Smoking TNT and Drinking Daynamite, or Business as Usual

Seeking “antifragility” during the crackup boom...
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The Daily Reckoning | Tuesday, May 7, 2013 Historic day for the Dow and other entertaining features of the crackup... Breaking Inequality... and 47 ways to avoid the demise of the dollar... Plus, Chris Mayer on finding antifragile businesses in increasingly dangerous markets, and plenty more... ------------------------------------------------------- After 13 Years... The Daily Reckoning Is WHAT? It all started on Jan. 19, 1999, when William “Bill” Bonner and Addison Wiggin started what would become one of the most controversial, and most useful, free financial e-newsletters in history... all from a rented apartment. But now, after 13 years, something rather shocking has happened. This is one of those things that happen only once... CLICK HERE for the full story. Addison Wiggin, plumbing the depths of a vicious cycle from Baltimore... History! Today the Dow rose above 15,000 for the first time. Tonight’s news headlines will be all about the 15,056 close. Corporate profit margins are at all-time highs, too. What’s not to love? Last month that J.P. Morgan’s first quarter earnings went up 33%, Citigroup’s net income rocketed by 30% and Bank of America’s earnings increased sevenfold year over year. In today’s episode of the Daily Reckoning, we give you an opportunity to explore the soft underbelly of “the crackup boom” and if you’re so inclined, to do something about it. “Some people are still saying that companies are suffering from ‘too much regulation’ and ‘too many taxes’.” The erstwhile tech stock promoter, Henry Blodget kicks us off. “Maybe little companies are, but big ones certainly aren't. What they're suffering from is a myopic obsession with short-term profits at the expense of long-term value creation.” At the same time, “companies are paying employees less than they ever have as a share of GDP. Nor do they employ as many Americans as they used to.” Blodget’s observations are likely true, but we suspect they’re merely symptoms of a greater disease. Our friend Ralph Benko forwarded on a link this morning to a new documentary online. After a cursory look at Breaking Inequality we’re confident the young filmmakers were inspired, at least in tone, by our own I.O.U.S.A. As such, we took the liberty of grabbing screenshots of two charts featured in the doc. One depicts the rising income disparity in the United States since 1970. The second shows the amount of U.S. dollars in circulation since 1910. Note the Everest like increase beginning with the bank bailouts in 2009. A crackup boom, we explained yesterday, is a financial boom that inspires euphoria on Wall Street... but shares little with the middle or working class. Nor does it inspire much confidence in the 1% of Occupy Wall Street ire. “Inflation,” the economist Friedrich Hayek adds, “is probably the most important single factor in that vicious circle wherein one kind of government action makes more and more government control necessary.” Despite having been invited to speak on the subject on our local NPR program repeatedly, we’ve never really been interested in the rising inequality inherent in boom times. But Hayek makes a good point. “For this reason,” the Austrian continues “all those who wish to stop the drift toward increasing government control should concentrate their effort on monetary policy.” [If you haven’t had a chance, check out these 47 Ways to protect yourself from a Shrinking Dollar.] The makers of Breaking Inequality claim they will present a petition with 10 or 20 million signatures to Congress in September of 2013 and force them by sheer will of the populace to restore the classical gold standard, thereby creating a level playing field for entrepreneurs, small business owners, bankers and politicians alike. As we write, it has a little over 24,000 views on YouTube. Take a look and sign it if you like. Or... take out an insurance policy. [Ed note. Yesterday, we introduced “crack up boom insurance”. Like car insurance, you buy a policy and pay premiums so that when a tree falls on it, you get back a piece of the original value. If the tree never falls, you paid for a little peace of mind along the way. “Crack-up boom insurance” works the same way; it’s a strategy that helps you stay in the game, but will also keep you whole when the bust comes. On out trading desk, Jonas Elmerajji, planned out a 21 Day Trading Experiment whereby he can show you what we mean. Each day of the experiment you’ll learn how to trade this historic market. And still feel confident you’ll be whole when the chips fall. There’s no cost or obligation for you to participate, just an opportunity for Jonas to show you how a bust doesn’t have to be bad news for you. If you want to join in at no cost you can join Jonas, here.] External Advertisement When the REAL Crash Happens... Believe me, you’ll know. Stocks will tank. Bond yields will dip to nothing. Massive new tax hikes will be imposed. We will enter an unprecedented era of American austerity. It’s coming. Yet you can absolutely avoid this fate. Find out how in this new presentation. The Daily Reckoning Presents: Before the bust, you’ll want to add some “antifragility” to your portfolio... Smoking TNT and Drinking Daynamite, or Business as Usual By Chris Mayer The Hydra of Greek myth is a many-headed serpent with a bad temper. But it has a special ability that makes it very hard to kill. When you cut off one head, two grow back in its place. To author Nassim Nicholas Taleb, the Hydra is the perfect metaphor for “antifragility.” The awkward and invented word is the title of his latest book, subtitled Things That Gain From Disorder. It is a simple enough concept, but it is rich in application. As an investor, antifragility captures an idea that I think will be more important in our crisis-filled times. In short, you want to own some Hydras in your portfolio. Let us start with this aspect of the idea: You can’t predict when or what the next shock will be. (Unless you enjoy deceiving yourself, as Taleb points out.) But you can “state with a lot more confidence that an object or a structure is more fragile than another, should a certain event happen.” For example, you can state with confidence that a porcelain vase is more fragile than a steel pot if dropped. You can look at one building and deduce it will withstand an earthquake better than another. And you can compare stocks and say which is more likely to survive a crisis. While reading the book, I kept thinking of companies I like that exhibit traits of antifragility. Like banks that did not suffer in the financial crisis, but used the opportunity to buy failed banks for cheap. Or like real estate companies that find deals in distressed assets. I also thought of reinsurance as an example of a great antifragile business. Then, on Page 73 of Taleb’s book, I read: “Some businesses love their own mistakes. Reinsurance companies, who focus on insuring catastrophic risks (and are used by insurance companies to ‘reinsure’ such nondiversifiable risks), manage to do well after a calamity or tail event causes them to take a hit. If they are still in business and ‘have their powder dry’ (few manage to have plans for such contingency), they make it up by disproportionately raising premia...” All the reinsurer has to do is keep mistakes small and maintain a nice cushion? Such a reinsurer has awesome antifragile properties. The Laziest Portfolio on Earth Imagine sticking a wad of cash in a can... Burying it in your backyard... And then digging it up in five years to find that you had doubled, tripled... maybe even QUADRUPLED your money... That’s how this “lazy man’s” portfolio works... No gambling, speculating... or digging required. Click here to see how easy and simple it really is... I picked up on a similar theme in the June 1993 issue of Schiff’s Insurance Observer in a piece titled “Smoking TNT and Drinking Dynamite: It’s Business as Usual in the Insurance Industry.” Insurance is one of those quirky industries for which bad news is good news, a point we should keep in mind as insurers take their beating from Hurricane Sandy. As Schiff writes, “Earthquakes, hailstorms, explosions, blizzards, tornadoes and tropical storms are considered augurs of better times to come.” The theory is that as insurers take their lumps, there is less insurance capital around. Less capital around means higher prices for insurance. In this way, insurers make up the losses and then some. It doesn’t always work out that way, of course, but often seems to. Point being, reinsurance would seem a rare industry that gains from disorder. It is a Hydra. Hydras, though, don’t dwell only in certain industries. There are characteristics that cut across industries. I can’t do justice to the many ideas in Taleb’s book here, but I want to highlight one. “Skin in the Game” is a chapter in Taleb’s book. Simply put, if you want antifragility, it helps to have insiders with money on the line. No upside for anyone without downside. No freebooting CEOs with golden parachutes when they fail. No wonder, then, “there seems to be a survival advantage to small or medium-sized owner-operated or family-owned companies... There is a difference between a manager running a company that is not his own and an owner-operated business.” The latter has downside. Clearly, most of the stock market does not operate on this principle. Instead, most corporate “suits” have “incentives” but minimal ownership. They get a free ride at the shareholders’ expense. Taleb uses the example of Robert Rubin, who made $120 million in a decade at Citibank. Citibank collapsed, but Rubin kept his money. Shareholders lost. (And taxpayers, too, unfortunately.) This aspect of modern markets really irritates me. I get grumpier about it as I get older. I’m at risk of becoming a curmudgeon. Fortunately, as fragile as much of the market and its corporations may be, there are always exceptions. I want to own the exceptions. And some of these even profit from this world of disorder. Which reminds me of another metaphor I thought of for antifragility: the fictional private detective Philip Marlowe. In one of Raymond Chandler’s short stories, Marlowe says: “Trouble is my business. How else would I make a nickel?” Regards, Chris Mayer for The Daily Reckoning Ed. Note: Chris’ commitment to finding companies with strong fundamentals has led his Mayer’s Special Situations readers to some incredible gains -- 67%... 111%... 137%... and UP TO 463% in just the last two years. Simply put, he finds great, undervalued companies that will stand the test of time. And his readers are thanking him for it: “Mayer’s Special Situations letter is by far the best new letter I receive. The equity recommendations are a huge bonus that will pay for the investment (not cost) in the newsletter 10 times over.” -- Chuck B. “I would like to pass on my thanks to Chris for the great job he has done on this publication; it is truly one of the few investment research services I have subscribed to over the years that I recommend to friends and family...” -- Alan W. “I now consider MSS to be my flagship research service. What I like about it is the concentration on value combined with search for substantial upside potential -- which has proven itself. Your analysis and presentations elicit respect and trust, which are only enhanced by the results.” -- U.G. This is just small fraction of the glowing emails we receive regularly about Chris’ analysis. You owe it to yourself to see what everyone’s talking about. 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