Is Fat Tails Insurance Worthless?

Tyler Durden's picture

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 06/27/2011 - 17:13 | 1406551 traderjoe
traderjoe's picture

'The joy of cash'?

Certainly one always wants to maintain some 'liquidity' - in my mind an ability to make it through a particular set of circumstances without having to sell any particular asset under unreasonable conditions and/or terms. 

But if the centrally planned fiats blow up, as I think they will - the only hedge will eventually be to own productive hard assets (unleveraged) and stores of value. And, of course, timing will be everything. But getting productive assets under contract and purchased takes time. Even precious metals purchasing takes time. What will the timing of the crack-up-boom be?

In short, I personally believe timing the flip from deflation to inflation will not be possible. It's best to position now for the other side, and use the time the PTB is allowing us to convert money away from FRN's. That's what I believe they are doing. In the end, the counter-party risk of the FRN is far too high for me. 

Mon, 06/27/2011 - 17:09 | 1406552 Bad Asset
Bad Asset's picture

Glenn Beck just dropped

Mon, 06/27/2011 - 17:46 | 1406614 Idiot Savant
Idiot Savant's picture

Junked for mentioning Beck and ZH in the same breath.

Mon, 06/27/2011 - 18:19 | 1406720 Libertarians fo...
Libertarians for Prosperity's picture

Anyone hear Peter Schiff last week call out Glenn Beck for ripping people off with Goldline?  

Seems like Schiff is going after all the charlatans and frauds recently.


Mon, 06/27/2011 - 17:14 | 1406558 rsnoble
rsnoble's picture

I don't suppose any of you have done a google search lately on the Nebraska nuclear plant flood bern collapsing?

After fukusalla, should we believe any of their crap?  I'm only 250 miles downwind from this sack of shit thus my concern.

Mon, 06/27/2011 - 17:18 | 1406562 Tyler Durden
Tyler Durden's picture

Was reported yesterday.

Mon, 06/27/2011 - 17:42 | 1406615 NotApplicable
NotApplicable's picture

Which I saw before going to bed last night, making my dreams more interesting than ever.

Mon, 06/27/2011 - 19:33 | 1406942 trav7777
trav7777's picture

too bad you didn't invest in a portable bugout ranch.  Oh wait, there is no such thing

Mon, 06/27/2011 - 17:16 | 1406561 HelluvaEngineer
HelluvaEngineer's picture

I'm gonna need more Effen vodka

Mon, 06/27/2011 - 17:23 | 1406571 hedgeless_horseman
hedgeless_horseman's picture

Those sure are funny looking black swans circling over Timmy.

Mon, 06/27/2011 - 17:35 | 1406586 akak
akak's picture

If only .....

But vultures only attack and feed on the dead, you know.

They will have to be content with feeding on Timmah's cranium for right now.
The rest of him will be available to them in due course.

Mon, 06/27/2011 - 17:45 | 1406583 buzzsaw99
buzzsaw99's picture

the last hundred words are pure gold. one other thing, the bernank put/counterparty bailout equipment only works if you are the squid et al. the levered beta players who aren't the squid could be up chit creek sans paddle pdq.

Mon, 06/27/2011 - 17:33 | 1406592 slewie the pi-rat
slewie the pi-rat's picture

cash?  did he actually say cash?


Mon, 06/27/2011 - 17:34 | 1406601 Bob Sacamano
Bob Sacamano's picture

Am thinkin the definition of a true Black Swan event will not include any event being widely discussed here or in other media......

Mon, 06/27/2011 - 17:42 | 1406608 DoChenRollingBearing
DoChenRollingBearing's picture

4. Gold

Mon, 06/27/2011 - 17:44 | 1406622 NotApplicable
NotApplicable's picture

I manage fat tail risk by keeping my fat tail out of risky positions.

Mon, 06/27/2011 - 17:46 | 1406629 JimRogers
JimRogers's picture

Nickels bitches!

Mon, 06/27/2011 - 19:23 | 1406901 slewie the pi-rat
slewie the pi-rat's picture

+ $.08 +

Mon, 06/27/2011 - 17:50 | 1406647 gwar5
gwar5's picture

Dirty Rotten Shame

Mon, 06/27/2011 - 18:02 | 1406666 russwinter
russwinter's picture

More than a rhetorical question, but where and how does one safely store large quantities of cash. I don't consider under a mattress or in a tin can buried in the backyard an option.

Money Market Funds: Run don't Walk:

Mon, 06/27/2011 - 18:09 | 1406691 NotApplicable
NotApplicable's picture

Gold Eagles

Mon, 06/27/2011 - 18:09 | 1406693 ZackLo
ZackLo's picture them boys at finviaz be at it again!


Mon, 06/27/2011 - 18:12 | 1406705 gangland
gangland's picture

long post but worth it, tried to edit for length but decided just to post half of the column.

it is worth reading another prespective and it is a good summary of the many posts TD strings together one after another here on ZH, though you may just want to read the highlighted sections.



Red alert
Commentary and weekly watch by Doug Noland

Last week provided added confirmation of the bear thesis, although with interesting twists. While Greek Prime Minister George Papandreous' government survived a no-confidence vote, this positive development provided little reprieve for the marketplace.

Contagion jumped the fire line thought to reside at Spain, as Italy arose as a cause for concern. Moody's lowered its outlook on 13 Italian banks and warned that 16 others were vulnerable to credit ratings downgrades. The Italian bank sector was pummeled on Friday, with some of the leading stocks down as much as 5%. Credit default swap (CDS) prices spiked dramatically throughout the Italian banking sector the past two sessions. In reference to

signals of financial stability, European Central Bank president Jean-Claude Trichet admitted things had turned to "red alert". The eruption of systemic risk within Italy should be viewed as a serious debt contagion escalation.

Following a warning the previous week of a possible sovereign debt downgrade, Italy's 10-year sovereign yields jumped 16 basis points (bps) last week to 4.97%. Yields were up 35 bps in three weeks to the highest level since early March. Perhaps more noteworthy, Italian two-year yields spiked 24 bps as the week drew to a close to 3.27%, the high since late 2008. The price of Italy CDS jumped 34 bps in two days to surpass 200 bps for the first time since January. Spain's two-year yields jumped 21 bps this week to 3.66%, the high since early January. Ireland saw its 10-year yields jump 57 bps to a record 11.72%, as Portuguese yields surged 50 bps to a record 11.11%.

Greek contagion fears now cast quite a pall. There were indications of ongoing de-risking and de-leveraging. The energy and commodities sectors suffered another tough week, and the leveraged players certainly can't feel better about the world. And it is an important part of the thesis that a debt crisis induced tightening of financial conditions will particularly weigh on those economies suffering structural short-comings. Italy fits the bill.

At 119%, Italian debt as a percentage of gross domestic product (GDP0 is second only to Greece (143%) in the eurozone (according to Bloomberg data). In the best of market times, this debt appears sound; in the worst, its non-productive and a huge problem. Fortunately, a highly accommodative global marketplace has to this point made Italy's heavy debt-load manageable. At about 5%, Italy's annual deficit has looked favorable relative to many countries in and outside the region. And with Italian banks having limited exposure to periphery debt, the market had believed the sector was largely immune to the crisis.

Yet Italy today hangs very much in the balance. Contagion fears are pushing up Italy's market yields, risking a problematic jump in future debt service costs (and deficits). And as was demonstrated in Greece, when market sentiment changes and things turn sour ... The Italian system now confronts market, political, economic and social uncertainties these days associated with additional austerity measures. Voting with their feet, the marketplace last week scampered away from the Italian financial sector. A tightening of lending by the markets and the banking sector comes at an inopportune time for the moribund Italian economy. GDP expanded only 1.3% in 2010, this following 2009's 5.2% contraction and 2008's 1.3% drop.

Not dissimilar to the United States of America, Italy's debt mountain (US$2.3 trillion) is sustainable only with decent and persistent economic growth. When global market confidence is running high, liquidity abundant and risk-taking in vogue, envisaging an optimistic scenario comes easily for the marketplace. But when the clouds darken, things turn dismal in a hurry. And when folks become nervous about a debt-laden and structurally challenged economy, they will quickly take a keen interest in capital ratios and the general soundness of that economy's banking system. Economic and debt structures suddenly move to the front burner. That's where we are with Italy, and others, these days, as contagion effects gain important momentum by the week.

The VIX index (the market's estimate of the near-term future volatility of the S&P500) actually declined last week. (Today, Monday's range was 20.27 - 21.82, closed at 20.56) It is interesting to note that at 21.10, the VIX closed on Friday slightly above its one-year average (20.19). The VIX spiked above 37 last July and briefly traded above 30 this past March. It is remarkable that contagion effects, having so hastily arrived at Italy's door, are not provoking a dramatic market response in the equity options marketplace. Clearly, the markets have bought into "global too big to fail". Apparently, the more troubling Greek contagion risks become, the greater the markets' faith that global policymakers will find the necessary resolve to come together and ensure things don't spiral out of control.

I would be remiss not mentioning the notably strong performance by Asian markets last week, a region still holding the potential to underpin (exceedingly unbalanced) global growth. And, curiously, from the Financial Times: "Chinese premier Wen Jiabao has declared victory over domestic inflation [in an op-ed piece in Friday's FT], saying that the government has successfully reined in price pressures. 'China has made capping price rises the priority of macro-economic regulation and introduced a host of targeted policies. These have worked ... We are confident price rises will be firmly under control this year.'" (lulz)

Well, OK. And it would be consistent with my thesis that the unfolding "Greek" crisis tempts the Chinese and others to back away from their rather timid tightening measures, giving an extended lease on life to their dangerous credit bubbles (while further feeding global imbalances). I ponder where the euro would trade today without the market perception that the Chinese are there to provide a backstop bid for European debt and the currency.

I have no doubt that global policymakers will act in ways to try to stabilize the system; I'm just increasingly concerned with unintended consequences. A few examples: European policymakers have, for the most part, reached a consensus view that any Greek debt restructuring must avoid triggering defaults within the expansive CDS marketplace. In the process, such maneuverings come with the high cost of damaging the integrity of this market and, perhaps, derivatives markets more generally.

Why purchase insurance if politicians and political pressure can come to bear on the fulfillment of future contractual obligations?
Elsewhere, politicians can release oil reserves and at least temporarily reduce energy prices for the benefit of consumers and economies. Yet, in an age of highly speculative markets, such moves exacerbate market turbulence, risk aversion and de-leveraging.

And as Federal Reserve chairman Ben Bernanke claims that the Fed retains considerable firepower to support the recovery, the marketplace is left to ponder what the devil he has in mind.




Mon, 06/27/2011 - 18:16 | 1406708 jm
jm's picture

People do focus too much on hedging, and they focus too much on extremes.  This is because taking the craziest risks is the name of the game.  I thnk hedging in this situation makes people even more reckless.

The fact of the matter is that you often aren't rewarded for taking extra risk, even over a long term.  If you bought a basket of subordinate European bank debt in 2004, you have made pretty good total return... along with some heart attacks.  If you bought senior debt on the same names, you got almost exactly the same total return with less heart problems.

A more legitimate reason for hedging is in illiquid markets, because you need something that will keep up with margin needs.  Heaven forbid you post shaky collateral and get a massive haircut applied to your position.  Cash often won't help here:  you need something that moves with a meltdown.     

Another hedge is a dealer that won't screw you on an unwind.


Mon, 06/27/2011 - 18:13 | 1406710 ZackLo
ZackLo's picture

Mon, 06/27/2011 - 18:29 | 1406737 ZackLo
ZackLo's picture

Last couple days on have been very strange.....

around 6 o clock both times check out the images..

you wanna talk about fat tails?!

Mon, 06/27/2011 - 19:01 | 1406848 LMAO
LMAO's picture

It's the brand new Mark to Market App. which they have installed.

It's an app. which shows true real-time market value of the said DJA.

This basically means DJA excluding ZIRP, TARP, QE inf. and other creative accounting machinations.


This was all supposed to be hush-hush financial insider Voo-Doo, until of course some finviz tool accidentally pushed the wrong button.

And there it is, exposed in all it's splendor.


Mon, 06/27/2011 - 20:39 | 1407173 Mercury
Mercury's picture

Insurance is of course only as good as the counterparty that sells it and their ability to manage their liabilities.  Cash really has been a great hedge against most such "black swans" in the past but if you can't lay your hands on it when you need it or it suddenly becomes worthless (hyperinflation, "red money" etc.), that won't work either. 

Hard assets are nice but depend on might or the rule of law to stay in one's possession.  They also tend not to travel well - I've known a couple of smart, accomplished men who fled Europe in the '30's for Cuba only to have to flee from there in the early '60's -  leaving a lot of accumulated real property and possessions behind in both cases.

Gold is sort of the best of both worlds but to quote The Grateful Dead:

Now I don't know but I been told, it's hard to run with the weight of gold
Other times I've heard it said, it's just as hard with the weight of lead...

No hedge is perfect and besides, on a long enough timeline...


Mon, 06/27/2011 - 22:31 | 1407540 oldman
oldman's picture

Zero hedge is freedom

unfortunately freedom does not allow

being off balance

or BIG

Tue, 06/28/2011 - 23:30 | 1410678 camoes
camoes's picture

There's no such thing as a black swan protection, because the very nature of it is to be unpredictable ex-ante. Taleb even mentions in his book that the only solution is to be robust, in the case of portfolio management it would be cash/less leverage. But never forget that the black swan may never come at all or the cost of opportunity is high enough that it would have been better off if you had not "protected" yourself.

Even "cash" is subject to a black swan, the currency you hold may be subject to a jump condition devaluation overnight, it has happened before in several countries.

Unfortunately for all the finance theory bashers, Markowitz is still right, the only effective low cost "black swan" protection is to be diversified. But diversification is also relative and subjective. One can say that to be diversified you just need a combination of stocks and bonds, most ZH readers would say guns, canned food and phyzzzz silver bitchez.

Do NOT follow this link or you will be banned from the site!