Markets Living in Reality Distortion


What One Can Learn from Wandering the Mountains

I tend to wander the mountains 1-3 hours each day. I am blessed to live next to Gyeryongsan (Phoenix Dragon Mountain or Rooster Dragon Mountain). I try not to look at maps. Today I looked at a map of the hills in the immediate vicinity of our place for the first time (in over a year), which was an interesting experience. It was a pretty good map and made a lot of sense to me, although it wasn’t 3 dimensional and it couldnt capture the feelings or sensations of weaving through the ancient pine trees, nor the breathtaking views and sense of achievement at the various summits.

It turned out that I have walked all the major trails on these mountains and more. Because I have a sense of the contours and where I am, I am bold enough to go off the trail in to the depths of the forest. And this heightens my experience and my knowledge of the mountains as well.

Its amazing how reliant we are on maps in our own self-development or self-actualisation. There are maps by the Christians, the Buddhists, the Hindus and the modern day ‘gurus’ like Tony Robbins. They are all great maps – but they are not the mountain. Somehow one needs to forge into the mountains alone and make the discoveries oneself. I always liked the Japanese approach to teaching. They would often say “katachi de hairu” which loosely means to learn by doing or perhaps more literally to enter through form.

Osho once said “Truth is an experience not a belief.” I guess there is a danger to that. I sometimes feel like I am getting lost, but the learnings are always profound. Life is dangerous and dynamic and beautiful in its ever changing nature. If I am too busy looking at the maps, I will never truly experience the beauty and the immensity of the snow-capped peaks.

Alan Watts once quoted a Chinese poet:

“Plucking chrysanthemums along the Eastern fence
gazing in silence at the southern hills,
the birds fly home in pairs,
through the soft air of dusk.
In all these things there is a deep meaning,
but when we’re about to express it,
we suddenly forget the words.”


We are living at a juncture of human history that is so historic – from robots to life extension and biotech to the likely breakdown of the nation state – it almost seems silly talking about the twist and turns of financial markets. There will be many major decisions to make that will decide one’s quality of life more than how you invest your stock portfolio, such as where to live, where to send your kids to study, what to do about your health, how to prepare for massive climate change, whether you should live in the city or countryside, and in which  industry you should work etc. And the new financial system is going to look totally different than it is today. But that said, many readers want to know where things are heading and do need to make decisions with their investments.

People used to speak about about Steve Job’s Reality Distortion field.  I am sure readers in Silicon Valley know all about it. His publicist once said:

“So when you worked with Steve Jobs everything that seemed impossible he made possible or he made you make it possible which is even more important and that became part of the reality distortion field. So that was the really the biggest part of that, was making the impossible possible.”

Reality Distortion Field of Steve Jobs

One investor thinks that Central Banks have created a reality distortion field, but  in this case I think he didn’t mean it in a positive way.

Today I watched a bloomberg clip with which  I had to concur: we are living in a big lie. The interviewee is Mark Spitznagel, Universa Investments president and chief investment officer. These are some of the key quotes with the video below:

“We are living in a reality distortion,” when it comes to what happened this week, and what will happen ahead, all roads lead to the central bankers at The Fed.”

“People feel we are in a benign investing environment… we are not!”

“We have been here before. Let’s remember The Great Moderation of the mid-2000s – we have seen this play out before and it will do the same thing again… It is so naive that people think they can put on trades like the short-volatility trade – I think people don’t really believe it but in the low-rate world, they are forced to chase and do crazy things…”

“It’s easy to snicker at how naive the short-volatility-trade was, but it is a short-gamma trade – which means there is feedback process where selling begets selling… There is no difference between that and people who are long the market – they are long the market because it went up; when it goes down people are not going to want to be long.”

Bob Dylan put it best, Spitznagel said, “people don’t do what they believe, they do what is convenient.. and then they repent… I think what we saw in the last few days was repenting, and there is more to come.”

Spiznagel on Market Crashes

This all makes sense from a bigger perspective. The biggest monetary policy experiment in history, the huge balances of the central banks along with the bloated debt in our economies all might seem a bit theoretical to the average citizen but they WILL come back and bite us at some point. It isn’t sustainable. And here is one measure of financial debt in the US system:

But I tend to think – and we have been saying this since early 2017 – that this market won’t peak until the middle of this year or so. The reality distortion of central banks will continue.

Yes we are late cycle if you think that this market has been rising since 2009. But given the 2 crises we have had in the interim – Europe in 2011 and China in 2015/16  – then perhaps it not as long as we keep saying. But more than than that many measures are not flashing red yet. The last pullback WAS predictable. We sent a chart out days before the sharp pull back showing how over-stretched we were technically.  But now I tend to agree with the Chief Global Strategist at Citi:

“Right now, still only four of the 18 “Bear Market” factors we watch are flashing red. Sure, valuations don’t look especially attractive and US corporate balance sheets are increasingly stretched, but other factors are less worrying. Companies are still fairly cautious — capex, M&A and IPOs remain subdued. At the top of a proper bull market, chief executives get sucked in as well. Equity fund inflows are picking up but still low compared with previous market peaks. Overall, we think that a second consecutive year of synchronised profit growth should be enough to push global indices to new highs. The dip we’ve had is one you should buy.”

Volatility will probably be higher than we have recently experienced so its going to be more of a roller coaster but stock markets can keep climbing higher. The way to go is to probably switch out of bonds and focus on stocks for the last hurrah…and start aggressively buying gold.

Gold and Silver

When one looks across asset classes today, there aren’t many bargains or things I might want to still be owning in 18 months time.  This is why I would be looking for special situations and major turning points in markets. We can talk about crypto later, but some of us are less confident of it being a form of digital gold going forwards. It has behaved just like a risk asset in the last move. So for me, gold and especially gold miners are looking highly attractive to me. The miners are seriously lagging the gold price even though their margins might have doubled from the bottom. I believe we are well out of the bear market in gold. So I find it a very attractive time to invest now.

Silver and silver derivatives also look attractive, with the extra long turn bonus of its use in next generation energy.

In fact,  the whole commodity complex looks attractive. Look at this chart I found:


I don’t have time here to go into too much detail but I thought that there were 2 interesting things I saw in the last 2 days. First was Putin’s very punchy comments about taking leadership in this sector.

Colleagues and citizens of the country may ask: Why do we need all this? We have oil, gas, coals, metals of all kinds … everything! But we need to further advance. This is what we need.”

“The Stone Age has not ended due to lack of stones, but because new technologies have appeared. And now new technologies appear in the world.”

He then went on to say that those who were late to enter the field wold be reliant on the early movers – “we cannot allow this.” Its worth seeing his punchy comments on the video:

Then there was Goldman Sachs’ decision to invest in a digital exchange:

Goldman Buys Digital Exchange


It wont have surprised the China Watchers that President Xi is being crowned Emperor with the change in the constitution. The Chinese military have been quick to sanction the move. In the South China Morning Post:

“China’s armed forces have voiced support for the ruling Communist Party’s controversial proposal to end the two-term limit on the presidency that could see Xi Jinping stay in power indefinitely.

The planned constitutional revisions – including removing the phrase about term limits for the president and vice-president – “are in line with the major theoretical views and key policies made during the Communist Party’s 19th congress … and reflect the new achievements, experience and demands of the party and the country’s development”, the PLA Daily said in a front-page report on Tuesday.

The military mouthpiece also described the move as “very necessary and timely”.

But many in Hong Kong – and Taiwan – are further worried about a hardline approach in those nations.

Martin Wolf at the FT thinks this raises the stakes in the competition between 2 systems:

“This shift back towards indefinite one-man rule in China, within the framework of an all-pervading Communist party, means that we are, once again, in an era of competition of systems, between democratic and — strange though it may sound (and indeed is) — communist capitalism. One implication is that the western democracies have to regard China not just as a rising great power, but as a strategic competitor. It is essential for China to be a partner over such challenges as climate change, world trade or global security. Indeed, in many of these areas, the direction of Mr Trump’s America First US is more worrying.”

I guess I shouldn’t be surprised by the framing. I sometimes wonder whether the Western media want us to end up in autocratic communism!

I have always really enjoyed my time in China. The Chinese have always been friendly and great hosts. And the police officers have always been considerably courteous and friendly. But of course one has to recognise that things are tightening up again there. China seems to be embracing aspects of AI which will further curb civil liberties. Now predictive policing – pre crime – seems to be really taking off. Although I must add many other countries want to go this way:

“Authorities in China’s troubled, heavily surveilled region of Xinjiang are deploying a platform that marshals the troves of data being collected to identify and pre-emptively detain potential troublemakers, according to a rights group.

Human Rights Watch said Tuesday the “predictive policing” platform combines feeds from surveillance cameras with other personal datasuch as phone use, travel records and religious orientation, and then analyzes the information to identify suspicious individuals.

China’s government has turned Xinjiang, a vast region on the border with Central Asia that thrums with ethnic tension, into a laboratory for cutting-edge surveillance and social control. High-definition cameras, security checkpoints equipped with facial recognition and police patrols armed with hand-held smartphone scanners blanket the region’s cities and villages.”

The whole article in the WSJ is here:

Pre Crime in China

Chinese Financial Sector – Anbang

Some people think that the Chinese government is just following through on its promise to tighten up on risks in the financial sector by taking over troubled Anyang Insurance and jailing its leader. Christopher Balding, a business professor in China, is a little more pessimistic and writes in Bloomberg:

“In their 2011 book “Reckless Endangerment,” Gretchen Morgenson and Joshua Rosner note that the 2008 subprime mortgage crisis in the U.S. was driven partly by a perverse symbiotic relationship between Washington and Wall Street. Because boosting homeownership was an explicit goal of policy makers, regulators had an incentive to look the other way as banks made dubious loans.

Anbang’s rise had a similar dynamic. Less than two years ago, it was one of many companies that China was urging to invest internationally. The government even suggested industries for these behemoths to focus on, such as technology, real estate and finance. Emboldened by this unofficial mandate, Anbang went forth and bought up assets around world, often on disadvantageous terms. Its debt levels implied that the company needed to earn a return on assets of close to 10 percent to meet its obligations. Now financial regulators will run the company for at least a year as its assets are sold and its finances are stabilized.

American regulators and politicians made many bad decisions before and after the 2008 financial crisis, but they ultimately realized they couldn’t — and shouldn’t — bail out all firms and individuals that were in trouble. Eventually, they allowed many banks to fail and home prices to plummet. This was painful, but it allowed for asset values to adjust and enabled a slow but steady recovery that lasts to this day.

Wonder whether there will be many overseas assets will ultimately have to sell over this cycle. This is exactly what happened to the Japanese after their shopping binges in the 1980s/early 90s.

Mobile World Congress

We mentioned the display of 5G at the Korean Winter Olympics yesterday. Now the Mobile World Congress is transpiring in Barcelona. I was excited by the walkabout pricing; and the Wall St Journal wrote an article asking the question have we passed peak pricing for handsets:

Peak Smartphones

Aside from snazzy new handsets, 5G is a big theme. This is the important infrastructure needed just to handle the current traffic and then prepare the way for the 4th Industrial Revolution. You can get a lot of information at their website and also see some of the keynote talks. This is the Ericsson CEO. Interestingly he touches on things such as how they will deal with things like remote surgery.

Keynote – Ericsson: President and CEO Borje Ekholm

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