New From Epsilon Theory: ‘Things That Go Bump In The Night’

18 thoughts on “New From Epsilon Theory: ‘Things That Go Bump In The Night’”

1. So, I read this, and it confirms much of what I know from just observation.

   The thing is, as a “non-professional” investor, here’s what I take from it:

   1) professionals are not necessarily – and in fact, seldom – good sources for advice given the current financial environment.

   2) no one is going to watch out for me other than me (I’ve known that for many, many years).

   3) be prepared for stuff to go sideways, through the barricade, and down the cliff.

   4) take steps to minimizee damage to your portfolio from that near-certain event.

   So, here’s my question . . . I can’t trust experts, I can’t trust institutions, and I can read literally dozen of opinions telling me how to prepare. Precious metals and crypto-currencies aren’t somethign I’ve ever considered nor would I consider them now.

   Other than being mostly into cash and sitting in the corner waiting for the effluent to hit the rapidly spinning blades, what is the “regular investor” supposed to do?

   I mean, cash is great, but when inflation hits (as apparently everyone thinks it will) it will gnaw at that cash horde.

   I could try real estate except that I can see the same borrowing patterns now as I did in the mid 2000s. I could go down the list, but I’m repeatedly told we’re in a new era and something we’ve never seen before and hence the usual approaches to minimize risk won’t work.

   Understand, I’m not asking for detailed advice, but the above piece ends with:

   “But I know that the Fed won’t prevent it, because the Fed isn’t your protector, and that’s what you should hedge against in an intentional, systematic way.”

   . . . right after it dismantles all the “standard” hedging. When I read we need a new theory or approach to handle the changing and erratic financial environment that’s resulted from heavy manipulation, it tells me we don’t have one yet, and that one is not forthcoming anytime soon.

   Is the underlying message that we’re basically screwed and no one knows what to do?

   1. Trader Kid

      1. Yes! We took over 50 years to screw ourselves. we are not going to come out of this without paying the price. Diversify in every aspect of our lives.

         1. Diversify is good advice . . . but Epsilon Theory has a number of articles dealing with arguments as to why that’s not going to help (unless you hit a mythical sweet spot they admit is difficult to do).

            My approach (for my age) is capital preservation, so right now I have very little exposure to risk (and missing out on all the exhuberance).

            The concern, frankly, is not the market, stocks, bonds, etc.

            The concern is what does this country look like in ten years? I’m asking both with respect to finacial and political considerations, especially since the two are inexorably tied at the hip.

            I hear people speak about the shit hitting the fan and “we’re going to pay the price” but there’s no details forthcoming as to what that even means. Are we talking riots on the streets? Or just that for a few years we won’t be able to count on making money in the market? Or both?

            I know there’s no crystal ball, but it’s a tad annoying continuously reading about this “price” we’re going to pay and no one explains what that is, exactly. The spectrum of possibilities seems to range from a stock downturn (most people don’t own stocks) to a failure of the political and social system (that would affect a lot of people).

            1. Disperser,

               I wish I could write as well and as fluently as you do. Nevertheless, here it goes.

               Governments will lose credibility and governments will change and will be replaced. However, I don’t believe, there will be confiscation of personal assets, unlike other society, that does not seem to be in American DNA. Here people generally want to be the next self made millionaire, instead of taking from the guy who has already made it.

               Our future generations may not have it as easy as we had because our standard of living was based on unearned borrowed money and money created from thin air. Our kids may have to earn it and compete for their standard of living with the rest of the world. However, we will still be the best nation on the planet to deal with the coming storm.

            2. Perhaps it’s because English is also my second language, but I don’t see anything wrong with the fluency and quality of your writing.

               I like the optimism that you have and – truth be told – I have a fair amount of optimism as well but it’s for the long run.

               The US (as a country) in its history has faced all sorts of things that could have derailed it and in a few instances, it nearly did. So, yes, there is some backbone to the American people and the professed ideals enshrined in its psyche . . . but even that is under attack.

               While I still hold hope, tribalism, identity politics, class warfare, all seem to be aplified by the advent of the Internet and the 24-hours news/opinion channels.

               Meaning, while I think we have a good chance to weather all this and what’s coming next (whatever that is) it still means that a lot of people will go through some short-term very unpleasant hardships. And yes, many generations of people have experienced the same or possibly worse in the past 200+ years.

               So, yes, we (the people who follow us) will likely survive and perhaps even prosper, but in the interim it’s not going to be much fun for a whole lot of people.

               Anyway, thanks for the conversation.

      2. Trader Kid?

         See, this is where I profess my ignorance; I don’t even know what that means.

         1. Hi Disperser,
            It was just an error, I could not figure out how to correct. My apologies.

            Getting back to our discussion, Given the proliferation and debasement of our financial systems, easy money, deficit spending, and political expediency, we have had in the past, I believe, there is a certain inevitability for a lot of pain. I am a newcomer to this beloved adopted country. At the end I still believe we have lot of good decent hardworking and honest people in this society with great civic values. We do have the best legal framework, national institutions and generally high moral value in our society. We will recover and rebuild. Once the dust settles, we will still be in a better position than the rest of the world.

            Personally, I have no debt, some rental income, a very diversified portfolio in large national international companies and 50% in cash and short term t-bills, still do some short term trading in Mo Mo stocks. Just my two cents.

         2. I can agree on some of that when speaking about individuals. Less so for larger groups.

            Personally, I’m very conservatively positioned (or what I think is very conservately positioned) with 1/3 equities (“stable” companies with deep pockets and dividends), and 2/3 a combination of cash and overlapping CD ladders. I’ve not had any debt since the middle 1990s and even right now I’m in between houses as we’re looking for a place to go and live (in no rush, at least for now, as we’re in Hawaii).

            What I mention about larger groups is what worries me both on the personal level and politically. As an example, I watched large unions get exclusions and waivers from certain ACA rules that apply to others.

            During the financial crisis I watched governments bail out pension plans and companies while the individual investors took the hit. My own losses were never actuated as they were paper losses but that was also because at the time I was working.

            I’m now retired and I’m called overly conservative for keeping enough liquidity to allow me to live for six+ years without touching investments.

            Per my (conservative and overly pessimistic) calculations, I only need a 3% net return (post inflation) for our savings to last into our 90s (uunlikely we’ll live that long, but that’s the plan).

            So, looking at all that, I’m not personally worried . . . and yet, if enough people get hurt, they can pressure the government to do certain things that will affect me ond others with savinsg. Things other countries who are hurting are either considering doing or actually doing. Things like penalizing people who did save and were prudent in their affairs.

            Although I don’t see it in the current environment, some people happily speak of the government taking over private retirements accounts. In view of so many states being in the deep crimson with their pension liabilities, it’s not outside the realm of possibility that at some point the majority of voters might be in favor of something like that, especially since the majority of voters have little to no savings for their own retirement.

            It sounds paranoid but this isn’t me reading some conspiracy theory. Some people are outright hostile to the idea that a few have savings and politicians are going to feel increased pressure to “help out” all these poor people who spent money they didn’t have and all these poor states who promised money they didn’t have based on projected returns that were pipe dreams.

            So, when I ask about thei “price” we’re going to pay, I’m asking because if the price is that a lot of people lose a lot of money in the market because they took unreasonable risks based on unreasonable expectations, well, crap, I don’t really give a rat’s ass. Sure, it won’t be pretty, but we’ve gon through that before.

            But, if the price is that the government will look at a large pool of money (pensions and IRA accounts) as a way to help out the majority because things really went to shit, well then, that’s a different story.

            Realistically, I probably can’t do anything about those extreme cases, but I still wonder what articles like the above and many articles on this blog speak of there being hell to pay.

            And even then, when I read possibilities for $30T debt and runaway inflation what does that mean in terms of how that will change financials systems and policies both here and abroad?

            Anyway, I read these kinds of posts and blogs to try and glean some measure of understanding for the dynamics of institutions that are well beyond my current understanding in both scope and dynamics.

            Unfortunately, often, all I get is more confused.

2. I keep coming up with the same question about a lot of articles I read here. “Here’s the problem; it’s new and different and nobody knows what to do about it, maybe. ” People have always invested their money in different things, but all of the usual avenues seem to be throttled. If stocks, bonds, savings accounts and cd’s aren’t workable, what do you do?

3. It has always been “different this time”, which is why we “don’t know what to do”. One thing that isn’t different this time, is that all of us are simply emotional monkeys who will eventually react to our fear and greed like we always have….buying everything, selling everything…then repeat.

   1. Yes and no . . . $15T (some say $22T) has made a mockery of the whole thing.

      I mean, even as I invested and did OK (not great, but OK) I always knew it’s a made-up quasi-ponzi-scheme game we play that is real because everyone pretends it’s real.

      Now, we’re not even pretending anymore. I think (from a non-expert point of view) one of the reasons we are at this point is that most people realize it’s a game but also believe the people who control it can’t afford to have it crash and burn. Literally.

      I’ve noticed that people with money react pretty much consistently . . . as they make and have more and more money, they become more and more protective of it (why the trickle down notion if a bunch of crap). And yes, I hear the arguments that no one can control the market, but because it is a game, it’s sensitive to bluffs and faints, and even a few well-chosen words can send it either way up or way down.

      You may be right that it’s always been like this, but the game was played by rules one could somewhat understand. Even someone like me, without direct ties to the financial and political systems, could gauge risks and rewards and discern a strategy based on my own personal goals.

      Now, some idiot (literally) will make a comment and the indices will swing a few hundred points in either direction, sometimes within a few hours. How the heck does one plan for that? My thinking is not to play the game, but that too has long-term consequences.

      . . . perhaps we are screwed . . . I would say “fucked” but I don’t like to swear.

      Not that long ago all I’d hoped for is for it not to go completely off the rails and sort of limp along for 20 years or so. Now I can’t even imagine a couple of years without things getting absolutely absurd.

      From that standpoint, all I really would like to know is what to expect. And by that, I don’t mean with the markets . . . I mean on the streets and at the stores and in towns and cities.

      For instance, one part of me can’t believe that fully half the states will have to declare bankrupcy within the next (X) numbers of years and that half the people (literally) might have to declare bankrupcy because they won’t be able to pay their loans and that the government itself might “run out of money” (whatever that means since they can print more).

      But, if I look at the numbers, that’s what I’m forced to conclude. It’s not a pretty sight and it speaks to . . . well, I don’t know. We’ve not been here before.

4. A warehouse full of plywood, located in a town on the path of a hurricane, is always a good investment.
   In other words, protection is in the eye of the beholder. Asking for specifics from another person just won’t apply to your needs.
   I’m thinking about ammunition, OTC drugs, first aid kits, salt and a few paired sheep. But then I have the room for that stuff. And I’ll only lose money in upkeep on the sheep.
   See, specifics.

   1. Not asking for specifics about what to do . . . asking what people are thinking might happen at the street level. Even a hint would help.

      1. Two years ago, would this question even come up? Today, I think about it daily. Not so much for me, but for my children and grandchildren. Here we are, probably on the doorstep of another presidential impeachment, the third in my lifetime. And all the while, the “leader of the free world” is probably raising black swans on the White House lawn. When the conflict comes, guess which faction will have the guns? Disperser, your concern is my concern, this will not end well.

         1. ” raising black swans on the White House lawn”

            What a great line. Hope you don’t mind if I use that sometime.

            We are in the process of transitioning into being a ‘global tribe’, especially the Northern Hemisphere, mainly thanks to communication and data processing technologies. Yet, we have the clown in chief running around trying to build walls of all kinds when it comes to trading with our friends (but not Putin. When it comes to the Russians, the Donald seems to spread his own ass-cheeks in anticipation). America first, will end up being America alone. Look at what he has done to the TPP, the climate agreement, and NAFTA.

            All revolutions have had economic origins. When the inequality in a society reaches a critical level and enough people have nothing to lose, then you get revolution; the American, the French, the Russian. When? Like always, timing is everything, but I can’t help you with that.

5. WOW! Well, for starters, what a great article … and I think I understood most of it.
   Then, what a great set of comments … or scary set of comments .. depending on?
   So – having exactly ONE option (a call on F promoted by the Najarian bros. – total disaster) under my belt, I cannot claim to have the experience to answer the question posed here about hedges. I will try to follow you all and glean some sort of plan (plan for change, then change the plan) from your sage advice.

   However, having some years of experience to draw from, I would offer the following:
   Until the masses (94% of whom are armed with some sort of lethal weapon) rise up in revolt (and then we will need the paired sheep, ammunition and, perhaps, a moat), I project that those with enough money (like myself) will require continuing healthcare regardless of the ‘health insurance’ available at the time. I am invested in hREITs which have two characteristics: They are not dependent on Federal or State healthcare insurance, and; They have as much rental space in variable-rate contracts as possible. VTR is my best example. These equities are losing value like crazy in this environment – but, if you believe in the premise that folks with money will take care of themselves in this way, then they present a continuing opportunity to buy, buy, buy at better yields every day … and will pay you to wait while collecting dividends. Opinions?

   I’m also convinced that China is serious about allowing the folks in Beijing to breath easier, and so am moving some of my portfolio towards MLPs which move, ship, and sell LNG. US produces much of NG and this seems to be a reasonable way to play the China ‘clean up’?

   Other than that, I’m trying to ‘clean up’ my own portfolio and moving towards a strong cash position. I wouldn’t have any idea how to ‘short’ volatility – but the concept of “put spreads” seems to make some sense to me. I am not certain that I would understand how to implement them.

   If you’ve followed me so far, then thank you. I will continue to follow y’all in the hopes of learning something of value .. and perhaps implementing it. I’m not ready to retire to the bomb shelter quite yet … but I would like to learn how to prepare for the ‘expected worst-case’ if I can. r.

6. Boy is my head swimming. I have limited knowledge and even more limited advice but I will tell you all this much — whatever I have I got from real estate and the secret I learned is solid smart people management for that real estate – starting when everything was going up condominiums which typically were fairly short term residences for your college kids and within a few years they were moving out, the family sold them (good buys!) so you pick up a few – some you keep and rent and some you fix and flip. Market was always pretty good for that resale – always someone headed to college, good rental management required.

   Then you stumble into managing a large condo owner/resident property and then they eventually want out and soon more than 75% is rental units so you take over additional rental management of those units and another few years drift by and the rest of of all owners would like to sell – not that many now – and put the entire property on the market, great high dollar area, all solid plus and sell as is and that buyer wants to continue the proven rental track record right there. So you roll along for a short time — during all these phases you steady made good cash, picked up a couple of good buys for yourself, good percentages on sales and monthly rental income/management fees (license is required). You made a decent dollar and worth the effort. The fun was free!

   Now you have some bucks in the bank, relax a couple years. Feels good. Ok, times up and need to get busy again. You can see how many years you have left in the bank account, some small income from little things, elderly parents leave a little nest egg you didn’t even know they had! Collect social security, cut medical cost due to Medicare benefits, pretty healthy life has paid off…until the day it didn’t. They can’t fix it but they can treat it; not sure how long, but hey, it’s already been 3 pretty easy years and doing really well. Got plenty to get to the end and still have a big old house to sell — or pass it on to the kids. Couple of CD’s, a whole life policy that pays dividends, some little stuff. The up side is I can stop worrying again! See, it all works out just fine in the end! 🙂

   You really don’t know what will come next so, don’t stress and do anything you are not 100% comfortable doing! Don’t take the risk if you would regret the loss. You really are not in charge. 🙂