Archive for July, 2009

Is the GFC the final crisis?

Thursday, July 30th, 2009

Late last year, the global financial system suffered a near death experience. History will remember that year as the Panic of 2008 (there was a panic 101 years ago too- the Panic of 1907). Today, there’s a belief that the worst of the Global Financial Crisis (GFC) is over. Thus, assuming that March 2009 is the pinnacle of the panic, then it must follow that things can only get better and that stocks will have to continue its long-term upward trajectory. The only question is how ‘fast’ stocks should go up to reflect the speed and extent of the ‘recovery’ (and in our opinion, also the speed in the rise of price inflation- see Can we have a booming stock market with economic calamity?).

But make no mistake about this: deflationary pressures still exists and it is still possible that asset prices can suffer seasons of mini-panics. If history is any guide (e.g. Japan in the 1990s and the Great Depression), the lows of March 2009 can still be challenged in say, a couple of years time.

Now, in the midst of witnessing all the unfolding drama of the GFC, it is easy to believe that the GFC is the final major economic crisis of our lifetime. It is easy to imagine that after the global economy survives this near catastrophe, it’s time to move on to the next phase.

But please understand this: the GFC is not the final crisis of our lifetime. There is a bigger looming disaster emanating from the United States that will begin several years from now. To the extent that the US dollar still functions as the global reserve currency, it will affect the rest of the world. What is this looming disaster?

Remember what we wrote in How is the US going to repay its national debt?? As we said in that article,

Meanwhile, the social security system faces an unfunded liability estimated by the Government Accountability Office at $US6.7 trillion and the unfunded liability of Medicare is $US34 trillion.

This liability is “unfunded” because the US government has not budgeted for it- it is paid as the liability is due. In total, depending on the various guesstimates, we can expect the order of several tens of trillions of dollars worth of debt (several hundred percent of US GDP) owed by the US government in the decades to come. The first of these social security liabilities will kick in in 5 years time. This is when the beginning of the tidal wave will begin. Where is the US going to find the money? Are the future tax revenues enough? We’re afraid they have no choice but to crank up the monetary printing press in order not to default.

That is when the real financial crisis in the US begins. Meanwhile, even the “funded” part of the budget deficit is still projected to grow.

Government taking tougher line on debt and bubbles

Tuesday, July 28th, 2009

To be a successful investor, one must be be aware of the sea-changes that are happening in the economy and financial markets. One of the sea-changes is in the line of central bank thinking. As we wrote in How are central bankers going to deal with asset bubbles?, central bankers are now more ready to deal with asset price bubbles than before. Previously, central bankers were targeting price inflation rate with their monetary policy while they stood idly by to let house prices form a bubble. As Glenn Stevens, governor of the RBA said today as reported in this mainstream news article,

Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track.

Please note that we are not endorsing the economic literacy level of that news article. Rather, we are quoting Glenn Stevens to show you what is going on inside his mind. The RBA is also hinting repeatedly that the next move in interest rates is up. Basically, the RBA is telling Australians this: you better wake up from your old ways and get serious about repaying your debts because the party is over.

This line of thinking is in sharp contrast to China’s central bankers, who are allowing a debt bubble to grow (see Is China setting itself up for a credit bust?) and spill over into asset prices (e.g. property and stocks).

The next sea-change is the change in the line of thinking from our dear Prime Minister, Kevin Rudd. He wrote in his essay published a few days ago,

The roots of the crisis lie in the preceding decade of excess. In it the world enjoyed an extraordinary boom… However, as we later learnt, the global boom was built in large part on a three-layered house of cards.

First, in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: ?For 25 years [the West] has been consuming more than we have been producing … living beyond our means.”

Second, these debts were racked up on the back of sky-rocketing asset prices. In several countries, stock prices and house values soared far above their true long-term worth, creating paper wealth that millions of households used as collateral for their growing debts.

This crisis has shown we have reached the limits of a purely debt-fuelled global growth strategy. Not only will the neo-liberal model of the past not provide growth for the future, its after-effects will make recovery more difficult. Mountains of global public and private debt, global imbalances, and a weakened global financial system will drag on global growth for a long time. As the renowned financial columnist Martin Wolf has written: “Those who expect a swift return to the business-as-usual of 2006 are fantasists. A slow and difficult recovery, dominated by de-leveraging and deflationary risks, is the most likely prospect.

This had been what we were arguing for a few years already (see Aussie household debt not as bad as it seems? on January 2008 and The Bubble Economy in October 2006). Kevin Rudd has finally understood the root cause of the GFC- spendthrift ways financed by rising debt using bubbly asset prices as collaterals. Now, he acknowledges that de-leveraging (repayment of debts) will be the fashion for a long time, in contrast to the past few decades of increasing debts. For many Generation Xs and Ys, the change from profligate to more frugal ways will be alien to them.

Unfortunately, as the mainstream always do, both the RBA and government is one-step behind.

The global economy is like a heart-attack patient on a life-support system. He faced a near-death experience in the second half of last year. Today, his condition has stabilised. But it will be a long time before he will fully recover and be fit enough to run again as in 2007. What the government is doing today is to inject more steroids (targeted stimulus spending financed by public debt) in the hope to see the patient running as soon as possible. The result is a walking zombie on life-support system (massive liquidity injections via ‘printing’ money).

As we wrote in Marc Faber vs Steve Keen in inflation/deflation debate- Part 2: Marc Faber?s view, the government is in danger of painting itself into a corner with no exit strategy (even though they’re talking a lot about it). If the exit strategy fails, we know the result is very high inflation (maybe even hyper-inflation).

How big is the credit bubble in China?

Monday, July 27th, 2009

In our previous article, we wrote of the credit growth in China. Today, we will show you the size of the total debt in China:

Chinese loan growth

Click on the graph for a full-size image

The Chinese total private debt to GDP ratio is 123% in January 2009. By June 2009, it is 146%. Currently, Australia’s total private debt to GDP ratio is south of 165% of GDP.

No wonder China could achieve such a spectacular ‘recovery!’

How is China slowing the never-ending stream of $US? Part 2: Forex escape valve

Thursday, July 23rd, 2009

In the first article of this series (How does China ?save?? Story of the circuitous journey of a US$), we showed you how the US$ leaked out of America from its current account deficit, streamed into China, showed up as monetary inflation of the Chinese currency and then flowed back into America as investment. In the previous article, we showed you how China opened up an avenue to slow down the never-ending flow of US$ into China. Today, we will explain to you another step that China is going to take to reduce the US$ inflow.

First, let?s take a look at steps 3 to 6of the process in our first article,

  • The remaining US$3 ends up in a factory in southern China. The deal between Oral-B and the Chinese manufacturer is denominated in US$ (i.e. the Chinese manufacturer is paid in US$). But US$ cannot be used in China because the RMB is the currency of China. So, what happens next?
  • The Chinese manufacturer will present the US$ to a local Chinese bank (say, the Shenzhen Development Bank). He has to show the receipts to the Shenzhen Development Bank (SDB) to prove that the US$ is earned by trade and not through speculation.
  • The Shenzhen Development Bank (SDB) will take the US$3 in exchange for RMB.
  • In China, the SDB has to surrender all of its US$ to the PBOC for RMB at whatever the official exchange rate.

Basically, US$ is like contraband in China- banks have to surrender all of them to the State. But things are changing…

Our long time readers may recall that back in October 2007, we wrote China considers leaking money to overseas stock. Back then, the Chinese government was toying with the idea of allowing private investors to punt in the overseas stock market. It was a pilot project back then.

From August 1, a new change will take into effect. As this official Chinese news report said,

China’s foreign exchange regulator said Wednesday it would loosen its controls on overseas investment procedures and foreign exchange management of domestic companies to boost outbound investment.

In other words, the Chinese government is making it easier for US$ to flow out of China as investments by the private sector. This will mean less pressure on the burgeoning official forex reserve.

Along with this new capital freedom, we expect the next logical step will be towards the eventual float of the RMB. This is because capital freedom and currency peg can be a dangerous powder-keg combination. To understand why, you may want to read this article that we wrote back in October 2007. But be warned, a float of the RMB will not happen tomorrow. The Chinese government will take their time reach that eventual destination.

How is China slowing the never-ending stream of $US? Part 1: Currency swaps

Tuesday, July 21st, 2009

In our previous article, we showed you the circuitous route made by a US$ from America (as consumer spending) to China and then back to America as investment in US Treasury bonds. Once you understand this process, you can easily see (as one of our reader David saw) how the US export inflation to China (see How does the US export inflation?). Also, it is easy to see (as another one of our reader Steve Netwriter saw) a problem with such an arrangement. This is what is commonly called a “massive global imbalance.”

So, you can see the never-ending stream of US$ flowing from America to China (and then back to America) as some sort of air streaming via a hose into a balloon waiting to burst. Recently, China has tweaked the rules in order to let some air out of the hose. What are the tweaks?

First, let’s take a look at step 7 of the process in our previous article,

Trade between China and other countries are also settled in US$, which means even more US$ are piled up in the PBOC.

Usually, when China trades with many other countries, the accounts used for the trade is denominated in US$. For example, if China wants to buy palm oil from Malaysia or sell textiles to Europe, US$ are used for settlement. Therefore, the net US$ that flows into China does not come from America alone.

What is happening today is that China is quietly setting up currency swap systems with its trading partners one at a time. With a currency swap system in place, the currency used for trade can be denominated in the Chinese currency (RMB) instead of US$. As this news article reported back in March 2009,

The agreement marks Argentina as the fifth nation to sign currency swap agreements with China following similar agreements with South Korea, Malaysia, Belarus and Indonesia. China ranks as Argentina’s second-largest trade partner.

Some people are saying that this is China’s scheme to slowly supplant the US$ as the world reserve currency. This will happen if/when one day, China captures more of the world trade then the US.

In August this year, China will open up another avenue for the US$ to ‘leak out.’ Keep in tune!

How does China ‘save?’ Story of the circuitous journey of a US$

Sunday, July 19th, 2009

One of the most common expressions that we hear today is that “China has a very high savings rate.” It is said that China saves 50% of its income. But as investors, we have to be very clear what this high savings rate mean. Does it mean that Chinese families and individuals, on aggregate, save 50% of their income? Certainly, the personal savings rate in China, on aggregate, is higher than the West. On the other hand, the Chinese, especially the younger generation, are emulating the profligate and spendthrift of their Western counterparts (see Chinese increasingly overdue on credit cards)- their rising credit card debt arrears and skyrocketing mortgage debt in the major cities shows that they are learning the bad habits of the West fast.

It is fair to say that the personal savings record of the Chinese does not fully account for the 50% savings rate. So, what does this high savings rate mean?

In reality, China’s high savings rate is the result of forced savings by the government. The Chinese government ‘forced’ savings on the Chinese people by accumulating massive US$2 trillion reserves (as foreign assets, notable US Treasury bonds) on behalf of their people through the currency peg. To understand how it all works, consider how the US dollars spent by American consumers typically ends up as US Treasury bonds in the US (China recently announced changes to the rules, which will affect the steps below):

  1.  An American consumer pays US$30 for an Oral-B electric toothbrush at Wal-Mart.
  2. Most of the US$30, say US$27,  stays in America to pay for the worker’s wages, distributions costs, transport cots, Wal-Mart’s profit, Oral-B’s profits and so on. This US$27 is part of the 70% consumer spending portion of the US economy. That US$27 helps to ‘stimulate’ the US economy.
  3. The remaining US$3 ends up in a factory in southern China. The deal between Oral-B and the Chinese manufacturer is denominated in US$ (i.e. the Chinese manufacturer is paid in US$). But US$ cannot be used in China because the RMB is the currency of China. So, what happens next?
  4. The Chinese manufacturer will present the US$ to a local Chinese bank (say, the Shenzhen Development Bank). He has to show the receipts to the Shenzhen Development Bank (SDB) to prove that the US$ is earned by trade and not through speculation.
  5. The Shenzhen Development Bank (SDB) will take the US$3 in exchange for RMB.
  6. This is where China is different from the West. In Western countries, a bank in SDB’s situation can do whatever it likes with the US$- e.g. trade them for euros or yen on the foreign-exchange market, invest them directly in America, issue dollar loans and whatever they think will bring the highest return. In China, the SDB has to surrender all of its US$ to the PBOC for RMB at whatever the official exchange rate (the RMB is ultimately created from thin air by the People’s Bank of China (PBOC)- see Why is China printing so much money?).
  7. Everyday, there are thousands of transactions between the local Chinese banks and the PBOC. The pile of US$ that keep piling up in the PBOC like crazy. Please note that trade with America is not the only thing that result in US$ streaming into China. Trade between China and other countries are also settled in US$, which means even more US$ are piled up in the PBOC.
  8. The PBOC transfers the US$ to the State Administration for Foreign Investment (SAFE). SAFE must figure out what to do with the rising pile of US$ (which is currently over the US$2 trillion). Some will be parked in US stocks, bonds, euros and so on. But the great majority ends up as boring US Treasury bonds.
  9. And so, the US$ makes a round trip back to America, hopefully to be used on Chinese goods again.

From this, you can see one thing: as long as US$ keeps streaming towards China, SAFE has to keep on investing them. Most of these US$ investments will end up as US Treasury bonds because it is the only market that is big and liquid (and politically sensitive) enough to absorb those never-ending stream of US$. Therefore, no matter how much China dislikes holding its forced savings as US$ assets, it has no choice.

But lately, China had announced some changes in rules that will hopefully alter the status quo (which they detest). Keep in tune!

Is China setting itself up for a credit bust?

Thursday, July 16th, 2009

Today, China posted an impressive 7.9% GDP growth in the 3 months to June 2009. The most commonly accepted reasons for such a rapid revival in growth are:

  1. 4 trillion yuan stimulus package
  2. Relaxation of lending standards for banks

No doubt, this gives the markets plenty of reasons to be optimistic about the world economy. Economic figures for housing and autos seem to point to a strong recovery in China. Yet on the other hand, there are many other contradictory economic signals as well. For example, Chinese exports are falling for 8 months straight (see China’s exports sink 21%). Consumer prices fell 1.7% in June (see China’s June CPI falls 1.7%). Producer prices fell 7.8% in June (see China’s PPI falls 7.8% in June).

The biggest concern we have for China right now is the surging growth in lending. Take a look at China’s lending growth over the past 3 years:

China's credit growth 2006 to H1 2009

As you can see, bank lending in China surged in 2009. As the Chines economy slowed significantly, it is very likely that private demand for debt will decline significantly too. What do you think will happen if the Chinese government force feed even more credit into the economy? Chances are, a lot of these credit will leak into speculations, unproductive projects and mal-investments.

This is a recipe for exploding amount of bad debts in the near future.

What’s the deal with China’s arrest of Stern Hu?

Tuesday, July 14th, 2009

Last week’s arrest of Stern Hu, Rio Tinto’s iron ore negotiator in China, on ‘espionage’ charges had caught many by surprise. Curiosly, the charges that were laid on him were, in the eyes of the Chinese government, matters of national security. In Western standards, such charges (e.g. bribery to obtain information on bargaining position), even if substantiated, are deemed commercial in nature.

What is going on? Why is the Chinese government doing that? Good questions. In fact, there are more questions than answers in this case.

Whatever turns out to be eventual outcome for Stern Hu, one thing is clear- the annual iron ore price negotiation is currently frozen indefinitely. The Chinese steel industry, before this incident, was a fragmented bunch of mob. Some of the steel makers wanted to break ranks and cave in to a smaller price cut. But with a few of the Chinese steel executive arrested too (this fact is overshadowed by the arrest of Stern Hu), it seemed that the Chinese government is imposing discipline on their own steel makers to force them into line. Only then can the Chinese steel industry present an united front against the pricing power of BHP-Rio. Currently, there are investigations being carried out at steel mills in China as the industry wondered whether more arrests are to follow.

Obviously, the impact on Rio Tinto is not good. As long as this incident is not resolved, it will imply revenue loss for Rio Tinto. The impact on China, however, is less clear. If this incident is a calculated move by the Chinese government, then it is likely that they are already prepared for an extended impasse. As we wrote before in Australia is a pawn in the international game of commodities,

Over the weekend, Michael Sainsbury wrote in The Australian that China has stockpiled a remarkable 100 million tonnes of iron ore. It?s one thing to stockpile copper, but iron ore is not easy to store in such huge quantities.

But is this move made by the Chinese government to gain merely a commercial advantage? If so, then it’s a very clumsy way of achieving a commercial goal. By using the national security apparatus on a common bribery case (who don’t bribe in China?), the Chinese government is politicising a commercial issue. This issue seems to be more than just a commercial matter. As this article reported, it was the Chinese president who endorsed a probe into Rio Tinto. Professor Yu Ping, an expert on Chinese criminal law said here,

My experience is the people working at the Shanghai State Security Bureau [who arrested Stern Hu] are well educated. Many speak English and are more competent and more aware of the national interest than their counterparts at the Public Security Bureau,” he said.

You have to assume that detaining Mr Hu is a calculated decision knowing full well the international political sensitivities of doing it during the iron ore negotiations.

The fact that the Chinese government did not bother to inform the Australian government of the nature of the charges (and Australia’s foreign ministry had to scour the official Chinese media to learn of that) shows that China is, for whatever reason, deeply offended with Australia.

Not only that, why would China want to elevate this issue from commercial matter to a national security issue?

As this news article reported,

The investigation into Rio appears to be part of a realignment of how China manages its economy in the wake of the global financial crisis, with spy and security agencies promoted to top strategy-making bodies.

The nine-member standing committee of China’s Communist Party, led by President Hu, had taken more control over economic decisions at the expense of the State Council, led by Premier Wen Jiabao, it said, quoting anonymous Chinese economic advisers. The president endorsed the Rio investigation, it said.

International security analyst Clive Williams said every country, not only Australia, now faced difficulties dealing with China, because of the country’s looming economic problems and leadership sensitivities about them.

Coming from a resource-rich lucky country, it is easy for people like us in Australia to see the world as one of plenty. In fact, relative to its small population, Australia has a glut of natural resources. China on the other hand, relative to its colossal population, sees the world as one of scarcity. Therefore, in our eyes, the Chinese government is over-reacting over a commercial dispute. As we wrote before in Nations will rise against nations,

Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise. We have no doubt that there will be plenty of Black Swans appearing in the days to come.

Certainly, there is more than meets the eye in Stern Hu’s arrest.

How are central bankers going to deal with asset bubbles?

Sunday, July 12th, 2009

Prior to the Global Financial Crisis (GFC), central bankers tend to adopt the ostrich’s mentality to asset price bubbles. Alan Greenspan, the chief architect of this school of thought believes that central bankers should only target price stability and price inflation with their interest rate levers. Greenspan argued that since it is impossible to know when bubbles will burst, it is impossible to intervene at the right moment (we heard of another twist to Greenspan’s argument- one can never know whether it’s a bubble until it bursts).

What about Australia? As we reported in What should the RBA do?, the RBA, regardless of whether it believes asset price bubbles are dangerous or not, do not have the mandate to prick them,

The masses have not given the RBA the mandate to spoil the asset price inflation party. Although, Ian Macfarlane acknowledged that asset price bubbles can be very dangerous for the economy, his hands were tied. Elsewhere, Coalition opposition politicians were toeing the populist line by demanding that Glen Stevens (the current head of the RBA) be grilled more frequently in order to pressure him against hiking interest rates.

This ostrich mentality of central bankers is strongly criticised by the Bank for International Settlement (BIS). As we wrote before in Bank for International Settlements (BIS) warning on stimulus spendings, the BIS is the

… only international body that had correctly anticipated the global financial crisis (GFC) and warned of another great depression back in June 2007, when they released their 77th annual report (see Bank for International Settlements warns of another Great Depression).

The BIS is dubbed as the central banker of central banks. Its chief-economist, William White, whom we believe is from the Austrian School of economic thought, warned central bankers repeatedly of impending global financial disaster and implored them to re-think their strategy as early as 2003.

Greenspan and White stood at opposing sides. It seemed that Greenspan’s views held sway among the central bankers. He was dubbed as the “Maestro” and was celebrated as the world’s greatest central banker. No one in the world of central banking dared to openly criticised Greenspan, except for William White of the BIS. Since Greenspan was a member of the board of directors of the BIS, he was technically White’s superior. Greenspan had the upper hand until…

… until the GFC erupted and the financial world order came close to collapse in 2008. And so, Greenspan is dis-credited today. White’s theory gained ascendency. As this article reported,

The group of the 20 most important industrialized and emerging nations, which is now left with the task of cleaning up the wreckage of the crisis, apparently faces less academic problems. At the London G-20 summit in April, the group decided to promote a crisis-prevention model based on White’s theories.

They want to introduce what might be called his hoarding model, which calls for banks to build up reserves in good times so that they can be more flexible in bad times. The central banks, according to White, must actively counteract bubbles and exert stronger control over the financial industry, including hedge funds and insurance companies.

As an adviser to German Chancellor Angela Merkel’s group of experts, White helped to shape the basic tenets of the new order. And the 79th annual report of the BIS, published in Basel last week, also reads like pure White. It lists, as the causes of the crisis, extensive global imbalances, a lengthy phase of low real interest rates, distorted incentive systems and underestimated risks. In addition to improved regulation, the BIS argues that “asset prices and credit growth must be more directly integrated into monetary policy frameworks.”

What does this imply for investors?

It means that any investments and investment strategy that depends on ever rising asset prices to work will no longer work in this new global financial order. To put it bluntly, in this new financial order, the Reserve Bank of Australia (RBA) will not let property prices balloon as it did over the past 10 years. As the RBA governor Glenn Stevens said (as reported in this Bloomberg article),

 Australian central bank Governor Glenn Stevens said policy makers must be cautious about cutting interest rates too far because that may encourage some borrowers into debt they can?t afford.

?It is the intention of current monetary policy settings to lower debt-servicing costs, assist efforts to reduce leverage and support demand,? Stevens told a conference in Townsville, Australia, today. ?It would be counterproductive, though, if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates.?

This is just an example of a sea-change in thinking among central bankers.

How should you go about investing in silver?

Friday, July 10th, 2009

After having read our series of articles on silver, you may wonder how you should go about investing in silver. Knowing about the potential for silver prices to sky-rocket is one thing. Benefiting from it is another. Today, we will go into that.

First, as you may already have known by now, when we used the word “silver,” we mean physical silver bullion. Financial assets disguised as silver (e.g. silver ETF, silver certificate, etc), at the end of the day, are just paper assets- they are not the real thing. This is especially true for silver ETFs. For example, in the SEC filings for the iShares Silver Trust, it has clauses that say something like “the liquidity of the iShares may decline and price of the price of the iShares may fluctuate independently of the price of silver and may fall” and the “iShares are intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver.” Silver paper assets are great for trading silver, but you may not want them as long-term investments.

Next, if you are very sure that silver prices will roar mightily in the future, should you pour all your life savings acquiring it?

To answer this question you have to understand that investing in silver falls under the Black Swan investment category. For those who haven’t already, we urge that you read Failure to understand Black Swan leads to fallacious thinking first. We encounter frequent and stubborn misunderstanding of the concepts of Black Swan. As we wrote in that article,

As we talk to more and more people, we encounter a very frequent lack of understanding of Black Swans (for those who wants to learn more about Black Swans in detail, we recommend this book: The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb). As a result, many people have this erroneous belief that contrarians are predictors of gloom and doom. The more entrenched this lack of understanding (of Black Swans) is, the deeper the fallacy one will fall into. This lack of understanding will degrade the quality of one?s thinking, which can translate to severe financial loss when investing.

Today, we will again attack the stubborn entrenchment of this conception black hole.

Many people have heard of and read Nassim Nicholas Taleb’s book, The Black Swan: The Impact of the Highly Improbable. But not many really understand it properly. It took us a few re-readings of Taleb’s winding meandering prose to fully grasp the concept of Black Swans. If you have not read Failure to understand Black Swan leads to fallacious thinking, please read that first…

… now that you have read that article, you should be able to appreciate this fact: when we talk about the potential of silver prices to explode, we are not making a ‘prediction’ of the future. As we wrote in that article, a parachutist packing a backup parachute is not making the ‘prediction’ that his primary parachute will fail. The backup parachute is there to ensure his survival should his primary parachute fail, which is unlikely based on statistical probability. In the same vein, based on statistical probability, it is improbable that the silver fuses (that we wrote before) will light up because it had not happened before. But should the fuses light up, you can be sure that the price impact will be massive.

Therefore, to profit from Black Swan investing, you have to implement an asymmetric pay-off strategy. This idea is very similar to the one that we wrote in the guide, How to profit from a stock market crash?. As we wrote in this article in that guide,

The basic idea behind the asymmetric payoff strategy is simple. First, you structure your bet in the market such that if you lose the bet, your loss is very tiny, but if you win, your gain is very massive. Next, you bet that the market will crash within a specific period of time. If you lose that bet, place another bet for the next period of time. You do this repeatedly until the day of the Black Swan event when your profit overwhelmingly overshadows your accumulated small losses.

Obviously, the disadvantage of this strategy is that it requires fortitude to absorb small losses indefinitely while waiting for a highly rewarding final vindication in the end.

In the same vein, investing in silver means accumulating it slowly, bit by bit and patiently waiting for the silver fuse day. Because you are investing one tiny bit at a time, it should not have any material financial impact on your day-to-day life. In other words, you are investing with your ‘loose change.’

Maybe the day of silver fuse will never come. In that case, the most you will lose are your ‘loose change.’ But should the day of silver fuse arrives, your ‘loose change’ is going to be worth many times over, maybe even a fortune.

Remember, do not bet a large chunk of your life savings into the silver fuse story.