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October 7 - November 2, 2019
Think of a low MS index for a cash-rich investor as analogous to the no longer dormant conifer seeds after their serotinous cones have opened, ready to spread throughout the fire-cleared, competitor-free land, enriched by nutrients of their vanquished predecessors.
The sudden realization of mass correlated entrepreneurial error is Austrian-speak for “stock market crash,” as most if not all companies suddenly are revealed to have been priced wrong, and many are engaged in (and now looking to quickly exit) projects that one minute were considered profitable, and the next not.
The first and second century CE Roman poet Juvenal is credited with coining the term black swan in reference to a “decent” wife—“a rare bird, as strange to the earth as a black swan.”3
When the MS index is high ex ante, subsequent large stock market losses and crashes are no longer tail events at all—rather they are perfectly expected events. To Austrian eyes, these epochal losses were not unforeseeable.
the real black swan problem of stock market busts is not about a remote event that is considered unforeseeable; rather it is about a foreseeable event that is considered remote.
Intertemporally challenged and further blinded by a myopic focus on the now, they price in only Anglo swans, missing the Viennese bird lurking conspicuously in the weeds.
tail hedging, as I have been explicitly practicing for about 15 years now, should be called central bank hedging—or, better yet, as I have coined the term, Austrian Investing I.
(Puts are just as much about reinvesting cash at a market low as they are about making money on the path down to that low.)
It seems the stock versus cash decision of the basic Misesian strategy (and of virtually all asset allocation decisions, and a good bit of academic research) is entirely misplaced with the availability of other such Austrian tools.
our investment goal is to maximize our investment edge at some particularly advantageous intertemporal points in the future.
the hedge is a Ziel, an intermediate objective, a waypoint of advantage along a roundabout path known as Austrian Investing.
The commonality of the two strategies—one to pinpoint when to avoid the market and the other to exploit the distortion—is the importance of preserving and generating capital to be deployed opportunistically later, when the moment is right.
tail hedging is, indeed, shi, becoming the means and setup for strategic positional advantage—a fully loaded crossbow (with extra arrows in the quiver) to be fired later when the vulnerable target appears. As such, tail hedging is a tool that allows us to actually exploit the distortion and not succumb to it.
We either can keep our capital on the sidelines in reserve (what I have called the basic Misesian strategy), or we can enter positions that opportunistically generate capital when its deployment is most effective (the more sophisticated complement of tail hedging, and what I call Austrian Investing I)—shi strategies all.
As always, we are guided by the Austrians’ principles of parsimony and fidelity to reality.
Austrians often come under fire, even today, as being quaint or medieval, yet they avoid the false precision that plagues the smartest guys in the room who built impressive and clever computer models of the financial markets that seemed to predict just fine . . . until they didn’t.
Roundabout production, therefore, cannot focus myopically on the immediate profit; rather, it invests teleologically, building the indirect means—the positional advantage—toward the ends of profits that will not materialize in the near term.
