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Buy The Fear (And You Will Be Protected From The Horror)

Tyler Durden's picture




 

Excerpted from Artemis Capital Management letter to investors,

The rise of central banking is the death of empiricism. The Federal Reserve is arguably the most powerful organization on the planet and is the economic rudder of the global economy. The decisions made by its members effect anyone touched by capitalism from the garment worker in Bangladesh all the way to the investment banker in London. By design, board members are not democratically elected and independent from the oversight of the executive and legislative branches of the US government. The voting membership of the Federal Open Markets Committee is dominated by members with predominantly academic or policy backgrounds (Yellen, Evans, Fischer, Lacker, Williams, Brainard, Tarullo, and Powell) with the remaining deriving their experience as Wall Street economists (Dudley, Lockhart)(32). This means the most powerful economic body on earth has little diversity in its intellectual ranks.

No FOMC board member knows what it means to be an entrepreneur. No FOMC board member has a record of accomplishment as a great investor. No FOMC board member has started or run a successful global business. No FOMC member has led a corporation through a crisis.  It may be time to consider whether economic leadership dominated by academic theory as opposed to empiricism is making things worse. I don’t claim to have the answers, but the empiricist knows what they do not know, and this is more than I can say for policymakers today.

Global central banks have made a Faustian bargain with our economic soul selling our future for a false stability today. At this stage, absent continuous intervention, a large deflationary crash in the global economy is inevitable. The greatest risk is that if central banks continue a policy of competitive devaluation and hyper-asset bubbles the end result will be an even more devastating crash, followed by sovereign defaults, and then class warfare. The next Lehman brothers will be a country.  The real ‘shadow convexity’ will not come from markets but political unrest or war. Never forget that Hitler rose to power by harnessing the anger of a humiliated German middle class and abusing constitutional authority granted from a decade of economic devastation and money printing.

The Federal Reserve is better off ending the Prisoner’s Dilemma by engineering a painful but manageable global recession today rather than risk an uncontrollable tragedy tomorrow. Absent such drastic actions, volatility will manifest itself first through hyper-asset explosions on the right tail, followed by a deflationary crash and sovereign default on the left tail. It may already be too late. History shows us that economic recovery from a depression has never been successfully engineered without major debt reduction, devaluation, default, hyperinflation, political revolution, or world war. To this extent, it is very likely this Prisoner’s Dilemma will end in one or more of these outcomes.

Peace is not the absence of conflict. Global Central Banks have set up the greatest long volatility trade in history. It is impossible to know with certainty when the volatility will fully manifest but the cost of holding the trade is far less than exponential pay-off. The longer the delay the bigger the payout will be. What is known is that at some point in the future a government or central bank will be asked to step up to a crisis and will either be unwilling or unable to do so, economically or by populist revolt. The markets will re-leverage in anticipation of policy support that will not materialize… the spell will be broken… and the collapse will be epic. You need to own volatility on both the right and left tail of the return distribution before that day happens. When markets are euphoric buy optionality to protect against deflation … when markets are crashing buy optionality to protect against hyper-reflation.

 

More important when volatility doubles... don’t short it... keep buying it until it quadruples. Buy the fear and you will be protected from the horror.

Do this consistently and dynamically and your portfolio will become a global macro straddle that, when combined with traditional asset classes, will result in a profile that is positively exposed to all forms of crisis. You do not know it yet... but your greatest asset are the risks the world is hiding from you. You need to assemble a collection of the most dangerous outcomes in the global economy... and try to make them do some good.

 

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Tue, 10/13/2015 - 12:59 | 6663260 kralizec
kralizec's picture

I'm staddling someting else entirely right now...I'll get back to ya...

Tue, 10/13/2015 - 13:18 | 6663294 FireBrander
FireBrander's picture

"Once the Fed initially raises rates, the economy will accelerate through the first couple rate hikes, giving the Fed a "better and more stable" platform from which to continue moving toward interest rates that are more in line with historical norms" - Drew Matus, deputy chief U.S. economist at UBS

I'm sure Drew is pulling down 6 figures even though he's clueless...soulless and capable of lying for "6 figure compensation" must have been in the job description.

Hey Drew....Rates rise, economy tanks!

Housing leads the way followed by the auto industry...and then the Government finances go KABOOM as the cost to finance our debt gets out of hand...

http://finance.yahoo.com/news/ex-feds-fisher-fomc-egg-112055256.html#

PS. Hey Drew...if raising rates would "accelerate the economy" and provide a "stable platform" for more rate hikes...why is the FED so hesitant? Either you, or the FED is clueless as to what happens if rates increase...

Tue, 10/13/2015 - 13:21 | 6663342 Falling Down
Falling Down's picture

Just wait 'til the piss ants blame Q3 numbers on the storm and Russia. Or something.

Tue, 10/13/2015 - 13:50 | 6663441 Nenad
Nenad's picture

Obama will not finish his second term! Banned independent documentary reveals the truth. This will scare millions! Current Events Linked to Ancient Biblical Prophecy!

http://motivationdose.com/is-america-babylon/

Tue, 10/13/2015 - 13:09 | 6663300 two hoots
two hoots's picture

Not a nuclear war, climate change, Y2K, ebola virus, that destroyed life as we know it,  no, it will be the Federal Reserve/CBs/IMF.

Tue, 10/13/2015 - 13:30 | 6663374 Consuelo
Consuelo's picture

Reverse cowgirl...?   Inquiring (lecherous) minds MUST know...!!!

 

 

Tue, 10/13/2015 - 14:20 | 6663531 kralizec
kralizec's picture

Naughty Russian girlfriend, Ivana Fokin...  ;)

Tue, 10/13/2015 - 15:31 | 6663880 Tall Tom
Tall Tom's picture

Then she had best be straddling you...

 

Or...What?

 

Is she wearing a strap on?

 

You cannot be serious.

Tue, 10/13/2015 - 13:03 | 6663270 LawsofPhysics
LawsofPhysics's picture

The only things that history teaches us are;

1) that which cannot be sustained won't be. and

2) Technology changes but human nature does not.

hedge accordingly, because despite all the bullshit propaganda, debts will be cleared (one way or another) and scores will be settled.

same as it ever was...

Tue, 10/13/2015 - 13:06 | 6663290 Money Boo Boo
Money Boo Boo's picture

you forgot

 

3) the greased pole goes in only one hole and usually sideways

Tue, 10/13/2015 - 13:10 | 6663303 KnuckleDragger-X
KnuckleDragger-X's picture

I believe in positive pessimism, hope for the best, but plan for the worst. I have very little hope left, but my plans are as ready as they'll ever be.....

Tue, 10/13/2015 - 13:19 | 6663335 Oldballplayer
Oldballplayer's picture

With my luck I would buy the six sigma stuff, the market would tank and I would become a millionaire.  Only to find out that the markets are broke and no one gets paid.

"Eff you very much."

Tue, 10/13/2015 - 13:25 | 6663358 Bemused Observer
Bemused Observer's picture

They wanted growth at any cost. They got it through debt. Now everyone is maxxed-out, and they aren't taking more loans.

So now they have a choice...the debts can be repaid, slowly, over time. This will put the brakes on any growth until the debt is cleared. This will take longer than several bankers lifetimes. But eventually the debt will be cleared and growth will resume. Of course, all the accumulated wealth of the banks will be sucked up trying to survive till then.

The debts can be defaulted, forgiven, or restructured significantly. This will return us to growth, for the time being anyway. The banks will take an immediate painful hit, but can quickly resume their upward momentum as the new growth fills their accounts again.

Either way, the banks are going to take it in the ass on all their debt income. Do they want it hard and fast, with a speedy recovery? Or would they prefer to drag this thing out for decades as they are slowly bled by the snowball of defaulting loans?

Tue, 10/13/2015 - 13:31 | 6663375 Beam Me Up Scotty
Beam Me Up Scotty's picture

"This will take longer than several bankers lifetimes"

Speaking of lifetimes, did you know that if you were one of those filthy rich assholes making a million dollars a year that it would take you about 72,000 years to catch up to Warren Buffet???  And thats assuming you weren't paying any taxes.  Double it to 144,000 years if you factor in the taxes.  Just to put things in perspective.

Tue, 10/13/2015 - 15:42 | 6663928 madcows
madcows's picture

I disagree.  The banks won't be taking it in the a$$.  You and I will.  The banks will be just fine.

Tue, 10/13/2015 - 13:37 | 6663390 yogibear
yogibear's picture

Federal Reserve rate hikes are about as probable as seeing a mermaid in the ocean for the next several years.

Tue, 10/13/2015 - 14:18 | 6663525 o r c k
o r c k's picture

Moarmaids a-poppin'

Tue, 10/13/2015 - 16:26 | 6664103 bid the soldier...
bid the soldiers shoot's picture

Buy fear
Sell hope

One of the oldest but infrequently heard of the market's axioms

Tue, 10/13/2015 - 17:25 | 6664323 stock market loser
stock market loser's picture

Hyperinflation. Negative interest rates . Soaring real estate and stock market. Dollar collapse.  Social unrest, revolution and killing the elites. Bankers will be shot out of the sky with bazookas. 

Tue, 10/13/2015 - 23:18 | 6665621 Dr_Snooz
Dr_Snooz's picture

"When markets are euphoric buy optionality to protect against deflation … when markets are crashing buy optionality to protect against hyper-reflation."

"Do this consistently and dynamically and your portfolio will become a global macro straddle that, when combined with traditional asset classes, will result in a profile that is positively exposed to all forms of crisis."

Yikes! This sounds an awful lot like trying to predict when the grenade will go off and where the shrapnel will land when it does. It's a very difficult endeavor and highly dangerous if you're wrong.

Me? I'd rather flee the building. The world economic order is collapsing. I'm working out of the system by investing in land, away from populated areas, that I can grow food on, as well as tools to work that land. It's less exciting than dodging shrapnel, but a lot safer.

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