Tempest. Not in a teacup.
France has unceremoniously kicked out
Le President. Greece has unequivocally flipped Chancellor Merkel
den vogel. Spain is worth less than Facebook. JP Morgan has just woken up to a US$2 Billion loss it breezily dismissed as a tempest in a teacup
a few weeks ago. Equities are about to [cue Daily Mail headline] plummet
(so much for the Equity Risk Premium – plenty of risk / no premium). UK gilt real yields
are negative (i.e. you pay
the government for the privilege of lending to the government. Che??). The new French President’s plane got hit by lightning
(which is what happens when you board a metal aircraft wearing a soaking wet suit
in a thunderstorm).
And Dave and Nick’s marriage is on the rocks.
My friends, connect the matrix of dots. The picture is as bleak as it is stark. The stage is set. The Tempest draws nigh. Or maybe not. But probably. One thing is certain: we are staring at a plethora of unknown unknowns. Tail risk abounds.
If ever you felt the need for a vivid, graphic, illustration of why you ought to hedge risk and not rely on a strategy of pious hope, the present difficulties surely provide it in Ultra High Definition.
Let’s talk about risk. You do not insure your house because you believe it will probably burn down sometime this year. Rather, you take out insurance because, in the highly unlikely event that your primary residence is razed to the ground, then, unless you are multi-billionaire Sir Richard Branson and can build it all again
, the consequences are unthinkable. Failing to insure your home is, to borrow a concept from the excellent Jim Collins
, a Death Line Risk.
A Death Line Risk is a risk so great, that, if it materialises, you will face catastrophic disaster. It is nuts to take Death Line Risk, whether you are climbing Everest
, riding a motorcycle, running a bank, or managing a pension plan.
Talking of pension plans and Death Line Risks, I am increasingly convinced there are, today, four categories of pension plan:
Those that figured out some time ago they were taking Death Line Risk by not diversifying their assets, not upgrading their governance structure and not de-risking, and did something
Those that talked of doing something about it - but never did
Those that have just worked it out and are urgently trying to figure out a survival game plan
Those that still haven’t figured it out.
[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer]