Monday, September 27, 2010

Excerpts from Dylan Grice's latest piece

Via Zero Hedge.

Albert [Edwards] and I have a reputation as bears. And it’s true that we tend to focus on the downside. But that’s because we believe that over the long haul, those who think about risk scenarios - whether precedented or not – are more likely to be prepared for them and to know a good hedge when they see one. So this week I want to explore some insurance ideas around inflation, deflation, bond market blow-ups and oil market instability. If we can manage our downside risks well, the upside will look after itself.

“Hope for the best, prepare for the worst,” goes the adage. It would be nice to think that the crash and near collapse of 2008 was anomalous, unusual and unlikely to be repeated. But a cursory glance at any history book shows how regular such ‘outliers’ are. We wish it weren’t true, but the fact is that bad things happen. Regular readers know Albert and I spend a lot of time thinking about downside risks. We don’t do this because we think we can predict when they’ll happen or even if they’ll happen. We do it because they might happen and the most basic defence against the ‘sea of troubles’ is to be aware of just how outrageous the slings and arrows of fortune can be.

We have no qualms about being thought of as extreme bears … but the truth is that being realistic isn’t the same as being pessimistic and we’d bet on the prepared realists over the blind optimists every time. If readiness is the first blockade against the unexpected, well chosen insurance is the electric fence. So this week I want to focus on some insurance ideas.