Guest Post: Playing Financial Chicken In Your Golden Years

Via Monty Pelerin's World blog,

My generation, born during or near post World War II, has been quite fortunate. Those of us lucky to have been born in the US during this period hit a sweet spot of both place and history. The economy thrived, standards of living soared and many avoided the numerous wars that dominated the Twentieth Century.

Today, the future does not look so bright. Economies are stagnant, standards of living are declining and the threats of war increase. Younger generations will have more difficult lives than my generation.

Life has its own ways of ensuring that TANSTAAFL (“There ain’t no such thing as a free lunch”) is enforced. My twilight years now present major challenges. The rise of big government has changed  retirement prospects in ways that few imagined. Many are still oblivious to what is coming and its implications on lifestyles, wealth and security. Those who believed they were financially secure are correctly revisiting this assumption.

The underlying premise of Trading To Armageddon  is that an economic and market debacle is unavoidable and likely to occur within the next several years. The timing of this event is impossible to predict. There are numerous potential triggers, some outside our borders. The crisis could happen as soon as this week, or it could take years to appear.

What Happened?


Intervention, stimulus and liquidity propped up the US economy and markets beyond levels that are sustainable. Like policies have been used in other developed economies.

For the last half-century government has pretended that it can manage an economy. Any slowdown brings the same reflex-action – expand liquidity and increase government spending. This response, according to Austrian Economics, is the source of the boom-bust cycle that now characterizes modern economies.

Decades of Keynesian interventions to prevent the business cycle have succeeded in weakening economies around the world. Each intervention was an attempt to prevent distortions to prices and asset allocations from correcting. In the attempt to prevent the corrections, government action added more imbalances. Today, most developed economies are filled with distortions and unable to operate efficiently, grow or create wealth.

The political interventions have reached their limits, at least in terms of covering up economic weakness. Trillions of dollars have been thrown at the current economic downturn over the last five years. There has been no recovery, nor will there be until economies purge themselves of the distortions. Cosmetics no longer work. The world does not have enough lipstick to cover this economic pig.

What Will Happen?

Governments of the world will continue to try to hide the damage. While this action may buy more time for the political class, it will do so at the cost of making the economic correction worse. The tipping point that ensures another Great Depression has been passed. Continued interventions will only make matters worse. Economies, governments and perhaps societies are likely to fail if political meddling continues.

Our “Wizard of Oz” government has no intention of admitting their mistakes.They will continue to pretend that they are “fixing” matters as they pour more poison into the veins of economic activity. Whether they stop willingly or they are stopped by a market collapse, a Great Depression will ensue.

What About Investing?

Investing, at least as we knew it, is dead! It died when markets became dominated by political rather than economic events. Investing principles that worked for most of the last 150 years are irrelevant in today’s politicized world. Who, for example, still believes that a “buy and hold” strategy is viable? It is still sold by hucksters. The surest way to make a million dollars in this stock market is to invest $3 million using a “buy and hold” strategy.

Traditional investors should not be in these markets. If they must, they should not behave as traditional investors.

Change Your Outlook on Investing

Most of what we learned about investing should be forgotten, at least until governments, society and markets return to honesty. If that occurs, it will be a multi generational process, As a result, no one alive today should consider himself an investor.

Don’t confuse Warren Buffet and his ilk with investors. They may have been at one time, but are no longer. They are political operators who utilize politics and connections to their personal advantage. Unless you are very big, well-connected and willing to pay to play, you cannot play in their league. If you fit the aforementioned categories, you already have forgotten about investing and are playing a more sordid but profitable game.

So what is the little guy to do? Either get out of markets or trade in a way that you protect yourself against the coming debacle.

Why Not Just Get Out Of Markets?

Getting out of markets is an option, although probably not a very good one. Government dishonesty, particularly with respect to currency, is an important reason why. As governments continue to throw liquidity into the system, two effects occur:

  • The money must go somewhere and will drive up prices.
  • The value of the currency declines.

Recently, money has been going into financial assets. Government is driving up the price of bonds keeping interest rates down. That forces yield-starved investors further out the risk curve and into stocks. Financial assets have been affected more than consumer prices at this point (particularly if you believe government CPI statistics).

Not being in the stock market today subjects you to a potential double-whammy — the opportunity cost of missing a run-up in financial assets and the loss of purchasing power from holding cash or near-cash. If you believe that inflation will become a major issue (and it is hard not to when the Federal Reserve has quadrupled its balance sheet and continues its expansion), then holding cash is the equivalent to deciding to become poorer.

A Gigantic Game of Financial Chicken

Investors, whether they know it or not, have been forced into a gigantic game of financial chicken. For those unfamiliar with this terminology, Wikipedia offers this explanation: :

The name “chicken” has its origins in a game in which two drivers drive towards each other on a collision course: one must swerve, or both may die in the crash, but if one driver swerves and the other does not, the one who swerved will be called a “chicken,” meaning a coward; this terminology is most prevalent in political science and economics. The name “Hawk-Dove” refers to a situation in which there is a competition for a shared resource and the contestants can choose either conciliation or conflict; this terminology is most commonly used in biology andevolutionary game theory. From a game-theoretic point of view, “chicken” and “hawk-dove” are identical; the different names stem from parallel development of the basic principles in different research areas.The game has also been used to describe the mutual assured destruction ofnuclear warfare, especially the sort of brinkmanship involved in the Cuban Missile Crisis.

The analogy is imperfect in the sense that the opponent (the market) is not an acting being whose well-being is jeopardized by its actions or inactions.

We are all forced to play this game whether we consider ourselves investors or not. Staying in markets is taking risk, but so too is leaving markets. If a person believes that liquidity will continue to drive up financial assets (until it no longer does) and drive down the purchasing power of money, then his biggest payoff is to remain in markets up to the point of collapse. Leaving too early is costly, and leaving too late could be even costlier.

No one should be forced to play this game. Retirees and near-retirees especially should be living off the income from a life of savings, not playing chicken to survive. Unfortunately, the government policy of financial repression (low interest rates) forces them into such a situation. The further policy of counterfeiting money makes the situation even more difficult.

Whether individuals abandon markets or stay in them, they are playing with fire whether they realize it or not. 

Which Position is Riskier?

Assessing risk is always subjective. Expectations regarding inflation, market upside, market downside and adjustment speed(s) should guide your course of action. The following comments provide an idea of how these considerations affect decisions:

  • If you believe that future inflation will not be serious, then you should only be concerned about the opportunity cost of missing a rise in financial assets. If you could be assured that your funds would hold their purchasing power, you might be inclined to leave markets early, preserving your purchasing power rather than trying to grow it and risk major loss.
  • If you believe that inflation will be severe, you should be inclined to stay in markets longer than otherwise.
  • If you believe that markets have much further to rise as a result of liquidity, then the opportunity cost of getting out is greater and you should stay in longer.
  • If you believe the market collapse will not be that severe (say 25 – 30%), you will stay in longer than if you expect a drop of 50+%.
  • If you believe the market drop will be gradual rather than rapid, then you likely will stay in longer and truncate your positions when the pain becomes too great.

In an honest world (where currency had integrity), I would be out of markets. But that is not the world we must deal with. As the great economist Frank Knight once observed:

We have to adapt and overcome, that’s all we can do. 

In Knight’s sense, we are mere pawns in some greater game. We must play the hand we are dealt.

The fact that currency is being depreciated around the world has implications that should not be ignored. The risk of high inflation, perhaps hyperinflation, can destroy anyone on fixed income or who stands pat believing his savings is enough.

At the same time, the potential for an economic apocalypse has never seemed greater. There have already been two 50% drops in stock market averages in the first decade of this century.

Because I believe that high inflation and a market collapse are real possibilities, I (and millions of others who believe similarly) am forced into playing the wildly dangerous game of financial chicken. When we should be enjoying our retirement and grandchildren, government has forced us to take risks that even wild teenagers likely would avoid.