Tuesday, April 21, 2009

Ten Principles For A Black Swan-Proof World / My Take / Gold & Silver Update From The DR

I'm almost home... 2 sleeps and a wake-up will put me back in Phoenix, add1 more sleep and a wake-up and I'm back in the studio. The whole plan to pontificate over endless espressos' and my laptop from a shady street-side cafe while sending you deep, insightful, meaningful posts pretty much went down in flames, but hey, Chin Up! it's not your fault, not really...

Before we get to the 10 Principiles, let me say this...

I miss trading but I do not miss sittitng in front of the screens all day.

I still don't trust CNN, I trust CNN Europe even less, yet somehow I quite enjoy it, perhaps because of its Disneyesque nature.

The world is a big place and I think we all owe it to ourselves and the world to see as much of it as we can as often as we can with people we love.

No matter where you are right now, or where you go tomorrow, do your very best to brighten that corner of the world. (I learned that from a wise man - thx david)

See ya' Friday morning LIVE from the underground studio of CFRN!

Bon Jour

Ten principles for a Black Swan-proof world

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

The writer Nassim Nicholas Talebis a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable

Silver Taste. Base Metal Money.

By The Mogambo Guru


04/21/09 Tampa Bay, Florida Dominic Frisby of MoneyMorning.com writes, “According to Jeff Christian of commodities research firm CPM Group, investors bought 70m ounces of silver in 2007; 100m in 2008; and based on current trends, they’re on track to buy 180m ounces in 2009.”

Mr. Frisby goes on that demand for silver is so great that the Barclays iShares Silver Trust has “completely filled up all the storage space foreseen in its custodian agreement with JP Morgan Chase, London. In fact, as of this past week, SLV reported its silver holdings exceeded the amount of silver JP Morgan is obligated to store for SLV.” Wow!

Demand is so high that they ran out of room to store the stuff! Yow!

Mr. Frisby apparently sees me taking this fact and going directly into a Screaming Mogambo Rant (SMR) about how people should be buying silver because it is such a raging, screaming bargain, but they are not, proving that they are idiots. Idiots, I tells ya!

Cleverly heading me off, he says, “Goodness knows where SLV are going to put all that extra silver, but the point is, investor demand is soaring and the price is not” which is usually enough to again get me predictably bellowing that the price of silver is insanely, insanely, insanely low before getting right in your face to demand to know why you are not buying some silver right now.

And then, if I don’t like your answer (“I don’t have any money!”) or your attitude (“Go to hell!”), I will subject you to a scathing examination of your intelligence, or lack thereof, hopefully in front of your kids so that they will learn a…Read more…

Bounce to Nowhere?

By Rob Parenteau


04/21/09 San Francisco, California The message from the March/early April macro news continues to be one of the free-fall phase ending, while the economy remains in a severe recession. Retail sales, for example, though disappointing in March, are stabilizing on a year-over-year rate of change, while the six-month rate of change is struggling back from an over-20% pace of contraction. Consumer spending is looking like it will grow 1-1.25% in Q1 real GDP, and a sequential 5-5.25% retrenchment in Q1 real GDP will mark a small improvement from Q4 2008.

To be sure, the larger theme we believe will dominate the consumer sector is the need to reduce leverage, which will require a higher gross saving rate than households previously achieved. In a recent issue, we introduced a base case estimate that $1.2 trillion of household debt would need to be paid down over the next three years to return the household debt-to-income ratio to the pre-housing bubble trend. French banking group Societe Generale, however, estimated that a return to the trend of the past five decades would require nearly twice that level of pay down we expected. The key point here is that the consumer contribution to any future recovery is likely to be muted by these debt head winds, regardless of the degree of fiscal and monetary stimulus applied. Equity investors using the regular playbook and running into consumer discretionary stocks should make sure their long-run earning growth expectations reflect this…Read more…

Getting in the Spirit of the Depression

By Bill Bonner


04/21/09 Buenos Aires, Argentina Just got back from our trip to the ranch. (About which, more below…)

As near as we can tell, the financial world conveniently remained on hold while we were gone. As of Sunday night, little had changed. Gold, stocks…economists…politicians – they’re all about where we left them. That is to say, the bear market rally on Wall Street continued. The feds continued to pervert the economy with their bailouts. Economists continued to call a spade a petunia. And politicians and commentators continued to blab and bluster about nothing.

But yesterday, the rally on Wall Street got smacked in the chops. The Dow fell 289 points. Oil dropped to $45. Investors were selling stocks – mostly financials – and turning to the dollar and gold for safety. The dollar rose to $1.29 per euro. Gold returned to $887.

The most important fact still sits like an alien spaceship on the White House lawn – so monstrous and dumbfounding that people don’t know what to make of it…so they simply ignore it. The U.S. government is spending $13 trillion – nearly an entire year’s output – to ‘fix’ the problems caused by the worldwide financial meltdown. Of course, they can’t actually fix anything. Companies that are losing money are still going to be losing money. Investors are still going to take losses on stocks and bonds that were overpriced. Bad debts are still bad. Bad investments are still bad. A kiss is still a kiss. A smile is still a smile. Time goes by just like it always did.

But this $13 trillion of extra spending is bound to have some big effect. What?

A…Read more…

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