Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.
Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.
While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.
Earlier this month, value investor Mohnish Pabrai took part in a Q&A session with William & Mary College students. Q3 2021 hedge fund letters, conferences and more Throughout the discussion, the hedge fund manager covered a range of topics, talking about his thoughts on valuation models, the key lessons every investor should know, and how Read More
Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.
Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.
In this week’s edition of the WOW we’re covering shaky ground… literally
A quarter of a million bucks is nothing to turn your nose up at. And that’s about how much I’d be out of pocket if I was to be so unfortunate as to have a home in
shakyville Kaikoura, a speck of a town on the South Island of New Zealand, which itself is a freckle on the face of Australasia. I hear there are actually people living there but thankfully not many. I say thankfully because they got one helluva shake the other night.
So much so that it measured 7.5 on the old “shako-meter, and far north of Kaikoura on an entirely different island we had a 2AM tsunami evacuation ceremony complete with wailing mentions that “but Fluffy can’t swim” which, come the worst, wouldn’t help Michael Phelps let alone furry four legged animals.
It prompted me to take a closer look at some existing insurance policies. Lo and behold, I’d not looked at them in a couple of years and during this time high six figures have been added to insured assets.
That’s what happens. You pay no attention to things you think are trucking along just fine and then bam, all of a sudden with lights blaring and sirens flashing low risk turns into “holy mother of Mary whowouldathunkit risk”. Now don’t get me wrong, there hasn’t been a tsunami here in… well, forever. But that doesn’t mean one isn’t coming though the odds aren’t exactly all that high. Nevertheless, insuring a home for full value is common sense.
The thing with insurance policies on things like homes is that they’re typically fairly quantifiable, which is what makes insurance businesses such great businesses. Men with large brains, brown suits, and no personality are paid a lot of money to price the risk and they typically do a good job of it.
Gratefully the pricing of event risk in financial markets doesn’t rest purely on acts of God but rather on an entire market of participants. Participants who repeatedly get caught up in folly.
The intersection between folly and math is where asymmetry and thus profit lies. It’s where the equivalent of earthquake insurance costs less in the Ring of Fire than it does in the Svalbard Seed Vault, which is widely considered to be THE safest place on earth. It’s the equivalent of NASDAQ 5,000 trading at 194 P/E. It’s the equivalent of oil at $25 per barrel in the late 90s.
In other words it’s where when dispassionately viewing something you think to yourself “heck, this doesn’t seem right”.
And speaking of things which don’t seem right, the following chart is worthy of your attention:
This, folks, is what the biggest weekly move in 30 years for the good Dr. Copper looks like.
I mentioned it briefly last week when we took a look at the most important charts for the post-Trump market reaction. Dr Copper has moved more than 20% in just a few days and though you can’t see it from this chart it is still below its 2011 highs.
So while a Trump victory was unsurprising, even “ensured”, copper caught me by surprise. We’d been watching the consolidating wedge formation pre-election thinking “ah, yes this is beginning to look interesting…” and “then there’s the fiscal stimulus that’s coming” but in truth we didn’t expect what we got. A reminder if ever there was one that risk happens fast.
Hindsight being a wonderful, if not underused thing, it shouldn’t have been surprising. We’d anticipated a Trump victory and yet we’d not taken second level thinking to its logical conclusion. Worthy of a slap around the back of the head, I dare say.
A New Insurance Policy?
As I mentioned last week, the traditional safe haven trade has been to buy bonds. This would make perfect sense in any world where government finances didn’t resemble Mugabe’s Zimbabwe. And in fact it does make a little (but only a little) sense purely for liquidity reasons. In other words if, unlike you (presumably since I never know who ends up reading this) and I, you need to move a few billion dollars quickly, then seeking safety in the shiny stuff is a tad more difficult purely for liquidity reasons.
Events such as Brexit and the US presidential elections provide an opportunity to watch the markets’ reaction to these events, which in turn helps us identify or confirm potential changes in the zeitgeist. Changes which more often than not represent the new hedge, and when new hedges come into play – especially when it’s been out of favour for an eternity – the premiums go from low to whoah!
For some context: Remember that the collapse of the mid-2000s housing bubble set the stage for the subsequent commodities boom.
Commodities, it was reasoned, were a safer bet after the bubble economy saw housing in the US, UK, Ireland, and large parts of Europe collapse. Now, of course there were other factors such as rapidly growing emerging markets which contributed but the point I want to make is that the old boom led way to a new boom in large part driven by fear.
If I didn’t know better, I’d say that the market reaction thus far is skewed towards stagflation (rising inflation with weak economic growth). If you disagree, and before commenting on the blog here giving me all the reasons this won’t happen, I’d invite you to consider the policy moves taking place not only in Trumpland but elsewhere in the world. Then I’d invite you to pull up some long term charts on commodities.
Investing and protecting our capital in a world which is enjoying the most severe distortions of any period in mans recorded history means that a different approach is required. And traditional portfolio management fails miserably to accomplish this.
And so our goal here is simple: protecting the majority of our wealth from the inevitable consequences of absurdity, while finding the most asymmetric investment opportunities for our capital. Ironically, such opportunities are a result of the actions which have landed the world in such trouble to begin with. If you would like to invest alongside me learn how here.
“Getting life insurance is like making a bet you can’t win. If you live, you don’t get the money. If you die, you don’t get to enjoy the money.” — Oliver Gaspirtz