Monthly Archives: March 2017

On “hopium” and the delusions of crowds.


“Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.”

Karl Marx

In a world with scant, if any, religious feelings left, hope is the establishment’s spurious replacement. In the well known Marxist quote above, you just have to change the term “religion” and read “hope” instead. The wise but controversial adage is still valid today. The establishment and CB politburos have been using Hope & Opium to kick the ball forward -for a seemingly endless decade. So far so good, but it pays to remember that hope never was, and will never be, a viable investment strategy.

It’s bad for morale to discredit hope, and I am aware of the high probability of being ignored as the automatic defense mechanisms for “cognitive dissonance” immediately pop up. If you need the yield or the return (ROI), financially you just have to be  “all in”. Most investors are additionally even selling some volatility to enhance their returns, regardless of being aware of assuming undue financial risks. It is all understandable. If I need the return, TINA is my criteria of choice (load up with equities, sell volatility). And if I were all in, I would hate to read my posts. Nevertheless, take a close look at the next chart. It shows the exuberant levels of risk in the system and gives me the shivers.

It could all well be the result of a new era. And, according to Heli-Ben debt doesn’t matter (LOL). Apparently, valuation doesn’t either (low rates are thought to provide a waiver that protects them from valuation excesses). But, at least, let’s look at financial valuations in relative terms (compared to physical assets) in the next chart. Sobering, ain’t it?

Finally, I can’t resist talking valuation in absolute terms, if only for a short overview. The Schiller CAPE confirms all our fears (see for yourselves online). So do charts on market cap related to gross value added, or price to revenues ratios -and all others that do not use “estimated future adjusted earnings” and current rates. That applies to most markets, Japan being the exception.

But complacency is soothing, and its appeal is difficult to resist when investors feel that they hold a CB put covering their back. No wonder everybody and their dog is short the VIX, and markets are rallying on little more than hopium. I have no words. I can do no better than Paul Brodsky at summarizing what’s going on.

“Rising markets, an unwillingness to acknowledge fat tails (unlikely knowns), and the inability to model Black Swans (unknown unknowns) have concentrated popular wealth into a narrowly distributed range of highly vulnerable assets and investment strategies. … 

We cannot help but conclude that asset prices are generally rising due mostly to inertia, in spite of unreason, and that the most likely outcome will be something unexpected and disappointing. …

 A socialized market framework with implicitly guaranteed perpetual positive returns for all must fail. … Helping to close unsustainable distortions is the only way capitalism can survive. Capitalism without failure is like Catholicism without hell.” Continue reading