Downsider Investment

My little clutch of speckled eggs are doing just fine. I stayed out of the market for quite some time, having learned the very worst way back in 2000 or there abouts. You know what I’m talking about, the bursting of the Dot Com bubble. And I wasn’t even too deeply speculative. I picked some self-evident winners and ignored a lot of advice. So yes I got in on Netscape back in the day. What I didn’t do was cash in my gains on a periodic basis and ended up losing.. I still pout when I think about it. Let’s just say I ended up losing a down payment on a house that would today be worth somewhere around 1.7 million bucks, yes even now. I remain quite sanguine about all that, because in fact, I’ve had worse luck and because I’ve always had my inner peace since my daughters were born.

One of the things I hope to do here at the Downside is to gather a few experts in various fields to sign on as co-authors of various sections. Investment is going to be one of those sections. And, building on the premise that I suggested before, we are going to have to talk about means-tested disasters. Everywhere from slight downturn in the market, to fiscal cliff, to hyperinflation to global meltdown. I’ve spent some time over at ZeroHedge, and they have a mix of paranoia over there. Now is a good time for me to check them out again.

You see I’ve been picking stocks, and this year I’m proud to say that I’ve done about 23% on my portfolio (so far). With any luck I’ll be able to retain those earnings. The problem is that as I see it, the downside scenario that is the most likely to occur is continuation and worsening of economic bad times. That means first of all that my investment strategy needs to change in anticipation of the bad news.

This brings me to a number of points.
1. I need to begin to understand bond funds.
2. I will be publishing financial & investment information here at the Downside
3. I obviously expect that there’s not going to be a complete global financial meltdown any time soon.
4. Let me introduce to you my financial gurus.

On that last point a bit of background. A couple years back I determined that I was reading far too broadly and listening to too many people who didn’t deserve my attention. To help focus myself I took on what I called the T50 project -which is basically to identify the Top 50 thinkers I would bother reading. So if we could imagine the desert island scenario – which 50 books would you take, I’d take the best books of the T50. Well and also “How To Build An Airplane From Coconut Palms”.

My Financial Gurus
Niall Ferguson, Tyler Cowen, Nassim Nicholas Taleb, David P. Goldman

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6 thoughts on “Downsider Investment

  1. Adam Weisshaupt

    Why do you expect there won’t be a global financial meltdown anytime soon? I am glad you had good gains over the past years. Now check out Shadowstats and see how good they were against the old measures of inflation. QE pumped the markets, kept values high, but its loosing its effect. Have you checked out the Debts owed by local, state and federal governments? How abut the Credit Default Swap overhang on those debts? The unfunded liabilities of public pensions and entitlement programs? Have you looked at Europe and Japan lately and the U.S. exposure to Debts and CDS there? And Bonds? Those things the Federal, State and Local governments issue that earn negative returns after inflation? Or the corporate bonds that the government is willing to cheat you out of to pay off unions like they did at GM? Yeah, there will be ways to profit from what is coming, but when “doing well” is going to be defined as living as you do now, its a bit of a different game. If you are really a downsider, as you define the term, then you must realize a total financial collapse is in the cards, if not a foregone conclusion. The rule of Law is dead, High Frequency trading rules the markets, there is outright fraud in commodities trading, and when failures occur, there is a new verb to describe what happens: Corzined. Remember, sometimes paranoia is justified.

    Reply
  2. mdcbowen Post author

    This is just the kind of information I want to pursue. But I want to know why things are hanging, as it were, in mid-air instead of collapsing outright and altogether. If the model is Japan’s ‘Lost Decade’ with its zombie banks, then why shouldn’t the US pull its act together in a decade? And what would be the indicator of that. Sony used to make the best TVs, and now Samsung, which was only introduced into the US market in 1996 is now the leader. Are there other players who will pull up the slack when various American institutions fail? That’s the level of detail we have to get to. Or take for example Oracle in the software industry. Almost none of its database technology was used to build Web 2.0, it was done for free with something called LAMP. How did Oracle survive the Dot Com bubble without it?

    I think in most cases, people are accustomed to paying inflated prices for things that they don’t necessarily need, and once they stop paying those high prices, what is lost turns out not to be essential to the sustaining economy. If Starbucks went broke tomorrow, 150,000 people would be out of a job – but are those the jobs our economy truly depends on? Not really. We could all do with less coffee, fewer new cars, fewer new houses. fewer smartphones. But what is it that we cannot do without? Will those entities suffer?

    If indeed a total financial collapse is in the cards, why has it not happened yet for Greece? And what is the financial stability of Iraq right now? Who is paying Syrian soldiers in that civil war? I think things can get a whole lot worse than a 10 or 15% drop in the standard of living of Americans before we even begin to approach the level of suffering many countries are experiencing right now, short of total collapse. But as I say, we should come up with some sort of categorization of levels of collapse. There’s no way America and Canada go from where we are to where Afghanistan is in less than 20 years. We are already too educated to not be able to moderate the situation.

    But in the meantime there will be plenty of catastrophic collapses. It could be that the State of Wisconsin defaults, closes its borders and calls out the national guard. Detroit has rioted before, why wouldn’t it riot again. I say that unless all the power goes out and stays out for 3 months, we will have months and months of warning.

    Still, there’s plenty of downside.

    Reply
    1. Adam Weisshaupt

      Every job means tax revenue- not just income tax, but SSI and Medicare/Caid. When entire businesses die, you loose their corporate taxes as well. So yeah, even the Starbucks jobs are significant, because the entitlements keep growing no matter how poorly the US economy does. And the govt will continue to compensate for that by money printing, because the alternative is an outright or partial default that is politically nonviable both domestically and internationally. Everyone will get paid- but in devalued dollars. Ultimately it means a huge drop in standard of living – more than 10 or 15% – something on the order of 50%. Yeah, of course we will survive it. People survive it everyday in the 3rd world. However, those in the 3rd world are not as entitlement minded as those in the United States, and hence we are probably going to experience a very violent period of adjustment, and further erosion of our freedoms because of it. But 3rd world is where the United States is headed. It won’t be less coffee – it will be no coffee – imports will be prohibitively expensive. And for each of those things we do with less of, the tax revenue is falling and the situation is getting worse (death spiral) Current conditions in Greece are exactly what a collapse looks like. – children being abandoned at churches, riots, higher crime, shortages. Argentina followed the same model as well back in the early 2000s. Rolling blackouts, unreliable water and fuel, and famine will become the new normal. A financial collapse doesn’t look like Mad Max.. but there is certainly less security- so firearms and armor (knife and . And no, there aren’t any other players to take up the slack – because the dollar is the reserve, we are the largest group of consumers, and the other fiats are forced into a “race to the bottom” by our devaluation. The world bank will try to replace it with another fiat – SDRs..though I think China and Russia are working on a play to grab the reserve by offering a Gold (and other commodities) backed currency – and they are already working on removing dollar demand in the world economy by making direct trade agreements – especially with oil. The more direct trades occur, the less the dollar is needed in arbitrage, and the more dollars that “come home to roost” driving inflation – especially as we try to import products from abroad. . No, its not the end of the world. Its the end of the World as we have known it. The very currency we rely on for transactions is becoming a fraud.Current events look frighteningly like the lead up to WWI and WWII. Collapse. Trade Wars. Currency Wars. Shooting Wars. So WWIII is not out of the question either – and I would expect that to include limited nuke exchanges as well. Not Holocaust scale, but having some KI and a Geiger counter around is probably going to be prudent We will get through it, but as the old Chinese curse goes, we are going to live in interesting times. Some new order will eventually emerge, and life will go on, but I would expect it to take decades, not months or years. I admit fully I could be wrong about all of it. I am guessing based on what knowledge I have of prior similar events and world history. Its very hard to predict the timing – but what cannot continue, won’t. This can’t continue. That much we can be sure of.

      Reply
      1. mdcbowen Post author

        I like your pessimism. It’s giving me a sense of gradations of disaster that are perceivable. Somewhere in there are some programmed responses by the government. In one way I’m a bit more cynical. I don’t believe that the entitlements will continue, I believe the military and national guard and police forces will continue. So what would be useful here is watching cities and municipalities where cops are quitting, and exactly what the triggers are for governors to call out the national guard.

        The intelligence of the average soldier is, in many ways is all that we need. Armies always survive. So when do we call the Army on Americans? What comes before that? Homeland Security? Who guards what? What gets turned off and what stays on no matter what?

    2. Adam Weisshaupt

      “There’s no way America and Canada go from where we are to where Afghanistan is in less than 20 years. We are already too educated to not be able to moderate the situation.”

      That is why it is hanging. You have ( as I did) way overestimated the average intelligence of the American citizen.

      Reply
  3. steve adams

    Luckily the Great State of Wisconsin ™ 🙂 just announced a significant budget surplus! Go Walker!

    Illinois on the other hand will experience a pension crash of sorts. I would bet Muni and State bonds will take a hit then but not for all locations.

    To me when some more of this issues show up will be a little like the housing market in CA or the price of Pets.com. It will go on long after I think it should pop.

    Reply

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