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.

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SheepDog-One's picture

Straight-up BULLSHIT! I'm not 'missing' a damn thing, and I could make a strong case that I've done better OUT of the markets than IN them! 

youngman's picture

to show how interconnected the markets are..all of them were down .51% at the same time....all of them....its just one computer now...

francis_sawyer's picture

They're not 'stupid'... They're all just criminals...

docmac324's picture

Week of February 11th.

Inthemix96's picture

Frying pans, I like frying pans.  You can do a whole load of stuff with a frying pan, you can even fry things in them.  In fact, frying pans have more uses than banksters who produce nothing but indentured servitude, out of fucking thin air.

Yes indeed, you would be fucked without a frying pan for eggs.  But would you be fucked without a bankster for your eggs?

And the added bonus is, frying pans make an invaluable weapon should a banker come stalking your house with a filo-fax and a pen, bray the fucker with a nice heavy-duty Tefal frying pan, and he aint getting back up mind.

Yes my friends, there is a lot I like about frying pans, and indeed we couldnt live as humans without them in my humble opinion, but I am more than sure if you heated a banker up on the stove enough to fry an egg, it wouldnt taste the same, so we dont need bankers.  We sure do need frying pans though.


Inthemix96's picture

Now thats a might fine frying pan there Hedgeless.

But I own a selection of Tefal "Hot-Spot" frying pans, and believe this my good man, you can fry an egg in them without any oil at all, not even a tea-spoon full.

I think I will stick to the Tefal frying pan, but your weapon of choice would certainly cause a cerebal problem.  Think outside the box peeps, is all it takes.

kito's picture

Those no-stick.frying plans are not good for your health-just like bankers.....

Cognitive Dissonance's picture

Kitchen porn.

And here I thought that just involved making love on the kitchen mind. :)

TuesdayBen's picture

Even I would have to pass on a bankerburger.

Anasteus's picture

The last pearl of wisdom from the former Maoist and currently a brilliant European politician José Manuel Barroso

"The Euro has been saved and the euro crisis is a thing of the past!"

... or a titbit for another ZH article?

knukles's picture




(Running about nude, pecker flipping up and down, arms waving, screaming)


Cognitive Dissonance's picture

Please, I'm asking nicely.

Stop making the print so small that I have to cut and paste it into a word document to read it.........only to instantly regret doing so. :)

fuu's picture

Try CTRL + or CTRL - instead.

Everybodys All American's picture

its a 11:30 am in the US. It's become the automatic daily market ramp.

SheepDog-One's picture

AH man! Murcun's don't care about the REAL truth! They just wanna rear-view trade some more and act like hot shit! COME ON daddy Bernank throw me some more chips I wanna gamble in that casino!

Xue's picture

Physical PM, PM stocks, high dividend yield commodity and energy stocks, and some dry powder.

That's how I hope to preserve my capital.

Bansters-in-my- feces's picture

By "defensive equities" you mean Military Industrial complex worker bees,right.?

AgAu_man's picture

2nd last sentence: “The reality is that we’re shepherding the irreplaceable assets of our clients.”

Tim, so who’s “we”?  LLC name or URL, please.  And what asset classes do you recommend, besides “real assets that CBs can’t print or steal within the US”? 


Iam Yue2's picture

Here is Goldman's O'Neill engaging in said group, wishful thinking (yea, stocks may be expensive on traditional indicators, but ya never know....)

"Some argue that US equities will weaken if US bond yields rise for the obvious reason that higher yields compete – perhaps on the premise that there is less liquidity. Others throw in that, from a conservative valuation perspective, such as cyclically adjusted PE ratios (CAPE), equities are no longer attractive. On our GSAM CAPE calculations, it is the case that US equities are not cheap, but it is quite conceivable that they could become expensive again (just as bonds have for many years) if the great rotation trade is about to start."

Tombstone's picture

What else are all these good little socialists supposed to do?  Create wealth prosperity? 

WhiskeyTangoFoxtrot's picture

Where's Simon? Must be meeting with swiss bankers or looking for productive farmland in remote corners of the world.

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