I view what is going on today as a sequel to the train wreck that unfolded in 2008.   The obvious problem now is that the risk is being assumed by entities responsible for protecting their citizens – sovereigns.

In 2005-2007:

• Rates and spreads were low creating all types of stupid transactions.
• What might these be?  Merger Monday blockbusters, Leveraged versions of anything vanilla, and blind faith in the underlying.
• Inverted yield curves? No big deal.

What was different is that market participants were assuming the risk, both long and short.  If you believed the industry experts at S&P and Moody’s – you have no money left.  If you didn’t, you’re just fine today.

Fast forward and the same set up is here.  Rates? Low.  Stupid transactions? POMO. ( I just had a client put $500k into the development of an online bitcoin casino.  Bean babies made more sense to me). Faith?  Governments will figure it out.

Two years ago the inventory of foreclosed homes was so high, we were talking about a decade to clear them.   Today, the Street has already purchased said distressed assets, packaged them, and is in the process of selling them back to the same people that thought flipping pre-construction condos in Naples was an investment strategy.  REITs, levered closed end funds, *MBS everything -  look what is being sold always feels right because its working. However, the Street doesn’t sell things that have performed terribly – because 90% of their customers won’t buy those ideas/products.  They sell you Facebook.  They sell you single family home REITs, floating rate funds that invest in companies that won’t survive if there is a recession.  Stop buying.

Ok so the yield curve.  The yield curve isn’t inverted, but negative real rates are just as significant.  Why?  Conventional wisdom leads you to believe that while you don’t fully understand it – Central Banks have the situation under control.  Investors in the most liquid securities in the world are calling BS.

Risk isn’t Beta, Standard Deviation, or any other consultant driven formula.  Risk is exposing your assets to permanent impairment.  Since Central Banks have it all figured out – there is no reason to worry – everything will go up and if it doesn’t, they’ll figure out a way to make it happen.

Riddle me this?  What happens if your Central Bank doesn’t recognize their exposure to permanent impairment?

This is well worth your time.

Some random thoughts.

• There was a good article in Barrons this week on a value investment course at NYU.  The following struck me: “….”Then there’s zero reason to diversify,” Rosenwald counseled. “You should bet it all on black, where you have done your own research.”  I like this guy.
• Do you actually know what an ETF is?  I’ve asked plenty of fund companies to describe EXACTLY how the logistics of particular vehicles work- and I get answers like “you know”, “well, if that happened we’d just get secondary liquidity or use a swap”, or “that is pretty extreme, but someone would step in”.
  Interesting… ETFs are derivatives, right?  Retail buys them, and Hedge Funds short them, right?  Hmm.
  Take a look at this paper on ETFs – I’m pretty sure no one has any idea what happens when these things (which now cover every asset class) blow up.  Any of you ETFers should probably make sure you can explain the Raptor below.  Why does retail need to trade ETFs intraday?  To get picked off by Algos? Si.
  

Pacific Drilling (PACD):  $13.50/share offer? – who cares?

Facebook (FB): Retail loves it 6 months ago, Street does a half-hearted research launch to make their customers feel less-bad about the 50% spanking they took.  Retail bails.  Street buys.  You were an idiot if you bought it, you were an idiot if you sold it.  Same ole’ game.

Intel (INTC): Was it that difficult? – Great dividend though

As some bright folks in Denmark point out:

• The S&P 500 is ahead of the business cycle
• Equities do not offer outsized risk/reward

This paper on Buffet is worth a read.

Ben Graham taught me 45 years ago that in investing it is not necessary to do extraordinary things to get extraordinary results
– Warren Buffett, Berkshire Hathaway Inc., Annual Report, 1994.

This isn’t a political statement, but what’s going on here?  You and I pay for these folks.