When investors are fearful, they look to hedge their portfolios by buying “insurance” that will protect them if the market falls.
Right now, fear is super high, says Christopher Cole at Artemis. This past September, he says it cost more than ever to hedge against a collapse — even more than in 2008, when everyone was scared the whole system was going to blow. “Ironically,” Cole writes, “markets are at their very best when everyone is scared out of their minds.”
He goes on:
The worst crashes usually occur when investors are not prepared or excessively leveraged. Very rarely are you ambushed when you are totally ready for it. Widespread hedging provides an unseen floor to equity prices. In a hedged market, the majority of investors 1) are not forced to sell in a decline or 2) have the ability to buy on the dip.
Which is to say, as Cole does, “Fear is a better reason than fundamentals to own stocks right now.” Stocks look expensive, he concedes. By his lights, it hardly matters.
What? Stocks are expensive but buy them anyway?
Cole trades volatility for a living, and I saw him make a presentation at Grant’s Fall Investment Conference. I also dug out his recent paper “Volatility of an Impossible Object: Risk, Fear and Safety in Games of Perception.” What follows are some thoughts on what he calls our “capitalist dystopia.”
If volatility seems rather far removed from the grubby world of flesh and blood and companies, I agree. I am too steeped in the Marty Whitman tradition to buy stocks because the market is “fearful.” (Whitman is the founder of the Third Avenue Value Fund and a longtime investment thinker par excellence. “Our interest is how the businesses in which we will invest will perform over the long term,” Whitman once wrote, “rather than what investor-speculator sentiment might be short term.”)
Still, Cole makes some well-known points in a memorable way.
For example, we know the Federal Reserve’s manipulation of asset prices severely hampers our perceptions of market realities. Cole finds a neat metaphor for this. He likens the market to an impossible object — these are 2-D figures that cannot exist in three dimensions. “Famous examples include the Necker cube, the Penrose triangle, the devil’s tuning fork and the artwork of M.C. Escher,” he writes. My favorite is the Penrose staircase (see nearby illustration).
As Cole notes, the fundamental characteristic behind the impossible object is an uncertainty of perception. Can you go up the staircase or down? Cole believes the impossible object is important in understanding the distortions of markets.
We live in a world that is nominally capitalistic. There are profits and losses. There are businesses and stock markets. There are interest rates and prices for commodities like oil and gold. We have the glitter and tinsel of capitalism. But do we have the real thing?
Real market prices reflect a process of price discovery. Buyers and sellers freely do their thing, and the results of their actions are the trails of prices those transactions leave behind. The signals these prices give off are what we rely on to plan and invest.
Cole believes that in today’s modern financial system, this process is arrested to a degree that makes the whole thing a fiction or illusion. “In a world where global central banks manipulate the cost of risk,” he writes in his third-quarter letter to investors, “the mechanics of price discovery have disengaged from reality.”
Consider the Federal Reserve’s recent announcement for so-called QE3. The Fed will buy mortgages in the form of unlimited $40 billion monthly purchases. It will also continue to keep interest rates low through “at least mid-2015.”
These monetary experiments create all kinds of problems. Superlow interest rates create big funding gaps in pension plans, for example, which could lead to social unrest as those pensions can’t make good on their promises.
Superlow interest rates also lead to the creation of a lot more debt on an already leveraged financial system, with little bang for the buck. Cole points out each $1 added in debt leads to ever smaller increments of economic growth. What the Fed is doing, essentially, is piling up lots of risks in the system to pump up stock prices in the short term. As Cole writes:
It is very hard to justify the risk-to-reward payoff of this monetary experiment. The defense of quantitative easing rests largely on an assessment of what would have happened to the economy absent its support. Nonetheless, we should fear the law of unintended consequences, because it takes a very small shift in perception to result in uncontrollable socioeconomic change. We may get higher asset prices today, but at the expense of inflation, class warfare, social unrest or something even worse tomorrow.
Cole points out that if the Federal Reserve follows through on its promise to buy mortgages to the tune of $40 billion per month, it will own the entire market in a decade. The Federal Reserve is already the largest holder of U.S. Treasury debt. Keep in mind the Federal Reserve is hardly an economic agent in the sense of normal buyers and sellers. It has its own agenda and an unlimited playbook. It is, in short, the illusionist.
Cole goes pretty far with this. In fact, he says, “The market is no longer an expression of the economy… it is the economy.” In other words, central bank strategy is trying to supplant the needs and wants of the market economy with its own ugly designs. It is as if the economy were a horse that pulled a cart. But the Fed wants to use the cart to pull the horse. Cole writes:
Our fiscal well-being is now prisoner to financial and monetary engineering of our own design. Central banking strategy does not hide this fact with the goal of creating the optional illusion of economic prosperity through artificially higher asset prices to stimulate the real economy. In doing so, they are exposing us all to hyperreality or what Baudrillard called “the desert of real.” In Fed speak, this is what Bernanke calls the “wealth effect,” and during his Sept. 13 press conference he explained the concept: “If people feel that their financial situation is better because their 401(k) looks better or for whatever reason… they are more willing to go out and spend, and that’s going to provide demand that firms need in order to be willing to hire and to invest.”
Jean Baudrillard was a French philosopher who wrote Simulacra and Simulation. This was the inspiration for the movie The Matrix. In the movie, people live ignorantly in a projected image that they believe is reality. In the same way, Cole argues, there is no real economy anymore — just false images.
I don’t go as far as this. There is still a real economy. And it is more powerful, in the long run, than the Federal Reserve or any government. Ultimately, the fundamentals — profits, losses, balance sheets, competitive positions — matter. They matter more than sentiment or Fed maneuvering. When this real economy asserts itself, we have one of our periodic crises.
Bottom line: We must be careful when we weigh “market” prices. We have to think more creatively about what is real and what is smoke and mirrors.
Don’t believe the Fed’s goosing of the market is the real thing. Don’t fall for credit-induced prosperity. More so than in the past, market prices can go up and down for reasons having nothing to do with the fundamentals. Yet in the long run, the fundamentals are the only thing that’s real.
Original article posted on Daily Resource Hunter
Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.
One has to view the Fed and the “too big to fail” banks as the Politburo. This was always on the cards when government expenditure began to rise as a percentage of “GDP” in the capitalistic society and is how I used to interpret the economic models and graphs of the 60′s and 70′s: another way of getting to communism! The “voted in” government is just a “noise”.
The production possibility boundary in relation to supply of fiat money (including credit) has been reached. The assets carried on the balance sheets of these banks are in effect uncollectible and the increase of money supply (ie Fed credits, not actually printed money) just goes towards propping up the system (replacing the contracted money supply without recognising the contraction), often called government bailouts.
The rules of insolvency have been neatly amended by an “accounting” stroke of the pen in a change to GAAP, so that trading can be undertaken and continued when liabilities exceed assets (most of which are in fact questionable assets). It seems that as long as you can show an item as an asset on the balance sheet, it’s OK PROVIDED you can call on the Fed for a credit!
The ultimate result taken to an extreme is that all the banks above (and the Fed) will own everything.
Forget about returns when you could have your capital misappropriated! To hold in your possession, “printed” notes and coins may be the way to go! All the “capital” is held by you and may not be misappropriated and there are no 3rd party charges for this! Your gain comes with a fall in prices because few will be able to obtain the medium of exchange.
Pingback: DSL Anbieter
Pingback: Rao vat
Pingback: local swingers
Pingback: how to get on reality tv
Pingback: make money from youtube
Pingback: marriage seminars dfw
Pingback: Cure herpes
Pingback: small business ideas for women
Pingback: phong ve may bay
Pingback: I have herpes now what do i do
Pingback: Cheap Backlinks
Pingback: atlanta web designer
Pingback: msn nicks
Pingback: music promotion
Pingback: make your own beats
Pingback: paxil birth defects lawsuit
Pingback: granuflo and naturalyte
Pingback: book of ra
Pingback: guaranteed seo services
Pingback: naprawa sterownikow
Pingback: get quality backlinks
Pingback: engine search optimization
Pingback: design insights
Pingback: nha hang tiec cuoi
Pingback: zalando lounge gutscheincode versandkosten 2013
Pingback: aktuelle comtech neukunden gutscheine
Pingback: Garmin nüvi 2797LMT 7-Inch
Pingback: gutscheincode sanicare versandkostenfrei
Pingback: gutscheincode notebooksbilliger versandkosten
Pingback: are aliens real
Pingback: gutscheincode sportscheck 10 euro
Pingback: s. oliver gutschein versandkosten
Pingback: medimops gutschein 2013
Pingback: Vietnam airlines
Pingback: teufel gutschein 10 euro
Pingback: gutscheincode dress for less versandkostenfrei
Pingback: koffer direkt gutschein 10 euro
Pingback: mirapodo gutschein mai
Pingback: home24 gutscheinnummer
Pingback: otto office gutscheincode 10
Pingback: blume2000 gutscheincode 10
Pingback: aktuelle redcoon gutscheine
Pingback: gutscheincode thalia neukunde
Pingback: hard rock mining clothes
Pingback: jako-o gutscheine
Pingback: gutscheincode spartoo 10 euro
Pingback: gutscheine douglas
Pingback: aktuelle toys'r'us neukunden gutscheine
Pingback: zooplus gutschein versandkosten
Pingback: heine gutschein mai
Pingback: Jamey Sossamanï¿½
Pingback: gutscheine baur
Pingback: koffer arena gutschein mai
Pingback: gaming pc build
Pingback: Malcolm Eurton
Pingback: mister spex gutscheine
Pingback: plus gutscheincode 10
Pingback: getgoods gutscheincode versandkosten 2013
Pingback: Eusebio Jarrellsï¿½
Pingback: Roberto Boatman
Pingback: weltbild gutschein 10 euro
Pingback: obat kuat seksual
Pingback: click for source
Pingback: obat kuat
Pingback: Orthodontist Chandler
Pingback: gutters clearwater fl
Pingback: isle of man reverse phone
Pingback: website seo analysis
Pingback: Estate Planning
Pingback: contractor marketing
Pingback: abogados en linea
Pingback: Orthodontist Gilbert
Pingback: Plastic Surgery SEO
Pingback: pr-agentur hannover
Pingback: Google Analytics help
Pingback: electrician raleigh nc
Pingback: Dr OZ Green Tea
Pingback: Garcinia Cambogia Extracts
Pingback: discount broker
Pingback: pakaian wanita
Pingback: how to get bigger boobs fast
Pingback: safe diet pills
Pingback: Green Coffee Bean Max
Pingback: Saffron Extract Select
Pingback: Home Based Business Ideas
Pingback: free intro maker
Pingback: Google Sniper
Pingback: Bisnis Investasi Aman
Pingback: Flyers, Brochures, Booklets - Graphics
Pingback: Glenn Kempleï¿½
Pingback: cheap hosting india
Pingback: Candie Nakao
Pingback: Jeni Oquinn
Pingback: Buck Wason
Pingback: zynga poker chips for sale
Pingback: e cigarettes reviews
Pingback: baby shoes
Pingback: Google Plus Followers
Pingback: IT Research Paper
Pingback: aspartam skutki uboczne
Pingback: cheap auto insurance
Pingback: locksmiths london
Pingback: stomach exercises
Pingback: co to jest aspartam
Pingback: best small business ideas
Pingback: lidal? lida
Pingback: garcinia cambogia fruitï¿½
Pingback: electronic cigarette starter kit
Pingback: green coffee bean extract safetyï¿½
Pingback: cleaning gold coast
Pingback: Pinterest 4 Carat Diamond Rings
Pingback: sarung bantal
Pingback: Singapore SEO
Pingback: where to eat in Rotterdam
Pingback: homestay yogyakarta
Pingback: workshop hipnoterapi
Pingback: Cheap 5 Carat Rings
Pingback: Buy Google Plus Followers
Pingback: plastic surgeon corpus christi
Pingback: ice vending machines
Pingback: how to make your hair grow faster
Pingback: model train accessories
Pingback: godaddy coupon code
Pingback: voyance gratuite sans attente serieuse
Pingback: web hosting
Pingback: Buy twitter followers
Pingback: high quality jordan kicks online
Pingback: google adwords
Pingback: free unique visitors
Pingback: Resurfacing cabinets
Pingback: Window Repairs
Pingback: Personal trainer Ventura
Pingback: Janet Willimonï¿½
Pingback: sore throat
Pingback: make money blogging
Pingback: hcg diet reviews
Pingback: quick money
Pingback: unlock iphone 4
Pingback: How To
Pingback: cheap louis vuitton handbags outlet
Pingback: Zalando Gutschein
Pingback: bill of sale washington state
Pingback: Inspirational quotes
Pingback: to get ripped in 30 days
Pingback: social media marketing
Pingback: Buy Facebook Fans
Pingback: printable bill of sale as is
Pingback: girls clothes
Pingback: debt consolidation non profit organization
Pingback: 20 questions
Pingback: Orlando apartments near ucf
Pingback: blogging sites
Pingback: úîåðåú ìáéú
Pingback: earn money online
Pingback: diet to go coupon code
Pingback: web design london
Pingback: Get Web Hosting
Pingback: Durban Spa
Pingback: abortion pill deltona
Pingback: abortion lakeland
Pingback: west palm beach fl abortion clinic
Pingback: gainesville fl abortion pill
Pingback: soap supplies
Pingback: jual treadmill
Pingback: MBBS in Ukraine
Make Way for the Gold Price "Zero Hour"
After a six month rally, the Nipponese index dropped 7.3%. Is it a turning point or a small correction?
After rising 3% out of the gate after Thursday’s bloodbath, the Japanese index embarked on a wild ride.
The American Association of Petroleum Geologists was nice enough to schedule its 2013 annual convention at my hometown of Pittsburgh…
Given a choice, Bernanke will likely strangle the currency (your money)... in favor of “strengthening” the economy.
If the Maker Movement Is So Great, Where’s Our Flying Car?
IRS scandals and the dangers of dissenting opinion in America.