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Contrarianism And The Danger Of Taking Hugh Hendry's "Blue Pill"
Submitted by Pater Tenebrarum via Acting-Man blog,
Distorted Markets
We have always liked Eclectica fund manager Hugh Hendry for his sound views and outspoken manner. Below is a somewhat dated video compilation showing several moments in which he stunned his opponents in television debates by voicing uncomfortable and politically incorrect truths. Included in the video is a defense of speculators, entrepreneurs and other risk takers in the marketplace against statist interventionists and “champagne socialists”, which we wholeheartedly agree with. Speculators have a bad name, mainly because they always serve as a convenient scapegoat for politicians (in fact, speculators and merchants have served as scapegoats whenever economic policy failures became apparent since at least the time of the Roman empire). However, they fulfill an extremely important function, as Mr. Hendry points out to his debate opponents.
A few excerpts from televised debates with Hugh Hendry
Mr. Hendry runs the Eclectica Fund and in recent quarters has frequently stressed that being contrarian has been a losing bet over the past few years (there are a few notable exceptions to this, see further below), while investors and fund managers relying blindly on the “money illusion” provided by central bank interventions have done quite well.
This is undeniably true. A prime example of what absurdities have become possible is shown below. The chart shows the 10-year JGB yield; Japan’s monthly annualized CPI rate of change over the past year is also shown, as an inset in the chart. The red rectangle outlines the time period over which these CPI readings were reported. At no point over the past year was Japan’s CPI not at least more than twice as high as the 10-year JGB yield. Even if one disregards the fact that CPI has been boosted due to a sales tax hike in April, current JGB yields make no sense. Prior to the sales tax hike, CPI fluctuated between 1.4% to 1.6% annualized, or 1.5% on average. This would still be almost five times the current 10-year yield of 0.31%.
In past “reflation” attempts by the BoJ, investors tended to drive up JGB yields concurrently with stock prices. Reported CPI figures also happened to increase slightly on these occasions. Investors consequently demanded higher yields. However, nowadays the BoJ has “become the JGB market”. It is such a big buyer, that no-one dares to oppose it anymore. After all, it has theoretically unlimited amounts of money at its disposal, since it creates them with the push of a button. Trading volume in the JGB market has completely dried up. Shorting JGBs is still the “widow-maker trade” – for now, anyway.
10 year JGB yields since 2006 and Japan’s CPI rate of change over the past year (the period corresponding to the red rectangle) , click to enlarge.
We are mentioning all this not to pick specifically on Japan’s policy makers (most others are by no means better), but mainly to confirm that Hugh Hendry does have a point. The prices of financial assets have been and continue to be massively distorted by loose monetary policy, and fighting these trends, no matter how absurd they appeared, has hitherto been a losing game.
The Fund Manager Conundrum
As we recall, Hugh Hendry mentioned in one of the Eclectica Fund’s previous reports that he has not only fully embraced the trends set into motion by central bank policy, but that he has also altered his short term tactics, by becoming more tolerant of short term losses. This was done because in recent years, every short term decline in the stock market was immediately recouped, so that “stop loss” strategies resulted in selling of long positions at exactly the wrong moment.
Zerohedge has recently reported on Mr. Hendry’s commentary accompanying the fund’s most recent results. These results were quite good, confirming that the current strategy works well, or at least that it has worked well in the most recent reporting period. Here are a few selected excerpts:
“There are times when an investor has no choice but to behave as though he believes in things that don’t necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often.
[…]
However since Draghi spoke, the role of market Disneyland has increasingly been taken on by the equity and fixed income markets. So the S&P has massively outperformed what has proven to be a tepid recovery in nominal GDP and a global real economy that is beset by deflation; just this month, European swaps contracts began to price in near term deflation. Yet equity markets are ignoring that reality in favor of the idea that the deflationary fallout from the collapse in the oil price will almost certainly mean even more monetary accommodation. The worse the reality of the economy becomes, the more we take on the reflexive belief in further and dramatic monetary expansion and the more attractive the stock market looks.
What is one to do with such a situation? In my view there are really only two responses. On one hand we have today’s bears. Remember the film The Matrix? Morpheus offered Neo the choice of two pills – blue, to forget about the Matrix and continue to live in the world of illusion, or red, to live in the painful world of reality. They, as the “enlightened”, chose red, and so are convinced that they understand everything which has become illusory about today’s markets. Their truth is Austrian economics. They know that today’s central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom; and they are convinced that they will therefore be spared the consequences of the inevitable crash. Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed, leaving them alone, to re-invest when markets finally get cheap. They will once again be masters of the universe.
This sounds good. Really good. I have long thought of myself as one of the enlightened. My much thumbed copy of Kindelberger’s Manias, Panics and Crashes aided and abetted my thinking as I correctly anticipated and monetised profits from the crisis of 2008 for example. But it isn’t always good. Kindelberger has been absolutely detrimental to my investment performance for the last six years and as a result I have changed. I still believe that the attempt by central bankers to prevent the private sector from deleveraging via a non-stop parade of asset price bubbles will end in tears. But I no longer think that anyone can say when. Look back on the last five years and I think that it is indisputable that mass injections of loose monetary policy have both fueled asset prices and staved off further crisis. I am also absolutely persuaded that the global economy remains so fragile that modern monetary interventions are likely to persist, if not accelerate. They will therefore continue to overwhelm all qualitative factors in determining the course for stock prices in the year ahead.
So I have come to embrace the French philosopher Baudrillard’s insight. “Truth is what we should rid ourselves of as fast as possible and pass it on to somebody else,” he wrote. “As with illness, it’s the only way to be cured of it. He who hangs on to truth has lost.” The economic truth of today no longer offers me much solace; I am taking the blue pills now. In the long run we will come to rue the central bank actions of today. But today there is no serious stimulus programme that our Disney markets will not consider to be successful. Markets can be no more long term than politics and we have no recourse but to put up with the environment that gives us; the modern market is effectively Keynesian with an Austrian tail.
(emphasis added)
We would agree that Mr. Hendry describes the current financial market reality quite well. At present, bad news seem to promise more monetary stimulus, hence they don’t represent a reason to sell. We would however add to this that good news have also not been seen as a reason to sell over the past year. One could therefore be tempted to conclude that there is actually nothing that could prompt a sell-off in risk assets. It seems possible that there is a catch.
As to the “Austrian” position, Mr. Hendry is correctly characterizing it in that Austrians are no doubt convinced that the artificial boom cannot last. Monetary pumping has distorted relative prices in the economy, which has far-reaching consequences. Since these distortions falsify economic calculation, many of the earnings reported by companies in recent years will later turn out to have been hiding capital consumption. Interventionism inspired by Keynesian (and monetarist) tenets has set the boom into motion, but the false reality and distortions this has created will eventually be unmasked. Insofar, the image of a “Keynesian boom with an Austrian tail” is not incorrect. However, it should be noted that the focus of Austrian business cycle theory is really on the boom, its chief causes and effects, and the fact that instead of increasing prosperity, it will lead to impoverishment in the long run.
Mr. Hendry’s brief characterization of Austrian investment philosophy strikes us as far too narrow though. The major difference between someone simply taking the blue pill and an “Austrian” investor in the current situation is probably that the latter attempts to incorporate all possible outcomes in his strategy, instead of trusting that central bank interventionism will continue to “work” for investors. It may well work for a while yet, but as Mr. Hendry himself points out: “I still believe that the attempt by central bankers to prevent the private sector from deleveraging via a non-stop parade of asset price bubbles will end in tears. But I no longer think that anyone can say when.”
If no-one can say when, then the “blue pill” strategy has a major weakness. It means that things could just as easily go haywire next week as next year. Monetary pumping is not operating in a vacuum. The higher asset prices go, and the bigger the distortions in the underlying real economy become, the more likely it becomes that a continuation of the asset price bubble will require accelerating monetary inflation. However, US monetary inflation has been slowing for some time, and continues to do so. The y/y growth rate of the broad money supply measure TMS-2 stands at a still brisk 7.57%, but this is actually one of the lowest readings of the past 6 ½ years:
Money TMS-2, y/y growth rate, click to enlarge.
This growth rate could accelerate again if private banks were to step up their lending, but if they fail to do so, then the end of “QE” implies that the slowdown will continue. In that case, the air could rapidly get quite thin for currently still extant asset price bubbles. We will definitely concede though that there is nothing that can tell us with absolute certainty that recent trends won’t continue for a while yet. However, numerous technical warning signs have piled up as well in the course of the past year (most notably, market internals have deteriorated and trend uniformity has decreased) and sentiment has become extremely lopsided.
We understand the conundrum faced by Mr. Hendry. Being contrarian hasn’t paid, and he is running a fund that must report results every month. If he doesn’t deliver a certain level of performance, his fund will suffer redemptions; moreover, the fund’s earnings are tied directly to its performance. Mr. Hendry is essentially saying: “I don’t get paid for being right and not making any money”, which is fair enough.
We would however be remiss not to point out that investment funds run by dedicated “Austrians” such as Mark Spitznagel’s Universa fund and the still young Incrementum Fund run by Ronald Stoeferle and Mark Valek (which has just won the FERI Euro Rating Award for “most innovative new fund”) have had a quite successful year as well. It is definitely not the case that “Austrians” don’t know how to make money in distorted markets. Even though these fund managers are well aware of the dangers associated with the boom and are frequently warning about them, they are still delivering great returns for their investors.
Contrarianism and the Danger of Taking the Blue Pill
We believe that there is a grave danger associated with simply “taking the blue pill”. First of all, in the context of “risk assets”, having faith in central bank magic is most definitely not a contrarian position anymore – less so than at any other time in the past six years. Contrarian views have actually worked very well in treasury bonds and crude oil in 2014, so it would also be quite wrong to state that “contrarianism no longer works” as a general proposition. The majority is of course always right during a strong trend. However, there inevitably comes a time when a trend has lasted long enough and gone far enough that the ranks of doubters have been thoroughly thinned out and the majority ceases to be correct.
We perceive a “greater tolerance for short term drawdowns” as quite dangerous in connection with risk assets at this juncture. In asset bubbles there are usually a number of short term breakdowns that are immediately followed by prices moving to new highs, a fact that greatly cements the confidence of market participants – usually to the point where it becomes fateful overconfidence. The main problem with this “tolerant” approach is that one simply cannot differentiate a run-of-the-mill short term correction from a short term downturn that ends up heralding something far worse. Initially, all corrections look similar.
To see how dangerous overvalued and extremely stretched markets can be, one only needs to study how prices have behaved following previous major historic peaks. The initial downturn is never seen as a cause for alarm. Sometimes this can however be followed by a decline so swift that having a tolerance for drawdowns can end up leaving one with very big losses in a very short time period.
Such sudden reassessments of market valuation can rarely be tied to specific fundamental developments. Rather, anything that is reported is all of a sudden interpreted negatively and becomes a trigger for more selling, even though similar news would have been shrugged off a few days or weeks earlier. After all, nearly every economic news item can be interpreted in a number of different ways, so that even superficially good news can become a problem (in the current situation they could e.g. create fears of a faster tightening of monetary policy).
Below is an update of Rydex assets and Rydex ratios. As can be seen, although the stock market is actually not very far above the peak it attained prior to the October correction, there has been a major rush by Rydex traders out of bearish and into bullish positions:
Rydex bear fund assets have ended the year right at an all time low, while the bull-bear asset ratio has continued to soared in blow-off like fashion. Remarkably, the ratio has moved from a level just below 12 at the low of the October correction to a high of nearly 30, in spite of the market not making a great deal of headway above its September peak, click to enlarge.
We were recently asked whether Rydex ratios are still meaningful nowadays. Although the assets invested in these funds are very small relative to the market’s size, we believe the data are akin to those gathered in e.g. political polls: the replies of a few thousand people can deliver statistically quite meaningful results applicable to the population at large. Similarly, the positioning of Rydex traders does tell us something meaningful about general market sentiment.
The most recent development strikes us as actually as especially meaningful. Bullish positioning has taken off like a rocket in the last quarter from an already high level (bull and sector assets rose by nearly 40%), while battered bear assets have plunged nearly by another 40% in just the final ten weeks of the year. The last quarter is especially noteworthy, as a massive surge in the bull-bear ratio occurred while the SPX gained only 70 points relative to its September peak. Comparing the two data points peak-to-peak, the SPX rose from about 2,020 at the September peak to 2,090 at the December peak (a gain of 70 points or 3.47%) while the Rydex asset ratio rose from approximately 18 points to 29,81 points over the same stretch (a gain of 11.81 points, or 65.6%). From its October low the ratio notched a gain of nearly 153%. In short, there is quite a big divergence between the actual gains delivered by the market at year end and the extent of conviction regarding further gains expressed by the positioning of Rydex traders.
Conclusion
We will readily admit that one cannot know with certainty whether the bubble in risk assets will become bigger. However, it seems to us that avoiding a big drawdown may actually be more important than gunning for whatever gains remain. One can of course endeavor to do both, but that inevitably limits short term returns due to the cost of insuring against a potential calamity.
We don’t know what, if any, insurance the Eclectica fund has in place, or whether Hugh Hendry’s trader instincts will help him to sidestep the eventual denouement; we are certainly hoping so and are wishing him all the best. However, we don’t think it is a good idea to simply “take the blue pill” and rely on the idea that the effects of the money illusion will last a lot longer. It is possible, but it becomes less and less likely the higher asset prices go and the more money supply growth slows down.
Lastly, the crude oil market strikes us as quite a pertinent example in this context, because everything that is these days mentioned as a cause of its enormous decline (such as the economic slowdown in China and Europe and the greater supply due to fracking) was already known many months before the sell-off started. The only thing that actually changed were market perceptions. No market is magically immune against such a change in perceptions.
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Hendry is a pimp. Collecting pennies in front of a steamroller he is throwing his investors under the bus ultimately so that he can make fees in the short term.
The sad thing is that ultimately that is precisely what his investors want him to do...
“Why, sometimes I've believed as many as six impossible things before breakfast.”
The Queen's response to Alice stating "one cannot believe impossible things".
Just when it seams that you have to go in because if you don't you will lose out is the time when the rug is pulled out from underneath you. I am sitting out until the next culling. It will happen.
Everything was NOT known about the cruded market months ago. In particular, nobody knew the Saudis would trash the shit out of the market intentionally. Supply-demand issues contributed to instability, but the proximate trigger was pure politics.
BTFD works great till it doesn't and we are in a Schroedinger cat market. Picking a tipping point is tricky with groups like the FED and GS skewing the system so badly but it's going to make the collapse much worse when it comes.
being brave with other people's money.....that's what investment professionals do for a living.
Always intresting, who owns the Economist?
Interesting indeed, from wiki: The publication belongs to The Economist Group, half of which is owned by Pearson PLC via the Financial Times. A group of independent shareholders, including many members of the staff and the Rothschild banking family of England,[7] owns the rest.
"The Economist Group is 50% owned by Pearson PLC via The Financial Times Limited. The bulk of the remaining shares are held by individual shareholders including the Cadbury, Rothschild, Schroder, Agnelli and other family interests as well as a number of staff and former staff shareholders. The Economist Group operates as a separate and independent business."
"The Economist Group is 50% owned by Pearson PLC via The Financial Times Limited. The bulk of the remaining shares are held by individual shareholders including the Cadbury, Rothschild, Schroder, Agnelli and other family interests as well as a number of staff and former staff shareholders. The Economist Group operates as a separate and independent business."
“There are times when an investor has no choice but to behave as though he believes in things that don’t necessarily exist."
ie: Federal Reserve got your back
emperor has no clothes moment coming ... soon
There are times where I am very happy I trade technically....
The dreaded day of reckoning will show up on charts as well.
You all can disagree but letting the trend on the S&P charts be my friend has made many FRN's which are then convertable to other more palatable forms of value. Irrespective of what I believe to be good and correct in this world, owning the S&P has created bigger numbers in my account...also over and above the 8% Fed inspired infalation rate....
yep ... the story the since the recession has been record earnings and buybacks ... why shouldn't stocks have risen?
and just don't see markets taking a (major) hit until US enters a recession (last go round Dow hit high 2 months prior to recession onset)
But, i do see a US recession in the cards ... and sooner than many expect
There is only one way for the market to stay up, much less continue up, and that's if everyone stays in. To take your profits and reinvest in something a bit safer is fine and well, but watch more than a few head for the door and witness the whole charade falling to the ground. Bankers are busily trying to sell their inflated stocks to the wary, but desperate, money on the sidelines. If they can offload enough without spooking the market they will have been successful in robbing the public blind, because once they are out, once their "irrational exuberance" has left the building and the muppets are standing there looking at each other's expectant faces, it will die. This is how a Ponzi is designed to work...and it always works. They only have to get the yields high enough for long enough to draw in the greedy muppets, then dump and run. Its all about timing and being the first out the door. As they pretty much hung the door, I have little doubt who will be left standing behind it when the time comes.
This particular "sideline" money will stay out, regardless of yield. I may lose financially, but I will not contribute to this fraud.
And EVERYONE knows it's fraud, simply rationalizing it as superior intelligence or market savvy. No different than any other grifter.
The Borg have assimilated another.....
Resistance is futile
The Borgs have no loyalty or allegiance other than to TPTB. Once you conform, your days are numbered. Killing conformists is easier than non-conformists.
"No market is magically immune against such a change in perceptions."
It's different this time.
It always is.....
managing perceptions in an imaginary world ~ LOL
Welcome to the new paradigm bitchez!
have no sympathy for hendry - finally - figuring things out
'shorting' this market is/has been a fool's errand
Is it "shorting" it to stay the fuck out of it?
If you don't want a man unhappy politically, don't give him two sides to a question to worry him; give him one. Better yet, give him none. Let him forget there is such a thing as war. If the government is inefficient, top-heavy, and tax-mad, better it be all those than that people worry over it. Peace, Montag. Give the people contests they win by remembering the words to more popular songs or the names of state capitals or how much corn Iowa grew last year. Cram them full of noncombustible data, chock them so damned full of 'facts' they feel stuffed, but absolutely 'brilliant' with information. Then they'll feel they're thinking, they'll get a sense of motion without moving. And they'll be happy, because facts of that sort don't change. RED PILL ALL THE WAYand yes it is hard
There is nothing more deceptive than an obvious fact
of course that means Austrian investors and not those studying the Austrian method. The first is playing Russian roulette whilst the second is munching pop corn with eyes on the big Boulder that looks increasingly precarious.
Austrians certainly don't believe they will be masters of the universe or net beneficiaries or unaffected - rather they are observers like natural scientists. When the volcano blows the lava hits them just as hard.
Hendry has committed the unpardonable sin of candor. Few professional money managers survive such an episode.
Kahunabear 'til the end!
Hold on to your hard-landing-hats, people! Hold on!
https://www.youtube.com/watch?v=S0bb5At4V38
Oh wow, timing is everything.
Hoocoudanode.
The unpardonable sin of candor... like all reformers who run back to the flock once the Inquisition gets its tenterhooks on you.
In this instance-- in the financial world-- the Pope is the BLUE Pill disseminator; aka FED/Squid combination; and his "indulgences" that "all true believers" must buy, are the QE/ZIRP soup all feeding the bigger derivative pie of financial emperor : TBTF consortium.
Hendry, like all those others who are within the church, as HFs eating off the ZIRP, but trying to go contrarian to the BLUE Pill mantra, is the typical heretic who says he is a true believer and not a corrupted Papist; now seen as the Anti-Christ of the Free Market fed on steroids.
But a heretic like Erasmus who cannot cut his umbilical chord to Pope. Not a heretic like Luther who only believes in the RED Pill mantra!
The awesome power of persuasion of the Market Pope, that he disseminates on those who still play the "spiritual game" of day trading and playing the spreads contrary to Fed mantra, makes the "soft" heretic easy meat once the Church has the Inquisition in place to brand the "enemy within"; aka the red pill shorters.
You start to lose your shirts as the Pope moves the market up n up and the laws of risk vs return (the laws of apostolic Nicene origin) no longer apply to the Borgia's world.
Nobody wants to end up like Savonarole burning on the stake. Its understandable.
But the Tyler of ZH is Luther in person ! No quarter asked for nor given, as the 95 articles get nailed to the wall come what may! Time and again !
Something tells me that the issue today will be like the Renaissance age; an age of perpetual wars and religious decimation. (I hope I'm wrong, but like a lot others I feel History just keeps singing the same old song).
Hope he gets out in time or makes some bucks in any case. He is pretty cautious but it may not be even weeks and rather a complete shut down of markets. Such is the nature of software.
Well isn't that the plan for all the "smart" people? Make their phenom gains and get the hell out before it tanks? Gosh, it would seem the doors a bit small and too few for that kind of quick exodus.
We will be watching in horror and very little surprise.
Austrians never presume to say when something that is clearly "unsustainable" will stop working and where economic reality reasserts itself.
Austrians never presume to say when something that is clearly "unsustainable" will stop working and where economic reality reasserts itself.
Austrians never presume to say when something that is clearly "unsustainable" will stop working and where economic reality reasserts itself.
only to a narcissist such thing as discovering "doubling down" and "momentum" and not knowing why one is buying something is a big deal (to be or not to be, red-pill blue-pill).
Contrary indicators are the best indicators for identifying trend reversal. When the whole herd starts believing the BS, it's time to go the other way. The massive credit bubble induced by the Federal Reserve and other central banks around the world is bursting. It's only a matter of time before everybody figures it out...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
I read the entire article but I'm a bit confused as to what your point is. As written in your conclusions:
"We will readily admit that one cannot know with certainty whether the bubble in risk assets will become bigger. However, it seems to us that avoiding a big drawdown may actually be more important than gunning for whatever gains remain. One can of course endeavor to do both, but that inevitably limits short term returns due to the cost of insuring against a potential calamity."
And you know what's important because of ... what, exactly? You've supplied no information to give any timing of what's to come or any indication that it's imminent. You could have, and likely did, make the same statement in January 2012 when the S&P was at 1100. It's now around 2400. Anyone listening to this type of investment advice has lost a small fortune, and if you're not giving investment advice but some kind of "life-affirming" advice ... then wtf do you care what Hugh Hendry says? I'll admit that the fundamentals and common sense say there's not much left, but fundamentals and common sense went out the door when Greenspan came into his own (if not long before). All I get from this article is the same thing I get from all of the unfounded blogger gloomster articles: "markets have to crash because I say they do."
Reading the contents of ZH is free, so there isn't really all that much to complain about with respect to limited value of content. But you seem like a smart guy, and you undoubtably have the resources and background to write an article that we normal-folk readers can glean something useful from. This was not one of them.
The negative weights on the economy now are largely the same ones as of January 2012, only bigger. The fact that we can see the asteroid heading at us from some distance out, doesn't make it less of a threat that we can't accurately measure its distance, velocity or time of ultimate impact. It is coming.
People who seek to derive their income from gambling have little choice but to stay in the game and that fact alone helps to perpetuate and extend its outcome, but the outcome is still there. The game cannot be sustained by the same players simply raising their bets. Eventually someone will call, the cards will be shown and the winner assessed. For the game to continue, new players, fresh money will have to come to the table as extending credit to the losers will eventual become too obviously futile. The game is officially over when there are no new players willing to bring their cash to the table. How long will you...or is it your money you are playing with?
I agree with what you've written. So, now give me a date for the outcome. You can't, nor do I mean to make it seem like you have implied that you can. But the difference between you posting a comment and this author writing the same article that's been written over and over and over for 5+ years is that you won't post the same thing month after month after month .... at least I assume you won't.
To the investor who makes their living off of the % increase on other people's money, the fact there is an accounting coming at some point in the future is worth noting ... but still they have to invest or go out of busness. And they will continue to invest until there is a concrete reason as to why they shouldn't. I'm not sure poker is a good analogy for how hedge fund managers invest (in poker it is a zero sum game, someone always wins and someone else always loses the equal sum - less house take). But I'm not an investor in equities, with my own money or others. Most of the market doesn't make sense to me with respect to investing. From that perspective I agree that they appear to be little more than gambling. However, I disagree with you in that the big change will not come about as a function of fundamentals (i.e. - no new players willing to take the risk). We both agree the fundamentals are currently very bad and have been bad for years. Change will come when Central Bank manipulations/money creation (virtual new players?) no longer works. What will make it stop working? I have no idea, and it's what I was looking for from this author.
So the person who sells for more than they paid wins, right. What does the buyer get? The only way this is not a zero sum game is if the market continues to go up and that can only happen if more new money comes in. Either from the muppets of QE. Stocks are not worth anything but what you can sell them for. They have no other use. They are not an investment, they are a gambling chip that when you walk out of the casino with them in your pocket are worthless until you re-enter the casino. How much of the worlds wealth is invested in the markets. What would the world look like if that money was invested in real assets, in productive assets?
Oldwood, your conversation with Oreilly has got me thinking about a scenario where there are two big holders of a certain publicly traded stock. These two gentlemen can simply trade 1 share back and forth at ever higher prices, which would then make them vastly richer on paper. Since we are all not adept at abstract thinking lets put some numbers to the thought experiment. ACME Adhesives has 100,000 shares of stock at $10 per share for a market cap of $1,000,000. Professor Plum owns 45% of these shares, Colonel Mustard owns 45% and the remaining 10% are owned by others. Professor plum and Colonel Mustard collude along wit their brokers collude and start trading 1 share per day for $1 per more per day than the previous day so that in a period of 2 weeks the share price is now $20, thereby doubling their paper profits. They are not "out" any money. Since Colonel Mustard was the last to by a share, he is out $10 (the difference between the closing price of 1 share and its initial cost basis). No new money has been introduced.
The hype caused by the rapidly doubling of the share price could be parlayed into these men selling all of their shares to others at perhaps higher valuations.
It's only a zero sum game if it's a closed system, which given the activities of Central Bankers in the last 10 years it would be hard to support anything remotely like closed. The Fed itself, never mind treasury, budget deficit, sovereign funds, EU CB, has over 4 trillion new debt on it's books. All of this fiat flows directly or indirectly into the markets, and so as you're pointing out, the markets explode upward with all of these "new" players. Equity, bond, forex, commodity ... you name it, the HUGE supplies of money passing thru the banks is coming and going everywhere EXCEPT into productive assets (I say coming and going because over the past 5 years most markets have faded up and down, with the equity markets currently being the poster child for upward trends). Only these are not really new players. They aren't really players at all, because a lot of the chips being used now are phantom and weren't created as a result of growth (GDP or otherwise). When the markets fall, some of them will simply be removed and written off as mal-investment.
If the S&P drops 25%, then roughly US$2.5 trillion is gone from those markets ... no one "won" that amount of money unless every share traded at the top and was held thru the drop. Take ExxonMobile as an example, where 51% of the shares are held institutionally and less than 0.5% shares change hands daily (these are Yahoo numbers, but I don't think they're too far off for the point I'm making). When crude oil pricing causes a 10% drop in XOM like it did recently, the US$40 billion of market capital loss does not go from XOM stockholder's pockets into someone else's pocket ... it largely just disappears with the valuation of the stock. In the case of XOM this happened in the space of 9 days over which only 150 million out of 4.5 billion shares changed hands. In the case of a Fall 2008 downturn where EVERY asset class drops 30%, the amount of valuation that simply disappears is mind-boggling, and it's undoubtably going to happen again, only worse this time (as you pointed out nothing has been solved and everything is worse). The bankers/financial CEOs/PTB will not pocket that 30%, it will simply cease to exist (ok, they'll pocket some of it from theft, graft, etc ... but nowhere near 30%).
And no one really argues these points, that it's going to happen (at least no one without a vested interest in maintaining the con game). I've been reading and hearing about the scam for 20 years (think it started with the run up in dot com stocks), and it still hasn't run it's course. I'm a believer in Generational Dynamics, Demographics, Economic Cycles, etc., and they all say 2010 to 2020 is the crisis point for the world economy. 10 years is pretty accurate for sociologists, but it sucks for economists and hedge fund managers. And so I'm back to my original point: how does this article help me in any way to know WHEN things are going to change? How does it help me plan for how long I have to sit and wait, or what I can do while I'm waiting if I take the red pill? And I'm back to my original response: it doesn't help at all.
The truth of the matter is that unless you are in the elite club, you're fucked no matter what you do. Go long in stocks and you will pay the price at a determined moment. Short the market and you will have your ass handed to you. Stay in cash (where I am right now) and watch as everyone else makes "easy money". At least for a while...
We're all just being pulled along. If you can just stay afloat in times of deception and theft, you're winning.
Sorry. Every time I see Stiglitz, I lose my shit, b/c asshats have a tendancy to do that to me.
I loved Hugh's interviews over the last few years, and was really disappointed when he caved in a few months ago. But cut the guy some slack, he runs money for people, and he's responsible to their expressed needs, period. Personally, I would NOT put money into Eclectica to have Hugh try to copy ordinary hedge fund hacks. I would use Hugh to aggressively pursue his contrary strategy, and hedge with money in more traditional strategies. Somebody put a lto of pressure of Hugh to toe the line.
but what is a contrarian strategy nowadays?
this is the same question Oreilly is asking above. We know it's all BS, nobody on ZH would dispute it's all fake, but as we and this article chasticise Hendry for no longer taking the "moral" stand, well, what is the alternative? do anyone have an answer to that?
Just received another order of "red pills", just not to be without...
seems to be working
Let me first reply to Hugh's later paragraph:
I still believe that the attempt by central bankers to prevent the private sector from deleveraging via a non-stop parade of asset price bubbles will end in tears. But I no longer think that anyone can say when. Look back on the last five years and I think that it is indisputable that mass injections of loose monetary policy have both fueled asset prices and staved off further crisis. I am also absolutely persuaded that the global economy remains so fragile that modern monetary interventions are likely to persist, if not accelerate. They will therefore continue to overwhelm all qualitative factors in determining the course for stock prices in the year ahead.
My satirical exaggerated me reads this as:
I (myself or for my investors) prefer longer-period feel-good together with short-period utter despair, over a more averaged out feeling level. I have rationalized this by believing I will still be able to make it to the exits ahead of the stampeding masses when finally it begins to end.
Their truth is Austrian economics. They know that today’s central bankers are spinning a falsehood of recovery; they steadfastly refuse to be suckered in by the euphoria of a monetary boom; and they are convinced that they will therefore be spared the consequences of the inevitable crash. Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be destroyed, leaving them alone, to re-invest when markets finally get cheap. They will once again be masters of the universe.
My true me states:
My truth is basically Austrian economics. I know that today’s central bankers are spinning a falsehood of recovery;
I steadfastly refuse to be suckered in by the euphoria of a monetary boom but am realizing that while my savings are too large to put them sensibly into bullets, beans, and bullion (even though I'm not rich) there are not enough viable options left to store wealth so I have divided it into thirds in each physPMs, cash, and stocks in the firm belief that one of those three should survive any SHTF scenario that is worth surviving;
and I am convinced that I will not be spared the consequences of the inevitable crash but hopefully can avoid a complete wipe-out.
Everyone else, currently drugged by the virtual simulation of prosperity and its acolyte QE, will be wiped out except for pure dumb luck or acceptance to become a true slave to some surviving elites.
Either some of my stocks survive somewhat, or else there will be nothing left to (re-)invest into, only rebuilding almost from scratch.
I will never be nor strive to ever become one of the masters of the universe.
"For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully."
This...makes...no...sense...It makes no SENSE!
God!
BULLSHIT!
Here's the way it works:
You may as well just buy the S&P and dance while the music plays because in case you hadn't noticed, the asset bubbles are gargantuan - when they do collapse the collapse will destroy the global economy and civilization will end
So what if you get lucky and time the exit before this happens --- or you are lucky with a short --- when the collapse happens you will be holding a fist full of worthless paper
The Central Banks will NEVER - I repeat - NEVER - increase interest rates. They will never stop the stimulus. Because they know that if they do they end civilization. So again - just ride the coat tails of the trillions of printed money and enjoy life while you can
This truly is the end of days. There are no safe havens. There are no good strategies. When this stops --- AND IT WILL STOP --- you are almost certainly DEAD.
Ya you can prep with guns and ammo and canned food and a vegetable patch but little good that will do you when starving hordes are unleashed when the collapse hits. For every one of you that is making prepartions there would be hundreds of thousands who have done nothing --- and they will see your little sanctuary -- and unless you can fend them off, they will clean you out.
Like I said, enjoy life while you can. When this hits, you are dead.
Hendry's taking the blue pill is yet another market top signal