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.