My mother tells me I predicted the housing bust. My father tells me I predicted the market crash in 2008. Readers believe I predicted the flash crash last year. None of this is true. I don’t predict anything. I can’t predict anything. No one can. But that doesn’t mean you can’t take highly calculated risks. The intelligent investor does not need to be able to predict the future. He/she merely needs to know when to fold ‘em and know when to hold ‘em. In the investment world, nothing is more important than knowing when to fold ‘em.
When I review the housing bubble I was far from predicting what ensued. I didn’t ever imagine the crisis that would unfold. All I knew was that there was a trend in US housing prices that was unprecedented, inconsistent with underlying fundamentals and unsustainable. I recognized a disequilibrium in the market. But my conclusion was not of the magnitude of “genius” like John Paulson, Kyle Bass or Michael Burry. No, my conclusion was far simpler. I just stayed away.
You see, playing with bubbles is a dangerous game. The difference between being John Paulson (who shorted sub-prime) and Julian Robertson (who shorted the Nasdaq bubble too soon) is a matter of months in the life of a bubble. Without a doubt both men are market geniuses. The difference, however, is that one had lucky timing and the other didn’t. I would argue that the truly intelligent investor simply pulls his chips back and steps away from the table for awhile in the midst of such irrationality. Warren Buffett is probably the best case of “don’t mess with what you don’t understand”. And in the case of bubbles, I would argue that no one understands the market’s behavior.
As I have previously discussed, market bubbles are the most severe cases of disequilibrium. It is the point in the market cycle where the system becomes highly unstable to the point of losing all linearity and entering an entirely chaotic orbit. This makes for a market environment that can be highly rewarding, but astronomically risky. But market don’t have to be in bubbles to be extraordinarily risky. What appears like a perfectly stable system can very quickly devolve into a nightmare.
With that said, are there examples of this in today’s markets? Are there markets that warrant a “do not enter” sign? I believe so. And if I were an investor in the following markets I would merely pull my chips off the table, take a long deep breath and walk away from the table.
1) China
China remains one of the great “if it’s too good to be true it probably is”. This economy is growing at a rate that is incomprehensible to most westerners. But the cracks have started to show in the facade. Between their reverse mergers, supposed GDP fraud, accounting scandals, highly flawed monetary policy and insanely inflationary fiscal policy (where they just build empty cities in the middle of nowhere) I have to wonder what breaks the back of this economy at some point? My guess is that inflation will rage in China to the point of public discontent and ultimately harsh economic repercussions. The bottom line: the risks of investing in China are enormous. For the majority of us, it’s simply not worth taking the risk.
2) Municipal bonds.
I don’t think there’s a major municipal bond crisis on the horizon. I’ve been fairly vocal about that. On the other hand, I have to accept the reality that the risk of a funding crisis is very real. This would most likely arise in the form of austerity due to politics, but the odds are that it could happen. With so many other options in the bond world one has to ask him/herself why they would bother taking the risk of buying municipal bonds? The mere potential for collapse in what is supposed to be a fairly low risk asset class is too much for me to bear.
3) Silver
This is not a popular call, but investing isn’t a popularity contest. The bottom line is that silver prices are on an unsustainable course. If I had to pick one bubble in the world today it would be the silver market. As is always the case, the fundamentals are always superb in a bubble, however, the market action never quite correlates appropriately. As I’ve said before, silver prices could double from here. On the other hand, they could also crater. I am going to invest in precious metals there are lower risk ways to obtain exposure.
4) European equities (particularly periphery nations)
Few things are more confusing in the world of macroeconomics today than the crisis in Europe. There is simply no telling if the region will collapse or unite. And while I think we are likely moving closer to some form of unity I have to also acknowledge that collapse is a very real potential. In the broad world of equities there is simply no reason to bother investing in European equities. This is particularly true for the periphery nations which are now serving as high beta form of their core brethren.
yogi- ‘its getting late earlier now’
your boy greenspan— “raise taxes- US debt crisis is imminent!”
http://www.automatedtrader.net/real-time-dow-jones/56755/greenspan-warns-of-us-debt-crisis-urges-end-to-bush_era-tax-cuts
Wow, greeny is really thrashing about to stay relevant. Now he’s trying to get a notch on his belt for calling a bubble (in US government debt, of all things)? And this from a guy who says that you just can’t predict these things….Why can’t he get on down to Del Boca Vista already?
I’m on PC’s side here. Risk assets are not worth the hassle right now. You’re essentially betting on QE3, which is a bit boneaheaded.
TPC: “You see, playing with bubbles is a dangerous game. The difference between being John Paulson (who shorted sub-prime) and Julian Robertson (who shorted the Nasdaq bubble too soon) is a matter of months in the life of a bubble. Without a doubt both men are market geniuses. The difference, however, is that one had lucky timing and the other didn't.”
As far as I know, Robertson shorted the Nasdaq outright, whereas John Paulson used the very cheap CDS insurance to short subprime. His timing was also largely off as he started already in 2005, but his choice of expressing the trade allowed him to stay in till 2007.
InvestorX
When does a banking crisis related to the mortgage/MBS mess become a large enough threat to join your list? It appears a collapse of the Mortgage Electronic Registry System with its 60 million+ mortgages is likely in the near future. Court decisions against the banks are accumulating. Huge investor law suits are ramping up. And main stream media is starting to cover the mess. The major bank’s potential MBS-no-true-sale exposure is more than their capitalization. Are you confident their next rescue, even in our current anti-bank political context, will shield us from risks associated with that potential crisis?
Correct on Paulson, but the size of his bet nearly broke his trade. As luck had it, it made him instead.
Standard & Poors didn’t get the memo.
The silver phenomena is now simply a refection of deposits built up during the credit bubble – people are simply transferring some of their accounts to silver money.
However the lack of silver on CB balance sheets makes this a problematic monetory metal. Its a form of true monetory rebellion against the priesthood which makes it inherently risky. That said every family should have a monster box if they have 6 -7 figure savings. PS I ain’t buying silver at these prices but euro gold is still at very attractive prices given the inevitable monetization coming down the ECB tracks. If they don’t your bank deposit Euros are dead anyway and a Euro economy based on just physical cash and checking accounts in circulation would be a very nasty place.
This author is right about one thing, an investor has to 1) gather the data and, 2) honor the data. An investor who fails to follow either of those two rules will fail.
On specifics, gold and silver are “fear-based investments”. As long as there is fear, those two will continue to rise and I don’t see any diminishment of fear anytime soon. People will ALWAYS flow money to safety in the midst of fear.
It’s stupid to believe that a mass of municipal bond failures or even one failure will occur due to what he calls “austerity due to politics”. These bonds represent communities not corporations. The citizens of these communities can’t simply fold up their tent like a corporation and continue life like people owning a corporation. The reason that municipal bonds have strengthened in 2011 is precisely because those politicians have decided to not incur more debt and balance their budgets rather than incur more debt with new issuance.
This author needs to heed his own advice and stop extrapolating situations to fit his beliefs.
managed money(speculators?) not responsible for silvers rise:
http://lakshmi-capital.com/blog/
I don’t see how a significant downturn in China or Europe will not affect almost all asset classes (including potentially real estate and municipal debt if the downturn is significant enough). There’s too much correlation these days between world markets, markets & commodities, and even global markets & local economies. If the downturn is significant enough even PMs tend to correct, as happened in 2008.
Avoiding China or Europe but being long America or EMs or even commodities means effectively betting China / Europe are due at worst tepid growth / soft landings, but not negative growth / hard landings. A hard landing in any major market is going to ripple through to all markets.
Bottom line, there are fewer and fewer non-correlated, non-intertwined markets as time goes on.
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Though not as actively covered as once upon a time, has anyone been keeping up with the latest Consumer Metrics Institute readings?
http://www.consumerindexes.com/index.html
So, where is the [credit] expansion?
â–º The reported headline number comes exclusively from seasonal adjustments. The unadjusted total and 5 of the 7 unadjusted subcategories show continued contraction.
â–º The only category showing substantial growth is student loans.
â–º While it might be nice to think that student loans are replacing unemployment checks, even that assumption doesn’t pass credibility tests when you look back further in that series. Since 2008 that line item has grown by nearly 250%. That kind of growth in total outstanding student loans over a three year period simply doesn’t pass the “smell test,” given that Federal Student Loans have been a staple of higher education since the passage of Title IV of the Higher Education Act of 1965 — nearly a half century ago.
That’s why shorting is so dangerous. You can go long and just wait for the chips to fall.
I agree with China in 5-10 years. Agree on munis and Europe. Silver call though, I think long term the price will settle in the $40-50 range for the next several years.
Although it could explode in a true bubble past $100 and change.
I will maintain that the bubble is in government paper, not hard assets. Once that is accepted, and that is beginning to be the case, then things will have to be repriced, to the upside…
Bubble in student loans (Sallie Mae)? See http://www.nytimes.com/2011/04/12/education/12college.html?_r=2&hp
Yeah, isn’t that nice. We are saddling our kids with debt….
“The burden of debt is no more when someone else foots the bill.”
Education keeps getting more and more expensive. Just this past weekend a local university announced that tuition rates will be raised 10% starting this fall semester; but this announcement will not deter the neophytes from getting into debt since the pols have now made higher education a right for everyone.
A student loan is easy money for the universities and the pols will go along with ANY rate increases. Rinse and repeat.
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