h/t to our steadfast and stoic advisor, Marcus Aurelius, for passing along this insightful interview with Michael Platt, CEO of BlueCrest Capital. By the way, you may see the associated article from Mish and his views on the interview here.
So, here are few thoughts on this, I’ll call it a “very disturbing”, interview:
- First and foremost, what Mr. Platt is talking about here are “mathematical certainties”, which have been addressed here for quite some time. This is, unfortunately, the central issue with all of this. There is such a thing as a point of no return. Nothing personal, it’s just math.
- Next, I find Platt’s obsessive use of the term “super-liquid” to be almost hypnotic, an effect surely aided by his impeccable English accent. Actually, this liquidity issue is, without question, among the most significant factors to consider. This, it would seem, is part and parcel of his “radical concern” regarding counterparty risk, insofar as it reflects the extent or depth of the potential contagion, the rate at which it can paralyze liquidity, and, ultimately, how these combine to create an ever smaller range of exits from a building that is already on fire. He’s saying, in effect, “So long as I’m still in the building at all, I’d like to be standing immediately in front of the nearest exist that is the least likely to blocked.” Sounds like a good idea, but it may also be high time to simply exit the building if there is no compelling reason to stay.
- Second, at this stage of the “fire”, which is – without question already well under way – is there a compelling reason to stay in the building? Some might argue that, even at this stage, that the risk of conflagration is still somewhat less than 100%, though it seems far enough beyond 50% to diminish my desire to quibble over it. In fact, the speed at which 50% can turn into 90% and at which 90% becomes 100% is likely to be astonishing when it happens. More to the point, since this phenomenon is a mostly a behavioral/perception issue, I think you have to be gauging sentiment rather astutely to have any hope of using that exit with any degree of alacrity. So why stay at all? As so well stated by Wayne Gretzky: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” My thinking is that the puck is leaving the building, sooner than we might think. (And, for what it’s worth, Platt’s moving his company out of the Eurozone is, itself, a rather significant fact, one we might all take to heart regarding where we ourselves are “physically invested”.)
- So, then, what can really be achieved by staying in the building, if just a little while longer? Even staying “super-liquid” in US and German bonds is going to get you what exactly? My guess: merely the top most cream on an already well developed foamy head of the latest and greatest bubble in human history. As more and more capital flows to these last vestiges of safety, we can see the ten-year “plummet” from 2% to what? 0%? Less than 0%? Maybe.
- Note: I wouldn’t really know, as a retail investor, just what that really gets you. Though Platt is staying on the shorter-term end of the bond market, you could buy ETF shares in something like TLT, I suppose, which is up 20% over the year, reflecting long- term rates (for 20 year bonds) declining from 4.18% to 2.67% – a 37% decline, thus, producing well less than a 1:1 payoff here. From here, one year out (Jan 19, 2013) $120 calls on TLT would cost you $7.75 and theoretically net $22.64, a 3:1 payoff, with 100% downside risk, of course. Something to think about, I suppose, but, still, is that really a smart play? Presumably, Mr. Platt has something a little better in mind that the average retail investor couldn’t simulate.
- Again, central to Platt’s concern is liquidity, which I take to mean that, no matter how bad it gets, he wants to position himself where the capital puck is most likely to flow towards. He, more-or-less rightly, I believe, thinks that will continue to be in the presumed “high quality” bonds, even if (perhaps, especially since) those will be repaid with newly minted currency, dollars or euros (or, is he really thinking revived deutschmarks?) But, his strategy implicitly reflects an admission that this is but a temporary strategy at best, and he’s not sharing his next move as yet, you’ll notice. He simply believes he’ll have time to sell his bond holdings in a still, presumably, “super-liquid” market, even if that liquidity is provided by the Federal Reserve itself, right?
- So, what’s his move after that? As with all market crash survivors, (even as Harry Dent himself would likely postulate), that would be buying some manner of hard assets, would it not? Though most conventional thinking would more strongly push for the acquisition of “depressed” equities, rather than the next most probable recipient of the capital flow-driven bubble, to my thinking, this is just splitting hairs a bit.
- The core logic to either strategy is that, (to mix our metaphors one more time) as the capital tide flows strongly towards one shore, it leaves another well exposed for the picking, timing being the key. You want to buy (or do your “clamming”) at a comparably low tide. What makes his current bond play somewhat compelling is that it is presumed to be a high tide already, though some strip of beach is still exposed, and relatively few are expecting a tsunami. But, tsunami’s are particularly notorious for sucking up quite a lot of water and exposing quite a lot of, normally submerged, tidelands before the big wave hits. So, even now, I would have to suppose that there are, indeed, value buys even in the bond realm.
- That I’m still inclined toward physical precious metals is still merely looking ahead, perhaps two or three moves yet, there being a few other intermediate strategies. Personally, I really don’t know how to time this stuff, don’t have enough capital to work with in any regard, and believe that any and all paper instruments will fail in this systemic contagion. That’s the core problem for me, ultimately, that the problem is, in fact, paper and all of it’s various derivatives, even to include stock shares and dollar bills themselves. If it were my business to be fully engaged, I would suppose that I’d have to play any and all of these strategies, including pre-planned “ex-filtration” and “flanking” maneuvers, ha, ha.
As I told our friend Marcus, “just thinking out loud here”.
PS – Bad literary form, I know, but my apologies for mixing so many metaphors: ice hockey, burning buildings, clamming – perhaps surfing – with tsunamis, and military maneuvers. I’ll try a bit harder to stick with one and only one metaphor at a time in the future.