When Barack Obama discussed running for president in 2005, his friend George Haywood – an accomplished investor – gave him a warning: the housing market was about to collapse, and would take the economy down with it.
George told Obama how mortgage-backed securities worked, how they were being rated all wrong, how much risk was piling up, and how inevitable its collapse was. And it wasn’t just talk: George was short the mortgage market.
Home prices kept rising for two years. By 2007, when cracks began showing, Obama checked in with George. Surely his bet was now paying off?
Obama wrote in his memoir:
George told me that he had been forced to abandon his short position after taking heavy losses.
“I just don’t have enough cash to stay with the bet,” he said calmly enough, adding, “Apparently I’ve underestimated how willing people are to maintain a charade.”
Irrational trends rarely follow rational timelines. Unsustainable things can last longer than you think.