The events of the last week, with Trump saying that he's getting ready to be serious with Iran, and it turns out two days ago, with North Korea (apparently most Americans think that North Korea is in Canada...).
Two important externalities that may (or may not) affect the global economy! The issue arose when meeting a new client (yeah) this morning and reviewing the world at large. Two years ago we discussed his possible investment in the US retail sector -- while the numbers were still "ok" the underlying factors were not. My point at the time was that the retail landscape was changing -- the internet was/is modifying shopping behaviours and this increases investor risk.
Externality 1 Internet shopping: Most people don't understand risk adjusted returns; they get the difference between government bonds, but even there, they have limits (Portugal is not the same as the US government). Looking at this real estate play (in retrospect) would have generated a 7.5% total return (not adjusted for currency and taxes), which is not bad. The problem is that's history; looking at the real estate market 18 months ago, the asset pricing was medium to high -- not the end of the world in terms of yield, but again not a bargain. The problem with externalities is that they can reshape the outcome of your investments; looking forward and saying I have a 40% probability that everything will be fine, and that I will make 7.5% is not the same as saying I have an 80% probability that I will make my 7.5% return, because the downside risk on the first is much higher than in the second (60 Vs 20).
Externality 2 Italixit: The question arose today on how to benefit from the Brexit fight that is just starting; I told him that I don't see any "inexpensive" tools available to get to that; plus you have to examine where things will fail. There are a few certainty; the UK economy will be gravely affected by its exit from Europe -- you cannot sugar coat that one; its going to hurt. However, as in investor can you benefit from this dislocation (yeah I know not very elegant...still a real question from a real client).
The externality here is Italy -- and its own problems with the EU. Until about a year ago, the possibility of Italy leaving the EU and the EMU was slight to none, because the dominant party was pro European; that changed a few months ago (due, in part, to the trouble facing the Italian financial sector). I told my "new" client that I although I could not see a trade there (right now), it was a massive externality for Brexit (depending when the "solids" hit the fan!). If he wants to play Europe, he should have some reserves and see how that situation affects the Brexit negotiations.
The recurrent theme of all these issues is the same we are looking at situations where external factors are key determinants to changing situation in a company/investment. I remember reading liars poker (years and years ago) , and Michael Lewis talked about how the would strategize client conference call (he was a bond salesman at Salomon Brothers) to take into account externalities.
The key here is finding arbitrage opportunities; its not to bet that the US retail sector will be only lightly affected by Amazon (true but irrelevant) its how to position yourself to take advantage of these short sharp dislocation. The Brexit trade is done -- unless the Italian one starts for real -- then all bets are off -- since Italy is far more integrated into Europe and would be a massive blow to the Union.
There is a strong argument to be long cash right now; Trump is "unknowable" as a geopolitical player, and probably resembles early Truman more than any other president -- uncurious and uninterested. However, he's aggressive and shoots from the hip (aka his comment on North Korea), so since the market is priced "for perfection" it is only reasonable to assume that external factors will negatively affect the market -- therefore, a prudent long term investor will "forgo immediate returns" to have excess liquidity to deploy when the market dips.
Even then, some would say that the last 5 years the market has been fully priced, and reserves should have been kept for all these years. Missing a huge part of the biggest bull market in nearly 40 years (from the 2008 low point)
Dealing with externalities is very difficult, because you are dealing with the unknowable.
Two important externalities that may (or may not) affect the global economy! The issue arose when meeting a new client (yeah) this morning and reviewing the world at large. Two years ago we discussed his possible investment in the US retail sector -- while the numbers were still "ok" the underlying factors were not. My point at the time was that the retail landscape was changing -- the internet was/is modifying shopping behaviours and this increases investor risk.
Externality 1 Internet shopping: Most people don't understand risk adjusted returns; they get the difference between government bonds, but even there, they have limits (Portugal is not the same as the US government). Looking at this real estate play (in retrospect) would have generated a 7.5% total return (not adjusted for currency and taxes), which is not bad. The problem is that's history; looking at the real estate market 18 months ago, the asset pricing was medium to high -- not the end of the world in terms of yield, but again not a bargain. The problem with externalities is that they can reshape the outcome of your investments; looking forward and saying I have a 40% probability that everything will be fine, and that I will make 7.5% is not the same as saying I have an 80% probability that I will make my 7.5% return, because the downside risk on the first is much higher than in the second (60 Vs 20).
Externality 2 Italixit: The question arose today on how to benefit from the Brexit fight that is just starting; I told him that I don't see any "inexpensive" tools available to get to that; plus you have to examine where things will fail. There are a few certainty; the UK economy will be gravely affected by its exit from Europe -- you cannot sugar coat that one; its going to hurt. However, as in investor can you benefit from this dislocation (yeah I know not very elegant...still a real question from a real client).
The externality here is Italy -- and its own problems with the EU. Until about a year ago, the possibility of Italy leaving the EU and the EMU was slight to none, because the dominant party was pro European; that changed a few months ago (due, in part, to the trouble facing the Italian financial sector). I told my "new" client that I although I could not see a trade there (right now), it was a massive externality for Brexit (depending when the "solids" hit the fan!). If he wants to play Europe, he should have some reserves and see how that situation affects the Brexit negotiations.
The recurrent theme of all these issues is the same we are looking at situations where external factors are key determinants to changing situation in a company/investment. I remember reading liars poker (years and years ago) , and Michael Lewis talked about how the would strategize client conference call (he was a bond salesman at Salomon Brothers) to take into account externalities.
The key here is finding arbitrage opportunities; its not to bet that the US retail sector will be only lightly affected by Amazon (true but irrelevant) its how to position yourself to take advantage of these short sharp dislocation. The Brexit trade is done -- unless the Italian one starts for real -- then all bets are off -- since Italy is far more integrated into Europe and would be a massive blow to the Union.
There is a strong argument to be long cash right now; Trump is "unknowable" as a geopolitical player, and probably resembles early Truman more than any other president -- uncurious and uninterested. However, he's aggressive and shoots from the hip (aka his comment on North Korea), so since the market is priced "for perfection" it is only reasonable to assume that external factors will negatively affect the market -- therefore, a prudent long term investor will "forgo immediate returns" to have excess liquidity to deploy when the market dips.
Even then, some would say that the last 5 years the market has been fully priced, and reserves should have been kept for all these years. Missing a huge part of the biggest bull market in nearly 40 years (from the 2008 low point)
Dealing with externalities is very difficult, because you are dealing with the unknowable.
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