But, these are "trading" sardines!

Capital Thinking • Issue #168 • View online

“Over the past 10 years it has not paid to be cautious.Low interest rates drove prices of almost all assets higher.

Pricier assets made people feel wealthier and thus magically created economic growth. Low interest rates also pushed people into riskier assets, thus creating a mismatch between the assets people hold and their true risk affordability and appetite.

So far, none of this has mattered — the more risk you took, the more money you made.

It will matter when risk gets ugly, because investor reaction to it will be more irrational than usual.”

- Vitaliy N. Katsenelson

From The Contrarian Edge by Vitaliy N. Katsenelson:

“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California.

The commodity traders bid them up and the price of a can of sardines soared.

One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good.

The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.” - Seth Klarman

Applying this to China, when an apartment becomes an unoccupied asset whose sole purpose to be used as a investment or speculation, it turns into a trading sardine.

Its price will rise until — nobody knows; but at some point someone will metaphorically open that trading can and Chinese real estate prices will collapse, bringing the banking system and the nation’s economy down with them.

Simply put, things that cannot go on forever don’t — it just feels like they’ll go on forever while you’re waiting for them to stop.

Today’s global investment environment is a game of musical chairs. Investors are up and marching along because the music is playing, hoping they’ll be able to grab a chair when the music stops (few will do so).

Accordingly, I am investing as if the music might stop any second.