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Why Notions of Systemic Failure Are On Par with Bigfoot and Unicorns for Most Investors

Phoenix Capital Research's picture




 

I wanted to take a moment to address the notion of serious collapse and/or systemic failure and why it's so hard for most investors to conceive.

First off, most people in general tend to be optimists or to generally believe that things will work out fine. So the idea of catastrophe is not something they spend much time thinking about.

Because of this, and other factors I'm about to explore, the notion of systemic failure is virtually impossible to grasp for most investors. Most professional traders are usually under the age of 40 (in fact they're typically in their mid to late 20s). As a result of this, they:

1)   Didn't experience the 1987 Crash

2)   Have never seen a Crisis that the Fed/ IMF/ etc. couldn't handle

Let's add a secondary element to this. Most institutional traders today operate, for the most part, based on trading models. These models, in general, are quantitative and based on correlations and patterns, not qualitative judgments.

This goes a long ways towards explaining why the market has developed such simplistic trading patterns. Consider the "Monday market rally" phenomenon we saw throughout 2009-2010. Or how about the Aussie Dollar/Japanese yen correlation to the S&P 500 we saw throughout much of 2010-2011. As one asset manager put it to me recently, the market has essentially become "one big trade" with virtually all asset classes moving tick for tick relative to each other.

Let us consider the mentality these age demographics and professional working tools engender. In general, both of these factors make for short-term thinking and a lack of qualitative analysis. They also mean that items or developments that exist outside the universe of trading models (most of which are entirely based on post-WWII data), are outside the scope of these traders' thinking.

This issue doesn't merely pertain to traders either. Going back 80+ years, there's never been a time in which the markets didn't have a backstop in the form of the Fed/ IMF/ or some other entity. No matter the Crisis that erupted, there was always money printing and other monetary policies to calm the storm.

Now, let's expand our analysis outside of professional traders to include asset managers and other institutional investors, the vast majority of whom are under the age of 60 or so.

Based on this age demographic, we find that there is an entire generation of investment professionals (aged 35-60) who:

  1. Have never witnessed nor invested during a bear market in bonds
  2. Have never witnessed, nor invested during a credit market collapse
  3. Have never witnessed a secular shift in the global economy

Consequently, the vast majority of professional investors are unable to contemplate truly dark times for the markets. After all, the two worst items most of them have witnessed (the Tech Bust and 2008) were both remedied within about 18 months and were followed by massive market rallies.

Because of this, the idea that the financial system might fail or that we might see any number of major catastrophes (Germany leaving the EU, a US debt default, hyperinflation, etc.) is on par with Bigfoot or Unicorns for 99% of those whose jobs are to manage investors' money or advise investors on how to allocate their capital.

If this doesn't worry you, you need to start looking at the actual numbers behind the financial system today. Here are just a few worth considering:

  1. US commercial banks currently sit atop $248 TRILLION in derivatives
  2. The US Federal Reserve is now buying 91% of all long-term new US debt issuance (at the same time China and Russia are dumping US bonds)
  3. Japan already spends roughly half of its annual tax revenues on debt payments and has relied on debt issuance more than tax revenues to fund its budget for four years now (how much longer can this last?)
  4. Europe's entire banking system is leveraged at 26 to 1 (Lehman Brothers was leveraged at 30 to 1 when it failed)

Folks, bad times are coming. It doesn't matter what the trading programs or "professionals" think about it... the math simply doesn't add up to us having a calm, profitable time in the markets over the next few years.

On that note, the time to be preparing for what's coming is now.

For more market and geopolitical insights, swing by www.gainspainscapital.com. We offer a number of Free Reports designed to help investors prepare for the necessary restructuring that is coming to the economy and the capital markets.

 

Best Regards,

 

Graham Summers

 

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Wed, 02/08/2012 - 13:33 | 2138411 JW n FL
JW n FL's picture

 

 

It Looks Like that Terrorist Ron Paul Agrees!

 

Ron Paul: The Coming Chaos

http://www.youtube.com/watch?v=Q7ZlxvDqYJY&feature=g-all-u&context=G2d4bc13FAAAAAAAAIAA

Uploaded by americanbandwidth on Feb 7, 2012

Heed These Words!!

 

Fri, 02/03/2012 - 07:30 | 2122478 Zero Govt
Zero Govt's picture

"Japan already spends roughly half of its annual tax revenues on debt payments.."

Productive citizen feeding parasite lay-about bankers

Is that not the specific design of the lazy cunts who erected (fabricated) the institution of Government?

Throw a few sweeties to the poor (who vote) and you have a slick liberal window dressing to hide your main game: theft and extortion

Fri, 02/03/2012 - 02:17 | 2122333 jonjon831983
jonjon831983's picture

Stories from gramps and grandma would be enough to tell you about investing back in 40's.

 

Wait.. maybe not investing, more of trying to survive.

Thu, 02/02/2012 - 23:30 | 2122109 SDS Trader
SDS Trader's picture

Ahh...I fall solidly in the 35-60 age group and have witnessed all 3 and invested during 2 of them.  I don't believe in Unicorns or Bigfoot, but I can remember the oil embargo in 1973 easily, I profited from the bull run in metals in '79 and '80 and the mid-teens 30yr. Bond rates at age 14, participated on the right side of the crash in '87 and on and on and on. I would submit that anyone who thinks these sorts of things are up there with fanciful creatures is NOT an investment professional.  They may not realize it, but they are posers.  Sincere, perhaps, but posers all the same. 

But we also don't have to be 100 years old to have seen some nasty stuff or made money during those times.  We used to regard them as opportunities to....say it with me me, "make money", not watch the Fed fire up the presses.

BTW, I agree - the tech bust was for pansies.  If you weren't smart enough to see "short BRCD or BRCM in the mid-200's" burned into your carpet, you were indeed an idiot.  And let's not even get started with RMBS or QCOM or the Pets.com sock puppet...

Thu, 02/02/2012 - 18:16 | 2121449 sidkof
sidkof's picture

my buddy's step-sister makes $68/hour on the internet. She has been without work for 8 months but last month her paycheck was $7255 just working on the internet for a few hours. Go to this web site and read more.. LazyCash9.com

Fri, 02/03/2012 - 03:14 | 2122363 Eireann go Brach
Eireann go Brach's picture

Sidkof fucks baby goats and sheep and his mom tapes it, and his buddy's step sister sells the videos for $6.08 on the Internet! Go to lazycunt.com

Fri, 02/03/2012 - 12:10 | 2123439 Obadiah
Obadiah's picture

OMG dont tempt me.

 

Hello this is Obadiah and I am and x-porn junkie... ooops sorry wrong blog...

Fri, 02/03/2012 - 02:34 | 2122347 steveo
steveo's picture

Bonehead go away

Fri, 02/03/2012 - 02:34 | 2122345 hannah
hannah's picture

sidkof - so how does your sister give a blowjo.b over the internet...?

Fri, 02/03/2012 - 05:25 | 2122435 jeff montanye
jeff montanye's picture

no no no.  it's his buddy's step sister who gives the virtual blow jobs.  the one's sidkof gives are the real thing (watch out for the oral lesions though).

Thu, 02/02/2012 - 20:41 | 2121814 cbxer55
cbxer55's picture

F.O.A.D. asshat

Thu, 02/02/2012 - 17:20 | 2121300 a4ln143c2001
a4ln143c2001's picture

too bad the fed just prints and market follows suit. market is broken, i am shorting again in june or july when everything is calm down

Thu, 02/02/2012 - 17:07 | 2121257 max2205
max2205's picture

OOOOOOOOOOOOOOOOOOOO

                   YYYYYYYYYYYYYYYY

Thu, 02/02/2012 - 17:13 | 2121275 flattrader
flattrader's picture

He got this post right.

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