WHAT WOULD I DO IF I WAS THE FED?

This year is a reminder that Mr. Market is the Almighty. Greed. Fear. Luck. Misfortune. What is simply accident and was is a real skill? Remember Hugh Hendry and his intellectual torture. Pleasure to read but useless otherwise. At least, so far.

In such a market no stock goes down without a proper reason. I am very curious to know what Michael Burry is doing these days. Is he also a part of a survivor's bias? Such thoughts are haunting me after a few investing setbacks. I think that mainly all heroes of Free Capital are simple survivors as for each one there are hundreds or thousands of those who did not make it. On the other hand, what do I know... there are guys from Graham-and-Doddsville. I did not see any pattern in Free Capital except that almost all of them had ten baggers, which set them free, meaning those were significant positions. For every big position, which worked 10 times there are thousand times more big positions, which has not worked.

Emotions aside, what would I do if I was the FED? I would love to know what is the tolerance of the market without risking too much to create an irreversible downward trends. It is easier said than done but something must be tried. Theoretically, the Fed can backstop at any market level. Practically, it is difficult to say.

But back to the question, what would I do?

a) I would pretend that everything is fine as long as possible; (e.g. perform stress test and find out that only 30b is needed to fix it all);
b) I would not let the new reality to set in ("muddle through" is good enough but "going down" - especially risking to reach the point of no return - is not affordable);
c) I would "slightly" manage statistics in case market overreacts downwards and fine tune later - similar to how GDP numbers are being "perfected" for a number of years.

The bad reality is that muddle through is not possible for too long (think 10 years) and this is the tragedy, which will cause another can kicking moment and potentially (4% probability) a full blow up of the system later. However, I think that money are on irreversible trend of losing value and the slowness of the process will cause the system to be in manageable equilibrium to infinity. I would place 4% probability to "nuclear" scenario and 96% to slow decay of money. It is nice to imagine, read and think about this "nuclear" case but it is not very probable. External shock could be a driver and it is the biggest unknown risk but this is normal (think about Buffett's fear of nuclear attack, Ebola expands exponentially, and similar).

Well, I think QE 4 and 5 is on the way but what is the level of S&P for that - this is the question? 1900? 1700? 1500? 1500 looks reasonable for me but could be too risky and too late, therefore, 1800 is probably a nice average to bear in mind. Well, I will note to myself that 2014 will be marked by indexes going nowhere, simply because all expected another 10-20% up year. Big move year will be saved for later.

THE BIGGEST LEGITIMATE INSIDER OF THE WORLD

I have been quiet for a while and traffic to the blog is just from search bots. As a coincidence, we are investing into a startup producing web robots. I (kind of) just want to write to myself that I have no intention to close this blog.

The first half of 2014 was not kind to portfolio and it is mainly my mistake in position concentration of option-like trades (they were not investments), which should be a fraction of portfolio and I confused feeling and past luck in similar situations to skill and knowledge. I let positions rise and did not liquidate in time, so since options expired worthless, portfolio is down double digits. Think of RSH, UNTK…

All these portfolio hits and my general busyness and lack of time made me rethink my current investments tactics. I have to admit that head is quite messy. Market is high and tempting to remove hedges. At least shorting small caps was a somewhat right insight. Well, I keep reminding myself that there is a price for cherry consensus and if everything would look right, there would be no upside left.

Thinking about general market perceptions is a fruitless thing, too. Who in his right mind can measure it? Do people are bearish too much or enough or not enough for the market to keep on climbing the wall of worry? Low interest rates just do not look right to me. Muddle through and new normal were very precise descriptions and predictions at their origination. At least, about the general background (I do not need even to search for evidence, it keeps coming like on a live news feed: Link).

So, who is this insider?

I am getting Daily Reckoning updates daily and sometimes read them, especially Chris Mayer and Bill Bonner. Chris is really good in giving tips to new interesting companies (whom we all tend to collect) and books, while Bill is a master of word and common sense. However, this time I read about insiders from a different author (Link).

I carry this insider idea in my head from early spring when Ukrainian situation was in its emotional Maidan stage. Such events cause stock fluctuations and Russian political decision makers do not have to report to SEC. It is trivial to make a billion dollars with a simple press release. It is redistribution of wealth in Russia when rich will get richer. But only for those who are close to the man.

It is September now and the idea does not seam so convincing anymore. The man has proven to be unpredictable and it is unclear what are his real motives, if any. Gazprom is a huge arbitrage story where a company with such proven reserves would cost probably 100x more if situated in a stable democratic country. Everything has a price. You can see my thought flow and here is the chart. The thing has started to brew between January and March.