The Independent had a lot to say about the UK real estate market today. The front cover paints a gloomy picture about the capacity of young people to purchase their own homes, and several further articles speculate about whether people should even want to buy houses at all. Irrespective of their differing points of view, they all contain one common premise: that real estate matters. This is the key to the puzzle of the real estate market in the UK – the time to buy will arrive when people just don’t care one way or the other. My hunch is that this scenario is at least few years away…

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In the consumer goods industries, it is clear that consumers want to acquire consumption goods and that producers want to acquire monetary profits. In this way, both parties gain from each other and their preferences are broadly inline. In stark contrast, the business of financial speculation displays more antagonistic characteristics. When two financial speculators execute a trade against one another, there is no clear ‘producer’ or ‘consumer’, rather, both of them want the same thing (a profit) and yet only one of them can have it.

 

In my mind, the age-old method of contrarian investing is a means of navigating the antagonistic waters of the financial markets. Here, I explore the principles of contrarian investing in the rudimentary supply/demand framework.

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The equity bulls often cite the old adage about the market climbing a “wall of worry” when propounding their bullish theses. I have no problem with the adage as such, but as a self-professed equity-basher (for now!), I have a problem with the application. Here, I explore the context in which this famous adage should be applied.

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A difficulty with contrarian conjecturing is that one is never absolutely sure about whether one is thinking contrarily or not. One can only view the world with one’s own prejudices and belief structures in place, therefore the status of being a contrarian is never certain. So, when acting on contrarian conjecture, it makes sense to oppose trades where sentiment has reached wild extremes. When people seem to be absolutely in love with something, the contrarian can seek to oppose or avoid that thing. Conversely, when people seem to hate something, the contrarian can seek to embrace that thing. This brings me to cash; that is, physical Federal Reserve notes. I contend that the prospect of owning Federal Reserve notes in any size has become completely unpalatable for most investors and speculators. Therefore – as a self-professed contrarian – I contend that it could be highly beneficial to own a significant cash reserve in the coming months and years.

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The Concept of Risk

May 8, 2011

My hunch is that investors generally look at market analysis a lot more than they think about market philosophy. If this is true, then it is rather unfortunate; for how can one ascertain a ‘good’ or ‘bad’ analysis without a solid of understanding of what it takes for it to be ‘good’ or ‘bad’? A problematic symptom of this is a general confusion about ‘risk’. It is often said that ‘such and such is risky’ or ‘he took too much risk’ or even ‘this is less risky than that’. But what do these statements really mean? And if we can understand what they are supposed to mean, then are they even intelligible? In short, what is this concept of risk?

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In the financial markets, the catch-phrase ‘He who sells what isn’t his’n, Must buy it back or go to Pris’n’ reminds the short-seller of the potential consequences of his actions – indeed, it keeps him in check. However, when it comes to ‘shorting money’ (i.e. taking on debt), different rules are deemed to apply. The adjusted catch-phrase seems to be rather more comforting; ‘He who sells what isn’t his’n, Must buy it back or go to Pris’n Congress’.

 

Cartoon - 'Go to Congress' instead of 'Go to Prison'

Click to enlarge.

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The investment community has become polarized into two mutually antagonistic groups; the inflation people and the deflation people. Each group has its fair share of prejudices, and such prejudices are often assumed to be held by any ‘inflationist’ or ‘deflationist’.

 

Here, I put forward the contention that – as a contrarian investor – one shouldn’t be ‘loyal’ to either side. Further, in defiance of the perception of an antagonistic stand-off between the uber-deflationists (like Robert Prechter) and Austrian hyperinflationists, I’ll outline the links between Austrian economics and Robert Prechter’s convictions.

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