaurants. One of my bosses came around one day and said, "I'm going to start this restaurant." I didn't know anything about restaurants. But I did understand that, politically, it would not be smart of me not to invest. I got absolutely nothing for it. I never even got to eat at the restaurant.
Is there anything about the global economy or markets that keeps you up at night?
The risk that policymakers could make a catastrophic error. I don't think they understand that they're in a very deep hole. They just assume that their [usual] models and ways of thinking are somehow going to work. And I worry that they're going to miscalculate really badly.