Guest Post: Out Of The Frying Pan And Into The Frying Pan

Tyler Durden's picture

Via Tim Price of Sovereign Man blog,

The groupthink in the world of finance is some of the worst on the planet. It’s incredible how such an educated, experienced group can willfully ignore reality, stick their heads in the sand, and repeat the same mantras over and over again until they become axiomatic.

Home prices never fall. The economy is recovering. Governments in the developed world won’t default. Conjuring money out of thin air, infinitely, has no consequences. Etc.

The desire to be accepted by one’s peers is part of human nature. And when it’s one’s peers who are rigging the financial system, the pressure to adopt industrial groupthink is enormous.

The note below, from Tim Price, just such an original thinker, highlights a critical lesson: despite the steady aural drubbing from financial media that we should all go buy stocks with wanton abandon, this is one of the most difficult times in recent history to invest. And investors may need to realign their goals from capital appreciation to capital preservation.

The dawning of a new year is invariably a time for forecasts. One of our New Year’s resolutions for 2013 is not to join the crowd in issuing them. Another is not to waste any time in reading them.

Having spent the past decade honing an investment approach designed to be proof against the very worst that an imperfect world of politicians and bankers can throw at it, it would be a capitulation to suddenly subcontract asset allocation to someone’s subjective assessment of the world.

And yet, we still devour investment commentary as if there were some unfound nugget of wisdom and insight that, once located, would finally reveal all the investment answers…

One British personal finance journalist confessed last week that he had sold all the bonds in his company pension to buy shares instead. His arguments are all rational:

- He expects bond prices to fall when interest rates rise, (nearly a mathematical certainty);
- Interest rates have sunk to derisory levels and can barely go lower;
- Most bonds are by no means as riskless as conventional thinking dictates;
- Most bonds are by any sensible analysis ridiculously overvalued.

But we have some reservations about the binary decision to ditch bonds and put the proceeds into the stock market, as if these are the only two asset choices in town. And while his decision may lead to a very comfortable retirement, we will now deploy two words that most professionals will never use: nobody knows.

The reason for our caution lies with a healthy respect for the volatility of the listed stock markets, especially at a time when the prices of all financial assets are being fundamentally distorted through the mechanism of money printing by the world’s major central banks.

Western government bond markets may blow up this year, or they may yet see their yields creep even lower, courtesy of a sudden wave of risk aversion, fears of deflation, state coercion and financial repression, or some other strange cocktail of the surprising.

The future, of course, is not known to us, or to anybody else. But there is a possibility (a possibility too heavy for us to entirely ignore) that equity markets will disappoint, perhaps at a profound level, those investors for whom they have become a panacea out of desperation at any obvious alternative.

To put it more plainly, ditching bonds to buy stocks may be jumping from the frying pan into another frying pan. To put it more plainly still, stock markets are only cheap by reference to grotesquely expensive government bonds, and the risk of significant price falls is ever present, especially at what is likely the tail-end of a multi-decade expansion in credit.

A falling tide might sink more than one type of boat.

As a result, the only true conviction we have is in capital preservation. For us, this includes a four-fold, multi-asset approach in cash (including exposure to non-western currencies), defensive equities, gold, and judicious exposure to one type of actively managed fund.

Kyle Bass, a fund manager for whom we have extreme respect, quotes Dick Mayo, founding partner of fund management group GMO, who recently said that it was the most difficult time to invest in his lifetime. We concur.

That markets remain weirdly ebullient doesn’t discredit our thesis. The reality is that we’re shepherding the irreplaceable assets of our clients. And if we weren’t pursuing a mandate of capital preservation in extremis, we would simply be pursuing the wrong mandate.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Shizzmoney's picture

I like to fry tulips.

TerminalDebt's picture

Stocks are better than bonds when Uncle Tim drops his helicopter load of trillion dollar coins

takeaction's picture

Sorry about the "Thread Jack" but I thought you should see this.  Alex Jones explains what happens after the insane interview.....Producer Crying. I hope Tyler will post this.  It is important.

http://www.youtube.com/watch?v=v0sE9hAXXB4

 

Buckaroo Banzai's picture

Sure hope he doesn't get "Breitbarted". Wouldn't rule it out, these guys are playing for keeps.

piceridu's picture

This guy is probably right about his assertions but comes off like a crackpot. Wondering if he helps the cause of liberty or does he do more harm?
Is the jury still out on Alex Jones? 

koncaswatch's picture

Much like Ron Paul, eh? Probably right about his assertions and called a crackpot by those of an opposing view. I do have to admit, to those who are unaware of the depth of our caustic corruption (worldwide btw), AJ will present himself as a tin foil hatter.

buzzsaw99's picture

quotes Dick Mayo, founding partner of fund management group GMO, who recently said that it was the most difficult time to invest in his lifetime...

What an idiot. I made 20% in less than a year. Just BTFD artard.

SuperDeDuper's picture

Invest in beer.  Everyone needs beer.  Everyone will want beer when they lose all their money. 

Cognitive Dissonance's picture

It seems no matter how much money we lose we never lose our beer money.

Funny how that is. :>)

Ghordius's picture

one of the most important statistics in Weimar Germany during hyperinflation was beer consumption

which skyrocketed thanks to the wage increases the unions were able to force in an economic climate of full employment - making the German (Industrial) Worker very, very happy - particularly because his rent did not raise at the same pace

Fräulein, noch ein Mass, bitte!

this in stark contrast with his union's bosses who got murdered in the hundreds

and the urban/professional middle class that lost nearly everything and became fascist

Winston Churchill's picture

I made a very detailed study of that Republic back in the sixty's.

Never heard that fectiod mentioned.

I cannot believe its veracity during the hyper stage,probably in the buildup, maybe.

DeadFred's picture

There's a good chance that when things get dicey .GOV will subsidize beer and pretzels to keep the sheep happy. Just use your Obamaphone to find the best deals.

TuesdayBen's picture

ObamaLite. Less Satisfying. Tastes Like State.

Stuck on Zero's picture

Beer is just one element of a winning portfolio of sin investments.  Bank on sloth, envy, greed, etc.  Buy into gambling casinos, sex parlors, tobacco, drugs, etc.  Always winners.

 

poor fella's picture

lol! that was effing awesome.

2013 - another year of record poppy production in Gannie?

hoos bin pharteen's picture

Don't forget the RPG and mortar aisle!

koncaswatch's picture

Anecdotal experience: Talking to my mom who grew up during the Great Depression, discussing the optimal business to be in during hard times; she said "men will always have money for beer and women will always have money for make-up". My wiseass response was to suggest I start a liquor store that sells cosmetics.

Long Walgreen's?

tooriskytoinvest's picture

Another Perfect Storm Brewing: 4th Quarter Earnings Will be an Unmitigated Disaster, Obama’s $264 Billion Tax Bill for 2013 May Spark New Recession, China's Inflation Is Spiking, Eurozone Unemployment Hits All-Time Highs, AND A Gigantic Asteroid Barreling Towards Earth In Mid-February!!!

http://investmentwatchblog.com/another-perfect-storm-brewing-4th-quarter...

Snakeeyes's picture

Has it dawned on anyone (outside of ZH) that the US and Euro are on a death spiral of spending, entitlements and debt. Throw Japan in too.

No wonder the Fed wants to mint trillion dollar coins. Zimbabwe Ben. WilliamBanzai?

http://confoundedinterest.wordpress.com/2013/01/06/pennies-40-ton-trilli...

hoos bin pharteen's picture

The Fed probably would have a cow if the Treasury did this. Effectively, this is just another way to nationalize the Fed to extinguish Treasury debt.

At this point Treasury and the Fed are chained together in deep water. If one drowns, the other goes down with it.

flattrader's picture

Japan is involved in a different kind of death spiral.

http://enenews.com/category/location/japan

 

Cognitive Dissonance's picture

"The groupthink in the world of finance is some of the worst on the planet. It’s incredible how such an educated, experienced group can willfully ignore reality, stick their heads in the sand, and repeat the same mantras over and over again until they become axiomatic."

A conflicted codependent mind is not a free mind. The severely addicted mind is a virtual slave to its addiction. And the most powerful drug in the world is the denial of the addicted.

DeadFred's picture

If he thinks financiers are bad let him try to publish a scientific journal article that steps outside the box.

Cognitive Dissonance's picture

All praise the almighty Gods of science, physics and finance.

To challenge the Gods is to be stoned as a heretic witch.

Sturm und Drang's picture

Bears a striking resemblence to the mythological Cerberus.

laozi's picture

Science is nothing like finance. In science people will regard anything that is backed by data. If the conclusion is new, other scientists will try to repeat the experiment. If the experiment is repeatable you will be a hero, every scientist's dream.

But to convince the unthinking masses, that is the true obstacle, because THEY fear change.

youngman's picture

I would love to get me one of them FREE Government Loans for college and go back in the Economics classes to see what they are teaching now...it has to be totally different than when I went....or do they just call it Central Banking 101 now...back in the ole days...we had balance sheets...not off balance sheets....we had a market..not a dark pool...we had a ticker tape..not an HFT computer....we had savings..not a loan to value...

TuesdayBen's picture

It is now known as Propanomics, Henny. A greasy blend of propaganda and old economics. Useless. Enjoy ogling the co-eds.

francis_sawyer's picture

 "A conflicted codependent mind is not a free mind. The severely addicted mind is a virtual slave to its addiction. And the most powerful drug in the world is the denial of the addicted."

~~~

which is why if you type 'clownbux' or 'bennybux' you get no junks, but if you type 'joobux' it's the end of the world... [even though they're all the same thing]...

Cognitive Dissonance's picture

There are so many deliberately implanted memes with regard to the subject of Jews and Zionists that it is very hard to understand what is really going on in that area. What I do know is that whatever it is, it works in favor of the mind controllers and manipulators.

Sturm und Drang's picture

"There are so many deliberately implanted memes with regard to the subject of Jews and Zionists that it is very hard to understand what is really going on in that area."

Not really.

AgAu_man's picture

It wasn’t till page 7 of Google, that I found a German “DIY” store by that name http://baumarkt.joobux.com/  Who said they have no sense of humor or irony?

AccreditedEYE's picture

Stop the fancy vocabulary and extravagant explanations, stop the 1+1=2 logic, stop the "end of the world" mentality... JUST BUY THE F-ING DIP. It isn't supposed to be logical or make sense. It just works. Buy. The. Dip. Fed moving assets up, not earnings or growth, just buy.

SuperDeDuper's picture

Sell now, come back after the debt ceiling.  They'll make an 11th hour deal.  Make money.  Retire early. 

Winston Churchill's picture

Be very careful .

Got to keep the livestock calm before slaughter.

Any farmer will tell you that,or else the meat is tainted.

buzzsaw99's picture

The irony is that it doesn't even matter what you buy on the freaking dip. Stocks, bonds, metals. Just pick something. If that dumbass can't make money in this market he is in the wrong freaking business!

AccreditedEYE's picture

Indeed... and after 4 yrs, people still aren't getting the message!

SheepDog-One's picture

I wouldn't touch this clownshow with a 10 foot pole myself, I don't need to play a rigged casino I do fine otherwise...but hey more power to the triumphant rear-view mirror traders. I just hope they don't come around here crying on the next giant market swoon which of course 'no one could have seen coming' because I'll just be laughing...dance with the devil dont be surprised when you get 3rd degree burns.

SheepDog-One's picture

Yea sure....sudennly everyone rear-views and says 'Hey, I bought that'! Whatever, have fun out there in delusion, or dancing with the devil in the rigged casino, whatever makes you feel better after all thats what america is about.

buzzsaw99's picture

even if i posted my trades in real time you would still say that.

SheepDog-One's picture

No I would say 'Hey have fun degenerate gambling in the rigged casino and further enabling the scam'. 

buzzsaw99's picture

If I could get out of the rigged casino I would. There is a certain amount that I am stuck with. I can either actively manage it or watch it rot. No matter what happens I doubt it will be worth much of anything when I finally can move it so please don't be so quick to judge because i like your comments in general.

AccreditedEYE's picture

If you AREN'T participating, you are losing purchasing power. (Ability to buy food, fuel, 6 pack of beer, whatever) Even if you sit in cash you participate as the dollar gets crushed lower and prices of things you need go higher. No need to get mad at people who want to keep their standard of living.

Panafrican Funktron Robot's picture

Purchasing power is ultimately maintained via purchase of real assets, not paper assets (or as I like to put it, digital assets, because often even the paper is of suspect origin and location).  If you're playing the paper market, you're playing in a rigged casino.  This is true whether you want it to be or not.  

laozi's picture

Amen. Buy PMs. Dont trade PMs with leverage. They will burn you if you do.

This is the Poker game where you don't bluff, and you play a tight hand.

SheepDog-One's picture

These guys think that if people didn't follow their questionable story that they were all-in the markets, then you've 'lost' something? That's just as ridiculous as saying if you're not going to Vegas every weekend then you're missing out on the jackpots there which you surely would have won. It's ridiculous, thats all.

AccreditedEYE's picture

I'm playing all over the place Funk... phizz Gold, paper stuff, stocks, commodities. To each their own. They too smart for me so I keep some fingers in many pies. Whatever market it may be, just BTFD. See them taking us off the lows and it's only 2:06? Wait till the end of day ramp... we could see a big move up from here.