The Achilles Heel of Capitalism

Taleb makes the point that the achilles heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.

I have made a similar point previously. Basically, those companies that appear to be "best in breed" are oftentimes those that are the rottenest, ie. they are cooking the books (eg. AIG).

Another Good Point - Seize the Opportunity

Seize any opportunity, or anything that looks like opportunity.

They are rare, much rarer than you think. Remember that positive Black Swans have a necessary first step: you need to be exposed to them.

Good Point from The Black Swan

Do not try to predict precise Black Swans - it tends to make you more vulnerable to the ones you did not predict.

Rather...

Invest in preparedness, not in prediction.

Hold Fast...Then Fade The Fading Seasonals

I am inclined to hold through to some ambiguous point in the first or second quarter 2013. I think the momentum and the seasonals are going to work in that favor. But I suspect resolution to the Fiscal Cliff and a burst of levity due to new year optimism will be worth fading.

It seems to me that the accumulation of obliviousness (classic market action - climbing the wall of worry) will peak and give way at some point to the weight of cumulative fears.

2012 has been a good year for the market. I don't think 2013 will be as good.

A Prayer of St Francis of Assisi

Lord, make me an instrument of your peace. Where there is hatred, let me sow love; where there is injury, pardon; where there is doubt, faith; where there is despair, hope; where there is sadness, joy; where there is darkness, light.

O Divine Master, grant that I may not so much seek to be consoled, as to console; not so much to be understood, as to understand; not so much to be loved, as to love. For it is in giving that we receive, it is in pardoning that we are pardoned, it is in dying that we are born again to eternal life.

Patience - One Of The Greatest Investment Skills

There are many skills an investor must have in order to be(come) a great investor. One of the greatest, and perhaps least appreciated, is the skill of patience. The ability to wait.

The structure of the markets and the nature of the investment management industry, in conjunction with our human essence, are predisposed against it.

The less I see of it in my own investment persona and its effects, the more I appreciate the value of patience.

I think the key with patience (and where its value lies) is that it allows you to pick your spot(s). To operate on your terms, when the conditions are most advantageous to you.

The Crux of the Matter

“If you can look into the seeds of time,
And say which grain will grow and which will not,
Speak then to me.”
– Macbeth, Act 1, Scene 3


Stole this quote from Crossing Wall Street this morning, but it reminded me of what I had been reading in Taleb's Black Swan.

Don't Forget Those Brief Episodes of Insanity

In the same way that we get brief glimpses of heaven, we sometimes get brief episodes of insanity. Don't forget them. And don't forget the slough of despond.

Read Job today (5/2/15). Here are some quotes that had real meaning for me:

The Lord gave and the Lord has taken away.

Shall we accept good from God, and no trouble?

Why is life given to those who are bitter to their soul?

What I feared has come upon me; what I dreaded has happened to me. I have no peace, no quietness; I have no rest, but only turmoil. [this has been my life for the last three years...it is too hard to describe...for those who have never experienced such depth of despair, they have no ability to identify]

Resentment kills a fool, and envy slays the simple. I myself have a seen a fool take root.

Man is born to trouble as surely as sparks fly upward.

I would appeal to God [and I have]. I would lay my cause before him [and I have]. - but have not heard from him. He [may] perform wonders that cannot be fathomed, miracles that cannot be counted. [but I have not seen them]

Blessed is the man whom God corrects; so do not despise the discipline of the Almighty. [this is about the only thing I can hang my hope on]

If only my anguish could be weighed and all my misery be placed on the scales! [my misery and anguish have been a lot]

The arrows of the Almighty are in me, my spirit drinks in their poison. [this is how I feel]

Oh, that I might have my request, that God would grant what I hope for, that God would be willing to crush me, to let loose his hand and cut me off! [I have felt this way]

My joy is unrelenting pain [although I have just had unrelenting pain...no joy]

What strength do I have, that I should still hope? What prospects, that I should be patient? [none...I am despairing]

I have been allotted months of futility, and nights of misery have been assigned to me. When I lied down I think, "How long before I get up?" The nights drags on, and I toss till dawn. {this describes my life over the past three years to a T}

I will not keep silent; I will speak out in the anguish of my spirit. I will complain to the bitterness of my soul. [and I have]

Why do you not pardon my offenses and forgive my sins? [I have asked God this over and over...how much more do I have to endure]

When he passes me, I cannot see him; when he goes by, I cannot perceive him. [this is how I feel about God and how he has treated me]

I despise my own life.

My days are swifter than a runner; they fly away without a glimpse of joy. They skim past like boats of papyrus, like eagles swooping down on their prey. [that is what the last 3 years have felt like...when O Lord will I find relief]

I loathe my very life; therefore I will give free rein to my complaint and speak out in the bitterness of my soul. [so true]

I am full of shame and drowned in my affliction. 

The difference between the business of living and the business of life

I see the business of living being what you do on a daily basis.

The business of life is what you make out of your life in its totality.

"The Mystery of Things"

Been re-reading Muggeridge's Jesus Rediscovered. Inspired and inspiring writing.

In our lives we go about our daily business...our regular routines...the norm.

Like a dream that we half remember, and want to remember more, we sometimes catch a glimpse of those fleeting things, and want to capture them, but cannot fully hold on. Those heavenly visions. Those inspirations. Those touches.

Only to come back to earth and be subsumed once again into our daily bread.

How The Industry Has Changed

Stage 1. Stock broker. Modus operandi: stock picking (wizard behind the curtain: sell side research).
Stage 2. Financial advisor. Modus operandi: mutual fund picking - picking the pickers (wizard behind the curtain: institutional stock pickers).
Stage 3. ETF picking - picking your index (wizard behind the curtain: index makers).

The stages are cumulative and not mutually exclusive.

And so we have an environment today where there are stock brokers recommending stocks for individual clients, financial advisors picking mutual funds and ETFs for individual clients, mutual fund managers picking stocks for their investor pool, ETF marketers packaging indexes for their investor pools, and individual investors picking and choosing from all options available.

A Book I'd Want To Read

I reckon this is a good book idea.

Need to think about this a little.

An account of the origins, the people and the ideas behind our modern mindset and culture, and how those ideas became embedded in our modern belief system.

Example
The idea of social justice.
Modern fatalism and nihilism.
Deterministic materialism.
Humanism.
Secular liberalism.
Existentialism.
Being and becoming.
The social contract.
Identity.
Origins.
Rationalism vs scientism.
Utilitarianism vs evolutionary naturalism.
Pragmatism.
Idealism.
The role of the state.
Collectivism v radical individualism.

Finding a job is like selling a house

It often takes a long time.
You only need one buyer.
There is often a lot of negotiation and tire kicking.
You've got to spruce things up a bit.

The Next Inflection Point

Getting the big picture right is one of the most important things an investment manager/strategist can do. Anticipating and timing an inflection point, a move from one regime to another, is where reputations are made and the greatest value addition can be achieved.

Post global financial crisis (GFC), the world has been mired in a debt enduced deleveraging. This has undermined confidence, weighed upon the economic fabric, and forced governments to lever-up to make up for private sector slack. Fiscal sector tailwinds are coming to an end. Financial markets are hanging on continuing monetary stimulus to prop up markets. Confidence is in short supply. The hope is that the monetary authorities, in conjunction with sufficient deferment, obfuscation, and can kicking from their fiscal partners, will get us through to the other side. With potholes everywhere (cue Europe, China, US problems), the future is still highly uncertain.

One scenario that could play out is a recovery in credit. US bank balance sheets have largely been rebuilt (the same is not necessarily true of their European counterparts). At some point they will be tempted to take advantage of the competitive opportunities, and in classic follow the herd fashion look to put money out the door. A devolution of reserves and rapid credit creation by financial entities could well be the catalyst that helps turn the corner. With confidence being the most lacking ingredient, wealth and prosperity illusions created by money creation could be just what the doctor ordered.

Will this scenario transpire? Possibly. When is it likely to happen? In 2013 if we continue on our current economic trajectory (many commentators have pegged 2013 as an inflection point of a negative kind). How long will it last? If it happens, I suspect 2-4 years. Will a renewal in growth trend be sufficient to overcome secular headwinds further out (rising interest rates, deteriorating fiscal profile, higher taxes)? It'll be a battle.

As yet, I don't think we have solved our fundamental structural problems within the global financial system. That having been said, if a blast of confidence comes flowing through the system on the back of banks being more willing to take a risk, there is a chance we experience a positive feedback loop that translates to real growth, and the possibility of getting out ahead of our problems. A major catalyst for that scenario is resolution of the developed world's fiscal financial path. Not only does it require confidence, but it also requires real leadership. Two traits in fairly short supply at present.

No signs of it yet. But keep an eye out for a change in conditions.

The Most Critical Thing

Future prosperity and expansion are entirely dependent upon the ability of the central banks to keep the interest rate genie in the bottle.

I don't know how they have done it so far. But the potential effect of a normalization of interest rates would be massively deleterious.

The treasury market implies long term inflation of about 2%. Assuming a 3% term premium, then normalization would return rates to between 4%-5%.

The debt servicing burden would very quickly rise to an unsustainable level - 15% of the government budget and 12%-15% of personal income. Lock it in while the going is good.

The New Normal

While the 'new normal' might have originally been invoked to describe a more subdued economic growth path as the economy absorbs financial deleveraging.

I was thinking perhaps a better use of the phrase 'new normal' is in describing the manner with which we have grown accustomed to extraordinary monetary measures. What five years ago would have been unfathomable, now passes without a blink.

The extent to which the Fed and the ECB have expanded their balance sheets and reduced their own lending standards is staggering.

And yet, in the new normal, it is, how should we say, 'normal'.

Thank You Blogosphere

It amazes me the quality of blog content. I don't know how these folks do it, day in a day out. I really wish I could convey a genuine thanks to the following people:

Barry Ritholz
John Hempton
Jesse's Cafe Americain
Felix Salmon
David Merkel
TheReformedBroker
Cullen Roche
Tyler Cowen
Diary of a Mad Hedge Fund Trader
Macro Man
Naked Capitalism
Zero Hedge
Abnormal Returns

They are all must reads. I have learned alot from them. I love learning from very smart people, and it makes me wish that I was that smart.

What remains to be seen is how long they can maintain it. Without a business model or the ability to leverage their content, it is a lot of hard work for little monetary return.