Black Swan

Perhaps gold investors are suffering the blues of too much good news since breaking out to the upside, north of the magic 1,000$ an ounce. Inflation being the big macroeconomic risk that everyone is looking for, might just be the real disappointment. For most of the last three decades we have been conditioned to drive/manage by looking in the rear view mirror. The last big black swan event of the 70’s related to the interest rate spike never replayed itself out a second time around. In the years ahead the unexpected might just be the norm and an extraordinary event could actually lead us to a hyper-deflationary black swan.

I've been meaning to write a piece on Ludwig von Mises, the greatest economist who ever lived, and, if you will, a hero of mine. This is a piece on Mises from the Op-Ed page of the Wall Street Journal by Mark Spitznagel. Spitznagel is the head of Universa Investments and is a protege and partner of Nassim Taleb of Black Swan fame. Those of you who have been following my blog know of my admiration of Mr. Taleb. He and Mr. Spitznagel were also "right," and Universa made a lot of money for their investors from our economic crisis.

David Einhorn is angry at CDS. But is that the full story? Hardly. We believe Einhorn's attack on CDS is an implicit attack on the broken core of the fiat monetary system itself.

The attached presentation, from John Taylor of Stanford and John Williams of the SF FRB, prepared in the weekend before the Lehman bankruptcy, and thus in the eye of last year's hurricane, provides some additional insights into money markets, the Fed's TAF program, OIS spreads, and how everything can gospectacularly wrong at mere whiff of that greatest black swan of all, and the one concept all in the financial business take for granted: counterparty risk. With the Fed now actively pursuing the extraction of capital out of money markets instead of primary dealers, the potential liquidity imbalance will be a major threat to the system and will be activelymonitored by Zero Hedge. If the Fed's soothing admonition that it has things in control serves any purpose, it is that sooner rather than later risk flaring and six sigma events will once again be a dailyoccurrence.

In the ongoing debate between the so called freshwater and saltwater economists about how the US got into this mess and how we are going to get out, what somehow often gets lost are the prophetic words of Hyman Minsky. Investors would be well advised to understand Minsky’s ideas concerning financial instability, especially given the current market euphoria.

I originally wrote this list of recommended books last year; recently I updated and added a few more. I hope to keep adding to it every year. It contains six sections: Selling, Think Like an Investor, Behavioral Investing, Economics, Stock Market History, and Books for the Soul. Due to its length, I divided it into two parts. Here is part 2. I hope you enjoy it.

In crazy times like today, all one could and actually should ask for is sanity. Yes, sanity – a clear mind free of noise to deal with the insanity that is thrust upon us by a volatile and noise-making machine also known as the stock market. We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow’s next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what’s next? Here is my advice: read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and come with plenty of sanity and sage advice.

What economic system do we really have in America right now?

Nassim Taleb, author of The Black Swan and Fooled By Randomness, writes brilliantly on investment risk, but his proposed solution to the economic crisis, converting defaulting mortgages to equity by banks, will result in America catching the Japanese Disease. We can't keep debt lingering on the books of banks like they did in Japan. And you can't magically turn stone into bread. Read this and tell me what you think. Perhaps he is creating another black swan.

Pass this on to people who get their news from the talking heads on tv . . .

Like him or hate him, the author of The Black Swan does provide a unique and interesting perspective. Here is his entire presentation to the Long Now foundation from early 2008, a few short months before everything starting collapsing, and, in many ways some would say, proving him right. Of particular note: Taleb's personal disdain for "experts" of all sorts, is second only to that of Buffett and Munger.

All this for a measly $100 million paycheck? He only made $2 billion for Citigroup.

If the budget deficit is $1 trillion per year, how much do we have to borrow? The answer is closer to $2 Trillion. The existing debt has to be refinanced too. Can this be sustained? Forever?

In a note released earlier by Raymond James, the author Jeffrey Saut does all in his power to explain not only why Treasuries are a bad bet (inflation is a-coming), and why the market will continue ramping higher, but ironically, why, even as the author submits by calling his piece "When the music stops" that all equity market participants have entered into a bubble frenzy, the market will simply continue going higher, period. As a reminder, comparable notes were a dime a dozen just before the dot com bubble popped. Of course, nobody will care to stake their reputation on calling when this bubble, which everyone now acknowledges it for what it is, will end. However, Saut does provide some astute observations on the career risk that has gripped most portfolio managers, the majority of which have, not surprisngly, not participated at all in the current rally. We would add, a comparable career risk now permeates among the analyst community which has all now gotten on the bull bandwagon, as nobody is willing to call a spade a spade, for fear of angering some of the larger accounts or superiors, for being a contrarian in a market that swiftly silences all objecting voices as it pursues new irrational highs.

By my count the D.C. mortgage lenders have upward of $1 trillion of loans on their books that were made to achieve social objectives. This has been 'play money' for Congress and past Administrations for years. The boss at FHFA has told Congress this has to stop. Where are chips going to fall on this one?