I feel as though I am in the midst of a paradigm shift. I am moving on from the old framework through which I processed national and geo-political forces. I am not sure where the ship will anchor. I am not 100% sure what has been the cause of the shift.
But I do not feel as confident today as I did in the past of interpreting and understanding international developments. I get a sense that part of it is that I have been so long in the trees that I no longer trust my judgment or focus on the forest. I think part of it is that big picture events have not necessarily played out the way I thought they would. This has dented my confidence in understanding cause and effect. The market seems to have become dull to any number of problems or risks. Maybe it has seen it all before and is betting it will play itself out or wash over in time. Perhaps it is just the belief that the CBs are cleaning things up and whatever happens there will be a back stop to nullify the full force.
Monday, September 30, 2013
Friday, September 27, 2013
Playing with fire
From January 1941 through September 1981, per Bernstein's figures, U.S. Treasuries shed 67.3% of their real value.
At a 3% nominal yield and 2.5% long term average inflation…locking in 0.50% real return….if inflation really gets going then all bets are off...and that return doesn't even take account of taxes.
Here is the real risk. Catastrophic risk. I don't think it is deflation. That is because the central banks are already all in on that one. They have already told us in no uncertain terms that they will do everything they can to forestall deflation. Fine. I believe them. If deflation takes place then the CBs are going to combat it. I think the real risk is that they are skating on thin ice. They not only lack credibility (they have used much of it up) but they lack the capacity to expand the monetary base (it is already overextended/on borrowed time). The likely result is things flipping from deflation to hyperinflation as total trust and confidence in the system evaporates. They are skating a fine line right now. If they do manage to get us out of the fire, then they will have been incredibly lucky.
If we don't go into deflation again, then we risk rising inflation and potentially hyperinflation (although that would require a real shock to the system).
We have plastered over the cracks. The system is fragile. Our psyches are fragile. Confidence is fragile (although I think it is very much seeping into the system at the moment and could very easily take us to the next level). But the whole thing is a facade, an emperor with no clothes. No one knows when the music will stop again, but stop it will.
At a 3% nominal yield and 2.5% long term average inflation…locking in 0.50% real return….if inflation really gets going then all bets are off...and that return doesn't even take account of taxes.
Here is the real risk. Catastrophic risk. I don't think it is deflation. That is because the central banks are already all in on that one. They have already told us in no uncertain terms that they will do everything they can to forestall deflation. Fine. I believe them. If deflation takes place then the CBs are going to combat it. I think the real risk is that they are skating on thin ice. They not only lack credibility (they have used much of it up) but they lack the capacity to expand the monetary base (it is already overextended/on borrowed time). The likely result is things flipping from deflation to hyperinflation as total trust and confidence in the system evaporates. They are skating a fine line right now. If they do manage to get us out of the fire, then they will have been incredibly lucky.
If we don't go into deflation again, then we risk rising inflation and potentially hyperinflation (although that would require a real shock to the system).
We have plastered over the cracks. The system is fragile. Our psyches are fragile. Confidence is fragile (although I think it is very much seeping into the system at the moment and could very easily take us to the next level). But the whole thing is a facade, an emperor with no clothes. No one knows when the music will stop again, but stop it will.
The Downside of Capitalism
I am a capitalist in the sense that I believe free and open markets are generally the best way to allocate resources, establish societally beneficial incentives, foster wealth creation and help lift standards of living for all. That is not to say that I believe capitalism is the only and best way, or that free and open markets are the only and best way to do something or bring about a rise in living standards.
In fact capitalism and free markets are two different things (but that is a discussion for another day).
Unfettered capitalism and unfettered free markets are not necessarily the best way to do or achieve something for society. And capitalist forces (incentives) often lead to sub-optimal outcomes (externalities) and a hollowing out of society's moral core.
Case in point. Consumerism and the trend toward consumption. Capitalism and modern societies are structured around and predicated upon the phenomenon of growth which is in turn is predicated upon people consuming more things. In the case of the medical profession it has lead from previously people being cared for by their family doctor (whom they trust and respect) to the professionalization of the business and the running of medical practices as businesses (where doctors are incentivized to "treat" people as clients). In that environment, clients (sick people) are treated as consumers and are sold (in a profit maximizing way as possible) a raft of medical "services". I believe this has changed the nature and the essence of the profession - in a not too positive way. The same forces can be seen in education, accounting, law and financial services (and no doubt many other cottage industries which are now businesses).
I say this somewhat facetiously. In the old days "capitalists" were easy to see. They were the robber barons, the natural resource exploiters, the telecom and transportation moguls. They were the landowners, the industrialists. They were the ones who arb'd the poor. These days everyone is a capitalist. Everyone has drunk the koolaid (of consumerism) - and it is not always for the better.
In fact capitalism and free markets are two different things (but that is a discussion for another day).
Unfettered capitalism and unfettered free markets are not necessarily the best way to do or achieve something for society. And capitalist forces (incentives) often lead to sub-optimal outcomes (externalities) and a hollowing out of society's moral core.
Case in point. Consumerism and the trend toward consumption. Capitalism and modern societies are structured around and predicated upon the phenomenon of growth which is in turn is predicated upon people consuming more things. In the case of the medical profession it has lead from previously people being cared for by their family doctor (whom they trust and respect) to the professionalization of the business and the running of medical practices as businesses (where doctors are incentivized to "treat" people as clients). In that environment, clients (sick people) are treated as consumers and are sold (in a profit maximizing way as possible) a raft of medical "services". I believe this has changed the nature and the essence of the profession - in a not too positive way. The same forces can be seen in education, accounting, law and financial services (and no doubt many other cottage industries which are now businesses).
I say this somewhat facetiously. In the old days "capitalists" were easy to see. They were the robber barons, the natural resource exploiters, the telecom and transportation moguls. They were the landowners, the industrialists. They were the ones who arb'd the poor. These days everyone is a capitalist. Everyone has drunk the koolaid (of consumerism) - and it is not always for the better.
Thursday, September 26, 2013
Redefining and Reinventing Money Management
We can't compete with the market. Charlie Ellis has made that clear repeatably (supported by the evidence) for the last thirty years.
If we can't compete with the market what good are we (investment managers)? What value do we have? Where can we add value?
The industry is tied to a millstone. The S&P 500 (or the Dow Jones or some other arbitrary benchmark).
The quandary is that everyone wants performance. Everyone is conditioned to want performance. Everyone is focused on performance.
How do you wean yourself (your business, your clients) off this?
Do you say, "I can't beat the market. I'm not going to try to beat the market. The market is an artificial construct. We've been duped. Or, we've duped ourselves. We need to focus on your goals (but what if my goals require a level of return that the market is unlikely to provide?). We need to focus on protecting your accumulated savings and generating a little return without putting it all on the line."
Then what am I paying you for? If you're only going to use index funds and give me market, then I can do that myself and save myself 1% pa.
Advisers have basic expertise (they know the nature of the market and are aware of the most appropriate vehicles for structuring a portfolio/achieving a goal) impose a structure and discipline most savers/investors don't have. But what if investors through the discipline of the 401K process develop their own structure, discipline and expertise.
The process (maturation process) reminds me of developments in theology. Theology would move forward as it addressed the thoughts and concerns of the time. Someone would rise up and create a framework to take the conversation to the next level. And then new questions, problems, issues would arise and someone else would have to rise up and propagate a new paradigm with which to venture forth.
If we can't compete with the market what good are we (investment managers)? What value do we have? Where can we add value?
The industry is tied to a millstone. The S&P 500 (or the Dow Jones or some other arbitrary benchmark).
The quandary is that everyone wants performance. Everyone is conditioned to want performance. Everyone is focused on performance.
How do you wean yourself (your business, your clients) off this?
Do you say, "I can't beat the market. I'm not going to try to beat the market. The market is an artificial construct. We've been duped. Or, we've duped ourselves. We need to focus on your goals (but what if my goals require a level of return that the market is unlikely to provide?). We need to focus on protecting your accumulated savings and generating a little return without putting it all on the line."
Then what am I paying you for? If you're only going to use index funds and give me market, then I can do that myself and save myself 1% pa.
Advisers have basic expertise (they know the nature of the market and are aware of the most appropriate vehicles for structuring a portfolio/achieving a goal) impose a structure and discipline most savers/investors don't have. But what if investors through the discipline of the 401K process develop their own structure, discipline and expertise.
The process (maturation process) reminds me of developments in theology. Theology would move forward as it addressed the thoughts and concerns of the time. Someone would rise up and create a framework to take the conversation to the next level. And then new questions, problems, issues would arise and someone else would have to rise up and propagate a new paradigm with which to venture forth.
More Great Insights from Taleb
The rule - what you don't do is more important than what you do. In natural systems, you need redundancy to make the system work better. People think that redundancies are inefficient. I think they're the most efficient thing in the world, if you do them right.
Redundancy is bad if you buy the same morning newspaper twice or if you have two subscriptions to the same website. But redundancy is fine if you have a stock of cash in the bank or if you're a company that needs oil and you have extra oil.
Let's assume that you have cash in the bank and there's a big crisis. You have dry powder. It will make you antifragile to have the extra dry powder if nobody else has money. You can buy anything you want. Cash is the opposite of leverage.
In fact, the number one indicator of fragility is leverage. It can be operational or financial. Leverage corresponds to people's overconfidence about the future.
Most people who have leverage will be completely squeezed in a crisis, and you will have cash.
Redundancy is bad if you buy the same morning newspaper twice or if you have two subscriptions to the same website. But redundancy is fine if you have a stock of cash in the bank or if you're a company that needs oil and you have extra oil.
Let's assume that you have cash in the bank and there's a big crisis. You have dry powder. It will make you antifragile to have the extra dry powder if nobody else has money. You can buy anything you want. Cash is the opposite of leverage.
In fact, the number one indicator of fragility is leverage. It can be operational or financial. Leverage corresponds to people's overconfidence about the future.
Most people who have leverage will be completely squeezed in a crisis, and you will have cash.
Thursday, September 12, 2013
Analogies - Explaining the world around us
I need to be more clever in the way I communicate and explain things. Analogies, stories and metaphors are the way to go.
Need to get thinking cap on.
The semblance of normalcy: life is moving along, all is well with the world.
Need to get thinking cap on.
The semblance of normalcy: life is moving along, all is well with the world.
Monday, September 9, 2013
How and Where to Work Smarter
I can't possibly keep up with the torrent of information necessary to know everything that is going on.
The only way to manage this state of affairs is to have a system that captures the necessary information (that which you absolutely need to know), processes that information properly (runs it through a filter/paradigm/framework that weighs and assesses it correctly), and results in insights/decisions that are superior to the above average wisdom of the market.
Not an easy feat.
There will be times, when there is no way to keep up, and other times when the market due to its very nature (overreaction, illiquidity, herd effect, greed, fear, hubris, complacency, comfort) presents opportunity for advantage. Discerning those times is the hard part. Having signals and systems in place to identify those potentialities is critical to being aware of where opportunity may lay.
The only way to manage this state of affairs is to have a system that captures the necessary information (that which you absolutely need to know), processes that information properly (runs it through a filter/paradigm/framework that weighs and assesses it correctly), and results in insights/decisions that are superior to the above average wisdom of the market.
Not an easy feat.
There will be times, when there is no way to keep up, and other times when the market due to its very nature (overreaction, illiquidity, herd effect, greed, fear, hubris, complacency, comfort) presents opportunity for advantage. Discerning those times is the hard part. Having signals and systems in place to identify those potentialities is critical to being aware of where opportunity may lay.
Hat tip Split Enz "History Never Repeats"
History doesn't repeat, but it has a kind of familiarity. And as the Byrds (or should I say Solomon) would say "there is a season...turn, turn, turn."
I was reading James North short, concise "A History of the Church" and noticed the pre-conditions* for the French Revolution were eerily similar to the conditions of today. As then, so today, it is very hard to know what the spark will be, but when it explodes the social order changes fast. If you need any convincing that that can happen today, look at how quickly the Arab Spring upended the status quo is a number of countries with lingering effect elsewhere.
To quote, "The immediate cause of the beginning of the French Revolution was the bankruptcy of the state. Financial mismanagement had been an unresolved problem in France for some time...the people had plenty of complaints against the government, chief of which was that the nobility and the clergy were escaping most of the taxes. While the assembly began to restructure the tax and social structure of the country, the mob stormed the Bastille on July 14. By August 4 the entire feudal structure of France, with special privileges enjoyed by aristocracy and clergy, was demolished."
*Pre-conditions were a corrupt, bankrupt state and uber-wealthy living off an inequitable tax burden placed upon the middle class.
I was reading James North short, concise "A History of the Church" and noticed the pre-conditions* for the French Revolution were eerily similar to the conditions of today. As then, so today, it is very hard to know what the spark will be, but when it explodes the social order changes fast. If you need any convincing that that can happen today, look at how quickly the Arab Spring upended the status quo is a number of countries with lingering effect elsewhere.
To quote, "The immediate cause of the beginning of the French Revolution was the bankruptcy of the state. Financial mismanagement had been an unresolved problem in France for some time...the people had plenty of complaints against the government, chief of which was that the nobility and the clergy were escaping most of the taxes. While the assembly began to restructure the tax and social structure of the country, the mob stormed the Bastille on July 14. By August 4 the entire feudal structure of France, with special privileges enjoyed by aristocracy and clergy, was demolished."
*Pre-conditions were a corrupt, bankrupt state and uber-wealthy living off an inequitable tax burden placed upon the middle class.
Sunday, September 1, 2013
Spinning Your Wheels
You can't possibly keep up with everything that is going on in the economy or even one company. There is too much information to parse.
You get on the information treadmill.
That is why you have to think smarter and act smarter. Heuristics are the way you maintain and at times can get ahead.
The information treadmill is never ending and never conquered. It is ever present and ever future. It waits for no one and offers only fool's gold if you think that by keeping up with the "news" you are able to make better decisions.
It is true that better information is better. But discerning the better information from noise is the hard part.
Keep things simple. Have a philosophy, a set of guidelines that put the odds in your favor. Be disciplined, courageous and patient.
That will allow you to keep a proper perspective and not get caught up in the noise.
Easier said than done.
You get on the information treadmill.
That is why you have to think smarter and act smarter. Heuristics are the way you maintain and at times can get ahead.
The information treadmill is never ending and never conquered. It is ever present and ever future. It waits for no one and offers only fool's gold if you think that by keeping up with the "news" you are able to make better decisions.
It is true that better information is better. But discerning the better information from noise is the hard part.
Keep things simple. Have a philosophy, a set of guidelines that put the odds in your favor. Be disciplined, courageous and patient.
That will allow you to keep a proper perspective and not get caught up in the noise.
Easier said than done.
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