The White Swan


This was in the Maanga on 31 Jan 2007. So, I completely agree with Andrew Lahde when he slams bankers for stupidity. But I may have to agree that Avataram knew more finance and wrote better two years ago:

It is kind of worrying:

-Article in FT and graphs attached show China and Nasdaq have a similar graph (China over last 14 months, Nasdaq from Oct 98 to March 00)

-Vietnam, some obscure, still communist country has a stock market overvalued 30%. In 2003, I was one of the few people watching Vietnam,  the fund managers loved me then as no one spoke to them. Now the local taxi driver is invested in Vietnam.

-Fine wine Index is up 50% over the past year. One of the most difficult things to store well (cellars, temperature, humidity this that and the other)  and yet people are buying it.

-People are lending to emerging market governments at 200bps over Libor. Hello! Only in 2001, Argentina defaulted on all its debt. Everyone is going communist in Latin America and nationalizing everything.

When markets collapsed in 2000, you could hide in Value stocks and real estate. When they collapsed in 2002, it was more of a credit collapse thanks to Enron and Worldcom, so you could hide in good stocks, emerging markets, even in Vietnam and in wine.

Now, there is no place to hide. Everyone knows about Vietnam, and everyone has a wine cellar and is stocking it. You cannot even hide in Indian art as even that has gone up.

I wonder how this is going to crash:

-Hyperinflation:  Germany 1923: Currencies will be worth nothing. You would need $100 to buy a cup of coffee. Gold will be $7000 an ounce or more. or

-High but not hyper Inflation: Inflation would cause interest rates to shoot up and asset prices to deflate quite a bit. (This is actually the best option)

-Deflation: Unlikely, I should think, with every central bank printing money

What to do now? One can go long Gulf markets. They shed 50% or so last year, and remain an option on rising oil prices and low US interest rates. Go long Singapore and Thailand Stock markets. Go long the yen (the carry trade will end someday) and the Nikkei (less sure about this).

And buy tons and tons of Puts and Put spreads on various asset classes. A 1425-1325 Put spread would pay $5 for every $1 you bet, provided the market just goes down to 1325 by June 07. The other markets are better to short, but because of high vol, the indian market is just a 2:1 trade. Same with China, and I understand that market even less.

The other idea is to live as I do. Just spend whatever you have very fast, because hyperinflation is just around the corner. Go to the gym regularly, as you will be able to steal that basket of money from the old woman just as she comes out of the house. Buy GLD and SILV, so that when paper money and all assets become worthless, you still have something to live on.

But every collapse has an opportunity. When Communism collapsed, I fucked Russian hookers by the dozens. When Vietnam opened up a bit, the Vietnamese girls came out. Very soon, I think Indian, Chinese and american women will be very cheap. “Naan kovil poyittu pakkathu veettu vaidhyalingathai othuttu varen”. “Seri, appa naanum poi inda tripurasundari kizhaviyai oru kai parkkaren. Nalaikku Pasanga Fees kattunume”!

Oh, for Brazil to collapse. I am delighted Venezuela is down 39% already this year. Chavez might be a fat bastard but the women are so yummy.

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