I first met Steven Drobny in Milan in 2005, when he invited me to deliver the keynote address at the European Drobny Global Conference, a biannual meeting of hedge fund managers where they debate their favorite trades. I was bearish on the global economy at the time, as I had been looking beneath the speculative frenzy that was driving the booming real estate and asset markets around the world. As is often the case in good times, few people paid heed to my doomsayer views, preferring instead to indulge the environment of easy money and write me off as an out-of-touch academic. I thus became accustomed to being the dark cloud at the party.
Before arriving in Milan, I was expecting more of the same: a group of successful, self-congratulatory hedge fund managers who in truth were only riding the loose credit wave by being long stocks, long credit, and long illiquid assets. To my surprise, this was not at all what I found in the Drobny crowd of predominantly global macro managers. Rather, these managers seemed to be on the same page as me, with the discussions focusing on growing macroeconomic imbalances, building credit concerns, housing bubbles, and other systemic issues with deep and far-reaching consequences for the global economy as a whole.
Although the boom would persist stubbornly for another year, the problems discussed at the Drobny Conference only increased, becoming exacerbated by the very fact that they continued longer than they should have. Ultimately, it all ...