Be unreasonable - play the uber trade to keep your investment mojo

This article comes from Long Room, part of Financial Times blog Alphaville. I find it bit more bearish than usual stuff, but doesn't Japan have two decades of deflation? Is the debt we accumulated repayable? Answer is obviously yes for the first question and no for the second. But honestly, I still don't know how will the world look in 5 years. And if somebody says he know... don't trust him :)

There is only one investment idea you need to think about right now.  All other investments are for a later date post the appearance of the uber trade.  As this is a singular trade diversification is not useful and could be costly.  You can pick up your various alphas or carry trades (in all its forms...ultimately wealth creation is a carry trade) if you must but know most will be unpicked by the uber trade.  As economics and markets are not fair when panicking even the 'fundamentally good' carry trades will be taken out and shot.

We are  undoubtedly high in the trajectory of the greatest most global leverage bubble ever seen.  As we have lived with this 'profitably' for 14 months post the 'end of the world' (long risk, any risk = bingo) we are complacent about it.  The world is incremental...politicians, consumers, journos, companies, intellectuals and particularly the hallowed markets and their participants (of which I am one)...even Bob Janjuah, Marc Faber, Jeremy Grantham to name but a few 'radicals' are also incrementalists in their insightful contrarian ways...in many ways the incrementalism of the general market participants irritates me most as it has such a deluded perception of its own radicalism and role.  As an aside I point out the ubiquity of data and information increases the weight and momentum of the incrementalist trundle.  (Please note, this is not an anti market polemic as I believe that free and simply regulated markets are awesome and their potential to constantly project the profit motive, or adjust when they realise they have been wrong, is the best system we can have...and we must take the volatility that comes with that as it is completely obvious there isn't a better solution).  It is the meeting of this incrementalism with the POTENTIAL of the uber trade that we should fear.  In some incremental, risk weighted world inhabited by all you very clever market people the uber trade may not be given a certainty of 100%...we could argue about it and give it 'reasonable' weights of say 5-50%...wide margin as its academic and I don't want to argue about reasonable stuff and this is the most stupid time ever to be reasonable

Of course, there is no uncertainty to the uber trade now.  The only uncertainty is when and how it blows.  The reason that there is not uncertainty and there is no scope to be intellectually reasonable is that once the markets sufficiently recognise the not insignificant presence of the uber trade then they will be drawn into pricing it and it becomes an inevitability....no cleverness of economic or monetary management can save us from it.  The stupendous gamma and rapid delta in the realisation finishes the game and makes it 100% certainty.  Its futile, don't argue with me if you think what I say is remotely true then the only options are 0% or 100% at this stage of the game....I know to say this irritates your intellectual prowess and desire to be reasonable/incremental...but get over it quickly as the market thinks quicker than all of us (wisdom of crowds is true)

The uber trade is created by the peak of the leverage mountain and the debt deflation this now heralds.  It may be slow to deflate for a bit...but that will only be as people may be slow to work out the significance of what it means to be on the downward slope...once they catch on incrementalism will turn all helter skelter.  The deeply embedded market and political wish that we can role the debt, even create some more, and then inflate it away is just a fairy tale born of canned historicism, herd thinking (thats after all what similarly educated people do who also enjoy the same ubquitous media feedback) and no little amount of hubris (as we have 1920's style belief in the wisdom of the masters of the market).  What is happening in Europe shows that the myth that debt can be used to grow out of debt bubble has been broken....of course the current inertial momentum of market believes this myth still...however this is one of those delicious schizoid paradox's of the market that happens near momentous times whereby if one could take and isolate each 'opinion former' in the market and ask what they think of this myth you would find a strong majority against.  Accept this and you instantaneously must conclude that credit creation (inc govt) must go into reverse so we have no fuel for the inflation fire (it is not likely - possible imo - that private sector credit appetite and money velocity ignites at this point - if you think otherwise then you should know you are a fantasist and not wise and balanced market operator you perceive yourself to be!).

And here's an alternative take on the 'friendly' inflation delusion.  To have global friendly inflation requires massively co-ordinated policy and action.  It will not come through some miracle of the market.  And it needs to be global and co-ordinated as easily observable and comparative advantages springing from differential experience will create quick and viscous feedback loops (remember we are coming from ridiculous debt level point so room for error is non existent).  Just look at the 1920's experience of reattachment to the gold standard by encumbered economies (much less than today by the way!) and how lack of 'fair play' and co-ordination led to destruction.  Sooooo, it becomes rather simple, without the ability for 'benign' inflationary adjustment the only option is debt deflation and this will destroy some demand so we will experience actual economic deflation

We have no choice to go the old fashioned deflation route out...capital cleansing must occur (and that is another reason why the inflation route is not plausible).  Our wonderful broad based proletarian economies and what we have learned about money (ie gold is sickness and fiat money is useful fantastical stuff) means that we will be able to avoid severe depression...but we will have a depression... particularly China where it will be huge as it has ultimately been the key recipient of the global credit boom in recent years.  The myth of Chinese political and strategic foresight will shown for the nonsense it is.  Yeah, what's happened in China has been quite spectacular and good in many respects...but it is an emerging market command economy where capital has been suboptimally deployed in massive scale.  Its not hard to work out, forget all the specific positives you can say about some elements of Chinese development and just remember that all emerging phases suck in huge amounts of capital (there is always some form of egregious credit creation....the carry trade gone mad even though it was originally rational) and then destroy it - China is no different no matter what GS tells you or all the various cheerleaders on the ground giving expert witness to its realness and greatness - just remember that the vast majority of them are in fact as clueless as you are even if they do get to write intellectual or 'insider informed' pieces in the FT or get to go on CNBC.

So, how do we get out of our deflation? Fortunately it is a naturally process,  wealth is impaired but it survives and once asset values fall sufficiently more than the fall in wealth we get the credit-less lead recovery whereby spontaneous investment begins to take place (good govt  may help support this but shouldn't try to create the process).  Rational greed kicks in.

What's the uber trade?  Long treasuries and dollar, take the debt of some other nations too (hedged) like Germany and UK if you must but really diversification isn't useful.  Hold some cash too particularly in US. Then hold net short position on ALL risk assets...yes, everything!  Particularly gold that most wonderous  of miscalculations!

I am not telling you that I know it is tomorrow.  But I believe that the Europe thing has taken us past the delusional stable equilibrium of the last 14 months and catastrophic instability could come anytime.  Don't be incremental about this!  Remember where the debt level is, remember the 'goodwill' and co-ordination that needs to come to keep us on track for painless inflationary delivery and, probably most of all, remember that we have reached the end of a generational narrative on how the economy and markets work....this lack of narrative to fit what is coming is the intangible catalyst that means markets will take us to the deflationary future no matter what politicians try

Good luck

Your optimistic mojo

PS related to others posts...I think that Germany may be the significant country closest to getting this and that the UK is catching on too.  The US seems furthest from the truth of it and quite hilariously think that it is the rest of the world that is sick and they are healthy!

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