Indeed it is speculation as a lot of what we do is speculate, obviously not in a financial sense but in the sense of trying to answer the 'what if' questions upon which we will make investment decisions.
This kind of 'speculation' is obviously a useful and necessary exercise. The idea that speculation is not worthwhile is deadly because, taken to an extreme, it is obvious that no one knows anything for certain. We would remain immobile if we allowed this kind of notion to overwhelm us.
Useful speculation is grounded on good sense, reason, logic, experience and a dash of intuition.
I think the article was useful in that regard.
We don't know the counterparty issues but we do know who are involved, we know the relative size of the risk, we know that some risks will definitely materialize and, if prudent, will assign a reasonable probability to such an event.
For me, given my utter lack of precise information, the best approach is a generalist's one. I do know that financial institutions are presently stressed by derivative and other risks but I cannot with precision say that Bank X will fail while Bank Y will survive. As a whole, however, I know there is some systemic risk because I know more or less what happened in 1998 when LTCM had its problems. That is good enough for me.
The investment solution for me has been to invest in an ETF that shorts financials as a class on a 2x leveraged basis. Although I have exited my position, it has been the source of some very nice returns in the last few months.
Since it is obvious that systemic risk is with us but I cannot for the life of me make a safe prediction as to how it will be contained and how much damage it will do, I chose to put a substantial amount of my PF in gold and in a double-long gold ETF, DPG, both of which have been very good to me. The assumption is a simple one, gold will go up in the face of systemic risk.
I 'speculate' that the crisis will be over at some point and that the markets will recover. I cannot say with certainty when that will happen - I think intuition will play as big a part of a successful determination of when a bottom is in place than anything else for fear and panic and the ability to gauge them will be paramount - but my plan is to be ready to invest into the beat-up shares of stellar companies for though it will seem like the end of the world, it won't be and the market will recover. |
