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"You Don't Buy Home Insurance After The Roof Catches Fire"
Submitted by Tim Price via Sovereign Man blog,
“We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no-one wants to leave while there is still time, so that everyone keeps asking, “What time is it? What time is it?” But none of the clocks have any hands.”
– From Supermoney by Adam Smith.
It was not supposed to be like this. As we highlighted last week, after the Great Debt Bubble, there has been no Great Deleveraging. In fact, as the McKinsey Global Institute showed in their February 2015 report,
“After the 2008 financial crisis and the longest and deepest global recession since World War II, it was widely expected that the world’s economies would deleverage. It has not happened. Instead…
“Debt continues to grow. Since 2007, global debt has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points.”
Herbert Stein’s Law mandates that if something cannot go on forever, it will stop. The great Austrian economist Ludwig von Mises expressed the same sentiment and came to a somewhat gloomier conclusion:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
As the McKinsey data show, the voluntary abandonment of further credit expansion has clearly not occurred. If Mises is correct, and we are minded to consider that he is, then draw your own conclusions.
We have now become used to so many years of utterly extraordinary monetary experimentation and policy-making on the hoof that there is a danger that Alice-in-Wonderland central banking activity simply gets taken for granted as the natural state of affairs.
This is the same type of absurd but incremental behaviour that gets frogs in pans boiled alive with their tacit approval.
Blithe sceptics to this line of thought will no doubt argue that if seven years of making-it-up-as-we-go-along monetary policy hasn’t derailed the system, then perhaps the system won’t get derailed.
Perhaps it’s even un-derailable. But this sounds suspiciously like Ben Bernanke’s own flawed thinking when he suggested in July 2005 that: “We’ve never had a decline in house prices on a nationwide basis.”
In other words, because something has never happened before, it never will.
(This from the same person who observed in March 2007 that “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”)
No, the insoluble problem facing every investor today is not just that the system is unsustainable. It clearly is. The problem is that we lack a means of forecasting accurately when the system is likely to break apart.
The financial market is a complex, adaptive system, reliant on confidence, the ongoing robustness of which is completely unforecastable. That confidence has been robust is not in question.
The creation of trillions of dollars, pounds, euros, yen and renminbi worth of ex nihilo money has yet to dent confidence entirely in an unbacked paper money system (notwithstanding the 345% gain in the dollar price of gold since the start of the millennium).
Just before the turn of the millennium, inside the late Peter L. Bernstein’s excellent history of risk, ‘Against the Gods’, we came across the following quotation by the Swiss mathematician and physicist Daniel Bernoulli: when managing money for wealthy people,
“The practical utility of any gain in portfolio value inversely relates to the size of the portfolio.”
Bernoulli (1700-1782) has a good claim to being one of the world’s first behavioural economists, in that he observed that investment performance for the wealthy is not exactly the same as investment performance for the non-wealthy.
For the objectively wealthy, or super-wealthy, any further gain in portfolio value has to be seen in the context of maintaining the original value of the portfolio. Since human beings are typically loss averse, maintaining the original purchasing power of the pot is much more important than generating further incremental gains, especially in an environment where the pursuit of those further gains risks existentially jeopardising that original pot.
US stock markets reached record highs last week. Question: does that make them riskier, or less risky? We think the former.
But for us the question is somewhat academic since we’re not remotely interested in index-tracking. Other investors, however, evidently are. Among the top 10 ETF purchases by customers of Barclays Stockbrokers last week were funds tracking:
- The S&P 500 (iShares and Vanguard)
- The FTSE 100 (iShares and Vanguard)
- The FTSE 250
- The Euro Stoxx 50
- Japan.
We foresee all kinds of risks in taking indexed exposure to stock markets close to or at their all-time highs. Index-tracking funds offer many things. Relatively low cost market exposure, for one.
But as and when stock markets go into reverse, purchasers of low cost trackers will find that they have been penny-wise and pound foolish, because low cost trackers offer precisely zero discernment or discretion when it comes to market direction. If the market goes down, they go down with it.
So rather than tag along for the ride, we much prefer to follow the ‘value’ route (to capital preservation and growth, in that order).
Index benchmarking is utterly inappropriate, we would suggest, for the private investor, for whom the ultimate reference rate should be cash, since cash remains the only asset that cannot decline in nominal terms. Or at least that used to be the case, before acronyms like QE, ZIRP and now NIRP (Negative Interest Rate Policy) steamrollered over all assets in their path, like financial terminators.
If we define ‘value’ as inherent quality plus attractive valuation, it has relevance to both debt and equity market investing today. Bond markets as a whole are clearly grotesquely overvalued but may remain so or become even more overvalued because there is an 800lb gorilla in the market determinedly gobbling them up.
As of March 2015, the ECB will be buying €60 billion worth every month. We doubt whether there’s that much quality debt on offer in the euro zone. But there may be elsewhere, not least because most of the world’s creditor countries lie outside the euro zone.
In equity markets, we see almost no compelling value in US stocks, which if nothing else are intensely well covered (we mean by number of analysts, not necessarily by quality of coverage) by Wall Street.
We see compelling pockets of genuine value, however, in markets like Japan, which simply aren’t well covered by the analyst community, which has been scared off by 20 years of bear market conditions.
We then supplement our debt and equity exposure with uncorrelated investments (namely systematic trend-followers), which we have always regarded as bellwether holdings, and with real assets, notably the monetary metals, gold and silver.
The result: four discrete asset classes that will behave in different ways under different market conditions.
- High quality debt offers income and a degree of capital preservation (especially in an environment of outright deflation).
- High quality ‘value’ equity offers income and the potential for attractive capital growth (especially in an environment of modest inflation).
- Systematic trend-followers are broadly market neutral, but with the potential to deliver outsized gains in an environment of systemic financial distress (most trend-followers generated double or triple digit percentage returns in 2008, for example).
- And real assets, again, offer the potential to deliver outsized gains in an environment of systemic financial distress or high inflation, or both.
Unlike most of our fund management peers, we accept that we can’t predict the future. Unlike many of them, we are at least preparing for it.
But that brings us back to our initial dilemma. We think the system is desperately unsound, so we take out what insurance we can, whilst still retaining a stake in a variety of markets (on our terms admittedly, rather than according to somebody else’s irrelevant benchmark).
But insurance only works if you have it when the crisis erupts. You don’t buy house insurance after the roof catches fire.
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The later and bigger collapse is always to be preferred.
"You Don't Buy Home Insuance After The Roof Catches Fire"
Well you would;... if you could...
However, you can buy ObamaCare after you're diagnosed with a dread disease...
Glad someone else mentioned this. If you can buy it after the adverse event occurs, it's simply not insurance. Hence, the disaster that is Obamacare.
We could have the
OBAMA HOMO[wner's] PROGRAM
You could sign up on your laptop in the driveway as flamers leap from your windows.
In America, burning house is pre-existing condition?
Google: Detroit
Welcome back. Where you were?
I love that Von Mises quote, it covers it much more thoroughly below. I’ve been plugging it a lot but I really like the article. Check it out for anyone who wants a good summary of where we are and how we got here.
http://debtcrash.blogspot.com/2015/02/history-and-introduction.html
Look.. i don't like anymore than anyone else. but, that printing stuff got us where we are Today... the obvious answer is: PRINT MORE FREE MONEY!!!!!! Dow 20,000!!!!
You’re ignoring the misallocation of resources. The manipulation of rates has people reaching for yield to whoever is willing to take on the debt. That is why the oil market is all screwed up. Fly by night companies borrowed cheap money to drill for oil, on projects that could never make money but supplied to much oil for the market to absorb. The companies are now going bust wreaking havoc in the high yield markets. That’s why they say money printing is like eating a jelly donut, it feels good at first but it does damage in the long run.
Take a look at this, it’s a long read but a good description:
http://debtcrash.blogspot.com/2015/02/history-and-introduction.html
you can now buy health insurance after you have cancer so nothing to see here just keep BTFD
If you havent been in stocks the last 10 years, you have gotten your balls ripped off. Same goes for the next 10 years. There is no market anymore
"If you havent been in stocks the last 10 years, you have gotten your balls ripped off."
I don't remember seeing happy faces in February, 2009.
Yeah, that's when my genius mutual fund manager lost 70% of my retirement savings for me. His fund still hasn't fully recovered.
possible you forgot that period from 2007-2009
Some iteration of this article: "Record high stocks mean the end is coming and we're all gonna die!" comes out every single time there is a new peak in the market.
*yawn*
been waiting years for it but the markets just keep going up
Its even better when there is a 200pt drop and everybody screams to grab the AR-15s, a pallet of pork & beans, and head to the hermetically sealed bomb shelters.
And to think, we bash on the MSM for fear mongering silliness...
Of course "they" (Wall Street, Your Government) lever up.
WE ARE ONE GREAT HAPPY FEDERATION!
Of course....we still haven't had the recovery yet either. So "the Fed is out of bullets" (they must raise rates) and New Jersey goes bankrupt.
So why would you expect to buy health insurance with a pre-existing condition?
With a little bit of own logical thinking you must recognize: the higher the markets are running the riskier it is to be in. But: no risk, no fun, no money (as it is to stay in market too long).
Dunno, I mean, just look at this bit of logical thinking.
It should be quite obvious to anyone paying attention that deleveraging is no longer possible without disaster occurring. So... what do they do, but to extend and pretend until deleveraging takes care of itself, and a suitable fall-guy is setup to take the blame for the even larger disaster.
I think people look at this backwards. If I'm a psychopath calling the shots and own the printing press what difference does the price of stocks make. When the syndicate wants to own a little bit more because 90% ain't enough they pull the rug, start a war and consolidate even more power. The playbook has been used time and time again, why should this time be different. Kill off a hundred million or so, blow some shit up and bring on the NWO. So simple even an inbred oligarch can do it.
Sure you do. This house stopped smouldering and became a rager the day Obamacare passed. The central banks are selling all the cheap insurance in the world.
The math of the macro is never a quick trade. But it always works in the end.
The only way its cheap if you get taxpayer subsidy for the rest of us its sky high
Agreed, buying comprehensive auto insurance after my windshield cracks works for me.
US stock markets reached record highs last week. Question: does that make them riskier, or less risky? We think the former.
Considering that the market always eventually goes up (if you ignore inflation, which you can't measure anyway), no record high subsequently followed by a record high is a low probability occurance. It is obviously more probable than a record low followed by a subsequent record low.
What is of course different between the two is record lows are more quickly followed by record lows than record highs are followed by record highs (i.e. behavior is sawtooth-on-an-incline-slope-like).
In the normal scheme of things, the quoted statement is seldom correct, but when it is correct, it looks brilliant and obvious at the same time.
Holy shit you're stupid!
He's only here to prove that over and over again.
Faulty logic is easy to refute. Calling shit holy and making slurs does not refute logic. Try refuting the logic.
I really didn't think I needed to prove the obvious. Should have been enough to just call people's attention to it when they make foolish statements that ignore the obvious.
We had another one yesterday saying the "smart money" was selling. That so-called "smart money" is only smart at the point of the very last "all time high". Up to that one point, the "dumb money" buying the all time high is obviously the smart money.
Mutual fund salesmen call it "dollar cost averaging". And they're right to recommend it more than they are wrong to recommend it. That's the nature of a "probability". Inflation (complements of all mismanaged MOEs) makes it so. Slow rises vs fast drops makes it so.
When you consider "weighted probability" and no inflation, it's a push. But this essay didn't say that.
"We have now become used to so many years of utterly extraordinary monetary experimentation"
It isn't really experimentation. Bernanke wrote in 1988, that QE does not work.
1+1 ALWAYS = 2. There isn't anything they don't know already, simply from doing the math.
The Fed and Wall Street keep elevating the markets until everyone believes it's a new way of measuring stocks and everyone is on board. Then and only then will Wall Street let it fall.
They call it the "business cycle" but it's just their "farming operation".
S&P500 weekly - heading into the seventh year of this trend created by central banks and not by economic growth
http://bullandbearmash.com/chart/sp500-weekly-closes-straight-week-centr...
This fraud will end eventually - gravity always wins. Commodities tanking and the USD rocketing - the downside pressure is mounting.
This is some kind of smart-sounding stupid. Guess what, the markets will always hit new record highs. Why else do you think the Zero says, "sell now, no, sell nooooow, no, seeellll noowwwwwwwww." Let me guess, you recognize that "eventually" markets will hit new highs, they're just not allowed right now.
I'm not saying keep up the euphoria, but to continually rebalance your investments to protect the equity bloat from becoming oversized equity deflate.
I choose door #2: " ...a final and total catastrophe of the currency system involved."
Humanity desperately needs a reprieve from the vampire death-grip of ultra-wealthy sociopaths --even at the cost of mass starvation and social chaos.
I note that post-apocalyptic scenarios however, have always been exclusively depicted as utterly and permanently desolate. But as I've weighed and integrated every factor, particularly over these last seven years, I've come to the conclusion that enough people with a preparedness mindset, together with those with a more creative approach to problem-solving across a wide spectrum of human affairs, have begun to reach a sort of critical mass. Consequently, a total collapse of the present system, which now appears inevitable, will simply make room for a new sort of cultural renaissance.
The reason the leveraging and champagne flowing has not stopped is because those responsible for it have not been punished....YET. Hint - (it's not the average middle class Joe Six-Pack)
"You Don't Buy Home Insurance After The Roof Catches Fire"
Please... With Obamacare you do. You can not be denied insurance for pre-existing conditions so you should only buy insurance when you have to be treated for an illness. Financially, it is the correct thing to do. It is the Obamacare law.
So if I follow a tangent of this reaoning, free credit would be available for a real estate broker company I start whose mission is the purchase of say, Africa? All under radar of course, like the rest of the deals.