Eric Peters: "We Are Investing As If 1987 Will Happen Tomorrow, Because It Will"

Excerpted from the latest weekend notes from One River Asset Management, courtesy of CIO, Eric Peters


People are no longer investing, they’re speculating,” said the CIO. “Is that wrong?” he asked, not waiting for an answer. “Depends on what you’re speculating in.”

Investors are implicitly worried about further price gains, they’re not really forecasting future fundamentals. “Investing is about estimating an asset’s fair value based on fundamentals, then forecasting what others will be willing to pay for those fundamentals.” But you can assign almost any value to the latter, and this means that for periods of time, fundamentals need not matter.

“There are a number of things that you’re absolutely meant to speculate in,” continued the same CIO. “It’s just that the universe of these opportunities is rather narrow relative to what people think it is.”

Paying a lot for everything is quite obviously foolish, but that’s where we are today. The only truly cheap asset class left is implied volatility. “People should be speculating in venture capital. Which is not to say that you can ignore price and value, but at least with venture capital you have a chance to make a lot of money.”

“Unfortunately, few people have access to venture opportunities,” explained the CIO. “Unlike decades past, new companies need very little capital to execute their business plans.” Years of regulation have discouraged smaller firms from going public. So the big platform companies gobble them up in private transactions.

“By owning Google and Facebook investors get access to innovation through acquisitions. Buying these big platforms is like buying closed-end venture capital funds. It’s one of the few ways to own a piece of the future.”


“We are investing as if 1987 will happen tomorrow, because it will,” said the CIO. “But we need to be long, or we’ll be out of business,” he explained, under pressure to perform. “So we construct option trades that are binary bets.” Which pay X profit if stocks rally, and cost Y if markets fall. No more and no less.

“What you do not want is a portfolio whose losses multiply depending on the severity of a decline.” That’s what most people have today. “At the last stage of the cycle, you want lots of binary bets. Many small wins. Before the big loss.”

Are we at the start or the end of the ‘Don’t know what I’m buying’ cycle?” asked the same CIO. “No one knows.” But we’re definitely within it.

“When their complex swaps drop 40%, and prime brokers demand more margin, investors will cry ‘It’s not possible!’ But anything is possible.” The prime brokers will hang up and stop them out.

“LTCM traded things they didn’t understand. They sold volatility swaps, which they thought were tethered to reality, subject to gravity. In theory, they are. But like many such things, they’re simply numbers on a screen.”


YUNOSELL Sun, 11/12/2017 - 10:51 Permalink

“LTCM traded things they didn’t understand. They sold volatility swaps, which they thought were tethered to reality, subject to gravity. In theory, they are. But like many such things, they’re simply numbers on a screen.”In Theory, theory and practice are the same -- in practice, they're not

The Real Tony Bokkenrijder Sun, 11/12/2017 - 13:27 Permalink

Buy "deep out of the money puts" because in theory the stock market should trip all the circuit breakers and the major excahnges should close for 2 weeks to a month with a reopen some 50 to 60 percent lower greatly eclipsing the 22 and hange drop back in '87. The second shoe has yet to drop from the '87 crash something that isn't talked about. A fifty to sixty percent drop would still leave the major indexes grossly overvalued.

In reply to by Bokkenrijder

Lore The Real Tony Sun, 11/12/2017 - 19:54 Permalink

There are vast hordes of commentators whose bread and butter is the ability to prattle at length without saying anything at all.  Rare is the FA who admits: "I have no goddamned idea what's going on."  The quality of mainstream market commentary is about on par with the quality of political discussion, which is to say, there is no quality.  The environment is increasingly predatory: everybody is out to swindle, squeeze and strip what they can from the system before it breaks.After all that has happened in recent decades, it's remarkable that the snow job still works for a lot of passive would-be investors. CHECK THE FINE PRINT. Know your place in line behind secured creditors. Don't get caught in the next MF Global. 

In reply to by The Real Tony

Richard640 YUNOSELL Sun, 11/12/2017 - 18:51 Permalink

BULLISH ARGUMENTS ARE "IRREFUTABLE" AT MARKET TOPS--THEIR LOGIC IS "IRON CLAD" No use's always the same-it's never different The end is nigh, brother, the end is nigh!  World markets are like a pie crust stretched across the roof of a volcano! Fu Manchu is about to pull the lever to the trap door! Warbucks signals the trusty  Punjab to cut the cords of the rope bridge!  Grease the skids! Happy tobogganing!

In reply to by YUNOSELL

Winston Churchill Sun, 11/12/2017 - 10:50 Permalink

Speculating in stawks and outright gambling in cryptos.Sure to end well,because its different this time, and it will be, a far worse outcome than ever beforein history.Easy come,easy go.

Lore The Real Tony Sun, 11/12/2017 - 20:02 Permalink

That presupposes that firms will sell the PM baby to cover the mainstream-paper-investment bathwater.  Considering the tiny size of the PM market relative to the broad stock/bond/derivative markets, that doesn't seem realistic.  More likely might be a panic scenario where everybody loses confidence all at once, like people racing from one side of a ship to the other.  I'm reading lately about the potential for a temporary "No Bid" situation, where there is literally no price and no working market. 

In reply to by The Real Tony

Mtnrunnr Sun, 11/12/2017 - 10:51 Permalink

the markets can stay irrational longer than you can stay solvent. The mere fact that funds think we're near the end means that we aren't. The day they capitulate is the day this ends.

Mini-Me Sun, 11/12/2017 - 10:54 Permalink

We don't have sound money, thanks to the Fed, and pretty much every market is hopelessly rigged.  Other than a small investment in mining stocks, I'm on the sidelines waiting for the inevitable reset to occur.

Winston Churchill Mini-Me Sun, 11/12/2017 - 12:42 Permalink

My grandfather, a very conservative swiss, never bought a stock in in the roaring twenties to muchridicule ,he steadily bought gold the whole time.He bought some amazing copper mines in Rhodesiafor pennies on the dollar after 1929 with that gold.Shame the family didn't sell them before UDI,but its the hare and tortoise philosophy.The temptation to go with the herd will kill you as it goesover the cliff.

In reply to by Mini-Me

Honest Sam jamesmmu Sun, 11/12/2017 - 13:07 Permalink

If CBs were damned they would not now exist.  That they are thriving, wearing out the numerical keypad on their I-Phones, with all the new digital Crypto currency just for the fun of it, should put the lie to that URL.CBs are doing just great and like no other entity on earth, they don't even answer to god. God consults them.

In reply to by jamesmmu

Dumpster Elite Sun, 11/12/2017 - 11:23 Permalink

When you read this guy, tell me how this is ANY different from how a handicapper constructs exotic bets at the race track. It is nothing more than fucking gambling. I've actually had this argument with a financial advisor friend of mine. He tells me, "Oh no, this is totally different. This is INVESTING. The racetrack is merely gambling." Bullshit...just because these guys are wearing fancy suits (paid for with your money), makes them no different than the guy at Aqueduct holding a Daily Racing Form.

Bobbyrib Dumpster Elite Sun, 11/12/2017 - 11:33 Permalink

It would be nice if truthful information was provided to make educated investment decisions. I think that is what is missing in order to label it investing and not gambling. Enron started manipulating their company's valuation with fraud and accounting tricks. Congress passed Sarbanes Oxley to act like they fixed the issue and the fraud and manipulation continues.

In reply to by Dumpster Elite

OverTheHedge The Real Tony Sun, 11/12/2017 - 14:53 Permalink

I spent a lot of my early years surrounded by racehorses, and I can tell you that the only way to know if it is a sure bet is with insider information. So, exactly like the stock market. The whole thing is a bit of a joke, in either market.

Either don't play by the rules, or don't play. Being a sheep will get you shorn and then served up for Sunday lunch.

In reply to by The Real Tony

Avichi Sun, 11/12/2017 - 11:42 Permalink

It is all STATISTICS & PROBABILITY folks - nothing more. Look at playing a "POKER GAME" of "PLAYING A STOCK", it is all "Normal Distribution" with 3-4 standard deviation (During a BLACk SWAN even that standard deviation can go up to 12), so as long as you know the RISK, just mitigate the risk and TAKE YOUR MONEY and enjoy.If someone thinks  "FUNDAMENTALS MATTER", they are grossly underestimate the "Value of Fuzzy Accounting Tricks" our "evilish Accountants" have come out with in  reporting "retained earnings". Think for a minute $SNAP clearly said "WE ARE A NOT PROFIT MAKING TRADED COMPANY", and still Speculators  "INVEST" in this company.Understand how the "GAME IS PLAYED", remember now the HFT (High Frequency BOTS), can trade millions of trades within a nano-second, and pinch "2cents on every trade, they are happing "MILKING" the unsuspecting.Watch this the RIDE , and get of the Horse when you feel satisfied.

all-priced-in Sun, 11/12/2017 - 12:00 Permalink

I have been buying 10 below the market puts & 1,000 shares of SPY - then if the market moves up sell a covered call If things crash to hell I lose a little - if they stay where they are or move up I make a decent return, but am not going to get rich with this strategy. Sad that lately I have wondered what would happen to my puts that expire 11/17 at 258 - if on 11/16 the market crashed to hell and they close trading for a few days - Say trading resumes on 11/20 with SPY trading at 200 and my puts are expired.  This is shit I would have never even considered before - What happened to all the options that expired with the market closed after 9/11? I assume many with an expiration of 11/14 must have existed - and the market didn't open until 11/17.