My worst investment mistakes (in Swedish)

This post is in Swedish (and it’s actually just a few excerpts from the real thing here). Try this post in English instead — about economic stimulus.


Lärdomar från mitt värsta investeringsmisstag

Trots att jag agerade moderator på en nyckelpresentation för Prosolvia i samband med börsnoteringen, och blev lite av en andra talesperson för aktien, efter deras huvudfirma Carnegie, så lyckades jag missa Prosolvias bokföringstricks och kommande konkurs ända in i det sista. Eftersom jag hade hunnit fylla 25 år och jobbat som professionell och högt rankad finansanalytiker i flera år fanns inga ursäkter.

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Men, min absolut sämsta investering på alla sätt — och där jag har absolut ingenting att skylla på — gäller en blankningsposition i ett europeiskt bankindex andra halvåret 2013. Misstaget kostade omkring en miljard kronor

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I korthet så hade jag det globala ansvaret för investeringar i bankaktier. När mina blankningar förlorade pengar på grund av en serie myndighetsåtgärder sommaren 2013 kunde jag inte förmå mig att stänga positionen utan drog på mig allt större förluster ända tills mina kolleger kunde övertala mig om att jag antagligen inte förstod läget så bra som jag trodde; och därför behövde täcka positionen.

Den miljarden lärde mig en hel del om min egen psykologi, om stop-loss-åtgärder och om att ta reda på vad man vet och vad man inte vet i vanskliga investeringslägen.

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Vad lärde jag mig av den här historien och hur kan du eller jag använda de insikterna idag? Några av de viktigaste punkterna gäller kommunikation, förenkling och ifrågasättande:

  • När förlusterna börjar stiga i en position, utgå från att…
  • Skapa en trovärdig bild av hur motståndarsidan…
  • Även om en bank är insolvent och tekniskt konkursmässig så…
  • Tyvärr utgick jag istället från att…
  • När förlusterna börjar stiga i en position, utgå från att du faktiskt inte förstår hela situationen eller har tillgång till all väsentlig information. Försök istället ta reda på vem som kan sitta på viktiga pusselbitar och kontakta den personen.

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Why you have been wrong about fiscal and monetary stimulus your whole life

Topic: the difference between kick-starting an engine and pushing a vehicle by manpower


Do you know how an old lawn mower with a gas engine worked? Or a water scooter? Or a dirt bike with a kick start?

They all have to use some kind of external force, be it a hand crank, a pull on a string, or an electrical start engine, to get the actual gas engine from stand still to running at a certain threshold rpm (revolutions per minute).

Once the gas engine is turning at the right speed, the controlled and timed gas explosions can move pistons in just the right way to rotate a shaft round its axis, which makes whatever we want spinning spin, e.g., the driving wheels of a car. Talking of cars and threshold rpm; isn’t it weird that the number of people fitting in a car is just right for pushing a car with a dead battery in a speed that just about reaches that magical limit where the ICE engine can take over?

So, what do start engines and kick starts have to do with stimulus? It’s quite straightforward: if you have to keep kicking, or pushing then it’s not stimulus; then it’s just temporary life support. Maybe you’re out of gas, or the engine is broken. In any case, you won’t get the motor running, it’ll just be you working up a sweat spending more energy than you get out of the effort.

That’s exactly how it is with economies and economics. If you can’t remove the stimulus, such as ultra-low interest rates and fiscal deficits without getting a significant slowdown, then what you did was never stimulus — it was just the equivalent of pushing a dead car a few hundred meters extra.

A stimulus the way Keynes talked about it, was a temporary effort that removed whatever was artificially blocking the real economic potential. Printing a trillion dollars a year while running a trillion dollar budget deficit, accompanied by zero interest rates year after year after year… does not qualify as stimulus. That’s using the defribillator on a corpse, with high enough voltage to make the body jerk around like president Trump’s assessments of what constitutes respectively good and bad monetary and fiscal stimulus depending on who’s pulling the strings. Hint: anything the Donald does is good policy. Anybody else doing the same thing: stoopid.

OK, maybe you had this right all along. I think you did, I just about exclusively have thoughtful readers.

Unfortunately this will never be read by the ones who really need it — the slimy arms of the vampire squid: the Kurodas, Ingveses, Draghis, Bernankes, Yellens and Powells of the world. Well, we’ll see about Powell… Who knows, he could be a Volcker in disguise.


Summary

Words matter. Definitions matter. Be careful not to let others cloud your thoughts by using misleading vocabulary.

Economic stimulus was always supposed to just be a quick, helping hand for a healthy person that slipped on a banana peel; not permanent crutches for somebody run over by a truck. What’s going on in the economy now is not stimulus, it’s a shock doctrine text book power game.

The shocking reason the market crashed this week

Summary: stocks tumble as investors update their models of policy rates, inflation, buybacks, bond yields, DCF models, refinancing hurdles, italian banks, Emerging Markets worries and trade wars

Thought of the day: how nimble and smart they are, investors!


What the pros are saying

WSJ, CNBC, Reuters and other news outlets have explained in detail the last two days why the stock market is crashing:

-Investors realized inflation is gaining momentum, and that the US Fed and other central banks will have to counter with rate hikes. Higher policy rates and less QE (money printing) feed into higher market yields for bonds, which in turn acts as both an alternative investment in a TINA* world, and a higher discount rate in investors’ Discounted Cash Flow models. The latter is particularly important for tech stocks that are expected to make most of their profits far into the future (if ever).

Not least investors took just 24 hours to realize that with inflation looming and interest rates rising into the low single digit space (the horror!) will become more difficult to finance the outlandish projects that warrant current double digit P/S valuations, as well to re-finance the already hugnormous piles of debt lingering from past stock repurchase programs — not to mention future stock buybacks that might very well have to be cancelled.

Can you imagine a world where corporate investment budgets shrink from year to year, and where dividends and stock purchases have to be financed with free cash flow stemming from profits rather than free bank money?

Finally, many models were swiftly updated with new currency prices and trade tariffs, as well as the endgame result of recursive doom-loops (government-bank insolvency and runaway financing rates), triggered by recent Italian bank bankruptcy jitters.

  • TINA = There Is No Alternative To Stocks

TINHIW

That Is Not How It Works!

No, no, no! No!

That’s emphatically not what happened this week. That’s not how the market works. There are hardly any investors left that take time off their days to think about thing s like that, and certainly not in that manner.

There are but a few fundamentally inclined outfits that do meet once a week to discuss similar things. However, A) they have not had their meetings yet this week, and B) they are quite few compared to passive funds, momentum investors, CTAs, daytraders, index huggers etc.

Ask yourself: Do you know anybody who claims they sold for the reasons listed above? That they updated their models and sold due to inflation gaining steam and all or any of the variables and repurcussions? I didn’t think so. There probably are quite a few talking about why the market sold of, why others sold, whether it’s thoughtful and smart of others to sell for those reasons, but just about nobody went through the calculations above and concluded it was time to sell this week. Nope.


The butterfly effect

If you stretch conditions far enough, e.g., with debt upon debt, derivatives upon derivatives, ever higher valuations on ever higher adjusted, manipulated numbers, based on unsustainably low costs for debt and wages, and resulting unsustainably, historically perverse margins…; then any little flap of the wing can set off an avalanche.

Do you know anybody

who claims they sold for above reasons

I’m not saying the last few days is an avalanche, an earthquake, a tsunami, the beginning of the big one. I mean, the small correction, which isn’t even a correction, let alone a “crash”, is hardly visible in a stock chart.

I’m just saying the conditions are already there for a massive re-set of stock markets and bond markets alike. And that means no other reason is needed for stocks to fall… or crash for that matter.

So, no, investors aren’t cooly and rationally updating their excel models with new assumptions and recent data publications, or discussing said inputs during partner meetings. Nope, they are selling because somewhere in the market someone’s sell order pushed one stock below a level that made somebody else sell – on a hunch, as a stop loss, a machine learning model, some esoteric and spurious correlation between normally unrelated instruments; I don’t know and it doesn’t matter – and that in turn made somebody else sell that or some other instrument.

Enough debt, enough leverage, enough trend following and passive investors, high enough valuations, too few short positions, too little cash reserves in big mutual funds and so on mean at a certain point there are no value based buyers left to mitigate the selling.

Again, whether this proves to be just a two day mini downturn, or the beginning of the worst bear market since the 70’s, doesn’t matter. The point is that nobody really knows what set off the selling. It wasn’t Powell, Trump, treasury yields or cash flow models. It was simply one eager seller too many — and that seller was baked in the cake since several years back, just being temporarily on hold due to increasingly deranged central bank policies.

Happy trading!


P.S. Bookmark my site, subscribe to my newsletter by entering your e-mail address, and finally DO CHECK OUT my recent podcast interview with the one and only Erik Townsend of Macro Voices (you can find the interview and Future Skills podcast on any podcast platform… and here).