More Lessons From Sandy
Sandy, as terrible a storm as it was to so many in the New York metro area, taught us some lessons about markets. For example, Doug Noland wrote about two aspects of the hurricane that shed light on our current economic situation.
First, Hurricane Sandy could be considered a "tail" or "black swan" event. The chances of a hurricane turning into the east coast from east to west, as Sandy did, were quite slim. The thing to remember about these sorts of black swans, though, is that just because they're rare - even extremely rare - they do happen. Indeed, I saw a documentary report about ten years ago that detailed what would happen were a hurricane to take such a path. The report pretty much described what actually did happen. It was only a matter of time.
So when it comes to black swans, while you don't want to lie awake at night imagining them happening any moment, you do want to be prepared. A lesson you can learn regarding your investments might be to focus intently on risk management. Few do. Indeed, most investors would be hard pressed to define risk management, much less apply it to their portfolios. But it's a discipline that I continually work at, much more than the often quixotic search for outsized gains.
Continuing with the black swan theme, many called the collapse in 2008 a black swan. But it really wasn't. While no one could determine the exact timing of the events that occurred or specifically what would trigger them, their occurrence ought not have shocked anyone. If it shocked you, you need to figure out why. And don't be surprised if a similar shock occurs in the next few years. The conditions haven't changed so much since 2008. Which brings us to Noland's theme of the ongoing Credit Bubble.
Each week, for years, Noland has chronicled the growth of the monstrous Credit Bubble that overhangs our economy and all financial markets. Without understanding the nature and extent of the debt that has piled up since the 1980s, it's hard to see how you can safely navigate financial markets, and it's hard to see how you could possibly have any idea about what happened in 2008. But worse than that, you'll be blind to the simple fact that the Credit Bubble continues to grow.
Relating this fact to Sandy and its awesome destruction, Noland points out that the damage will almost surely surpass that of all previous hurricanes in the U.S. And he notes that our credit bubble contributed to an increase in expensive houses, the cost of which adds to the monetary losses. Indeed, the use of borrowed money (big mortgages) to build homes and buy expensive stuff (frequently via the use of credit card debt) led to an inflated economy-wide cost structure that will cause repair and rebuilding costs to be much higher than the past. Not only will insurance companies take a hit, but uninsured losses will push many families and businesses to the brink of bankruptcy - especially considering that, at least in the case of many families, they may have been hovering on the edge even before the hurricane due to excessive debt that they can't repay.
The fact is, we remain in a manic financial (credit) bubble and money is still available to borrow even now. So we can anticipate that the damage and consequent repair efforts due to Hurricane Sandy will incite a borrowing and spending boom. But before you buy into the belief that this is somehow going to be a good thing, remember that the current market's love of debt leads to over-issuance of debt, misallocation of capital, as well as malfeasance (wrongdoing), which ultimately risks destroying faith in money itself. And a loss of faith in money results in the value of that money collapsing. If you're not certain how or why this can and indeed has happened, you may want to pick up a copy of When Money Dies by Adam Ferguson at your earliest convenience. (See our previous discussion of this important book by clicking HERE.)
If you haven't yet seen reason to buy and hold some gold, perhaps Sandy's lessons will help you find your way.
(In case you're not familiar with Noland's work, click HERE for his latest piece.)
First, Hurricane Sandy could be considered a "tail" or "black swan" event. The chances of a hurricane turning into the east coast from east to west, as Sandy did, were quite slim. The thing to remember about these sorts of black swans, though, is that just because they're rare - even extremely rare - they do happen. Indeed, I saw a documentary report about ten years ago that detailed what would happen were a hurricane to take such a path. The report pretty much described what actually did happen. It was only a matter of time.
So when it comes to black swans, while you don't want to lie awake at night imagining them happening any moment, you do want to be prepared. A lesson you can learn regarding your investments might be to focus intently on risk management. Few do. Indeed, most investors would be hard pressed to define risk management, much less apply it to their portfolios. But it's a discipline that I continually work at, much more than the often quixotic search for outsized gains.
Continuing with the black swan theme, many called the collapse in 2008 a black swan. But it really wasn't. While no one could determine the exact timing of the events that occurred or specifically what would trigger them, their occurrence ought not have shocked anyone. If it shocked you, you need to figure out why. And don't be surprised if a similar shock occurs in the next few years. The conditions haven't changed so much since 2008. Which brings us to Noland's theme of the ongoing Credit Bubble.
Each week, for years, Noland has chronicled the growth of the monstrous Credit Bubble that overhangs our economy and all financial markets. Without understanding the nature and extent of the debt that has piled up since the 1980s, it's hard to see how you can safely navigate financial markets, and it's hard to see how you could possibly have any idea about what happened in 2008. But worse than that, you'll be blind to the simple fact that the Credit Bubble continues to grow.
Relating this fact to Sandy and its awesome destruction, Noland points out that the damage will almost surely surpass that of all previous hurricanes in the U.S. And he notes that our credit bubble contributed to an increase in expensive houses, the cost of which adds to the monetary losses. Indeed, the use of borrowed money (big mortgages) to build homes and buy expensive stuff (frequently via the use of credit card debt) led to an inflated economy-wide cost structure that will cause repair and rebuilding costs to be much higher than the past. Not only will insurance companies take a hit, but uninsured losses will push many families and businesses to the brink of bankruptcy - especially considering that, at least in the case of many families, they may have been hovering on the edge even before the hurricane due to excessive debt that they can't repay.
The fact is, we remain in a manic financial (credit) bubble and money is still available to borrow even now. So we can anticipate that the damage and consequent repair efforts due to Hurricane Sandy will incite a borrowing and spending boom. But before you buy into the belief that this is somehow going to be a good thing, remember that the current market's love of debt leads to over-issuance of debt, misallocation of capital, as well as malfeasance (wrongdoing), which ultimately risks destroying faith in money itself. And a loss of faith in money results in the value of that money collapsing. If you're not certain how or why this can and indeed has happened, you may want to pick up a copy of When Money Dies by Adam Ferguson at your earliest convenience. (See our previous discussion of this important book by clicking HERE.)
If you haven't yet seen reason to buy and hold some gold, perhaps Sandy's lessons will help you find your way.
(In case you're not familiar with Noland's work, click HERE for his latest piece.)
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