Inflation and other scares

Last week I decided to do a bit of a change, instead of passing my days sit at my kitchen table working, I took a week off…to pass my days on the couch in front of my kitchen table. At least that was the plan; as exciting as it sounds, it is still more exciting that not using your holidays and give them back for free to your master.

I still managed to accomplish something unique: my apartment has been burglarized in the middle of a lockdown when you are forced at home 24/7. Sort of. Real story is even sillier but it goes beyond the purpose of this blog. I spent 30 minutes of my free time trying to understand how to tokenise my soul and sell it as a NFT (did I tell you I had fun last week?); I did not have much success but after the theft I wondered why I did not have all my valuables on a blockchain…it took me the time to settle a Bitcoin transaction (another half an hour) to actually myself and remember that thefts on the blockchain happen all the time.

Talking with the police, I learned how you can get convicted of theft in the UK:

• there is a CCTV video of you committing the crime
• there is a witness of the crime (uh?)
• the stolen item is presented to the judge during the trial (uh? uh?)

I also learned how you DO NOT get convicted of theft:

• you admit to the police you have committed a theft

Yes, the only admission that counts is in front of a judge, when you have a solicitor sit next to you whispering that if you do not confess, you are free to go. In UK you go out of prison on bail…posting nothing as collateral. Came for the weather, stayed for the lousy legislation (and the high taxes).

Anyway, when we told the story, some friends asked us ‘why did you not insure the thing that was stolen?’…which is a fitter topic for this blog. An insurance is an investment with negative expected value: you are SUPPOSED to lose money and if you understand this concept, you know that the less insurance premiums you pay, the better it is for you financial situation. It makes emotional and financial sense to buy an insurance for events that are rare and extreme: if you die, your children need financial resources to survive so you buy a life insurance. If your house get destroyed, you probably do not not have the means to buy a new one but you still need a place to live, so you buy insurance.

The alternative of buying an insurance is to invest by yourself the premium that you would pay. Since you have no control (more on this later) on the day you will die, you buy insurance because even if it is more likely for you to live long enough to save and provide for your family, there is the possibility that a car will hit you tomorrow and your children wont have enough financial support. In this sense an insurance (plus your job) is the only investment that guarantees you that your family will have money no matter what. But this makes sense only if you put yourself in the best spot to avoid those risks in the first place.

The right insurance depends on your goals. If your goal is to live longer with your family, do not buy a motorbike…and if you do, definitely do not insure it (the best case scenario for you is an event that prevents you to use it further); if you want to give your family financial stability, buy a life insurance but live a financial responsible life as well: if you take too much debt, for example, you can ruin them if you are still alive.

Excluding these cases, buying insurance loses all financial sense but it can still retain emotional sense. You insure your financial portfolio because sleeping at night (having smaller losses) is more important to you than maximise your gains. Here the mistake is not being consistent, i.e. you realise you do not wanted the losses AFTER the market crashed while you LOVED the gains when the market was going up. In 2017 Meb Faber launched the TAIL etf, a product designed to gain when the market is going down. He forecasted that investor will have the above descripted behaviour, rush to buy the ETF after a big market downturn. And he was right:

AUM exploded at the end of April 2020, when the stock market bottomed.

This often happens outside the financial world as well: people start to consider to purchase an insurance after some accident happens to them or to someone close. You break your leg skiing, you then buy insurance. Your friend holiday is cancelled, you buy insurance. Something is stolen in my apartment, you ask me about insurance.

But you do not ask if I had a safe. You see a guy riding a motorbike and think how cool it is. You get money to get by in the Minor Leagues but then refuse to pay back once you hit the Major League (but then change your mind, at least). The emotional component overrides the crude statistical picture.

The biggest issue in my particular case is that there is something you cannot insure: emotional value. No insurer is going to pay for it…and even if they did, it would not matter anyway. So there are instances where you should buy an insurance and you do not do it, instances where you might want to buy an insurance but you do it too late and instances where you should NOT buy an insurance and you do. Like insuring your Rolex…really? We can go at length to discuss why people buy overprice stuff and what’s the meaning of value itself: with the current explosion in NFT you can find multiple interesting threads to read out there. Insuring an item like that means:

• you are not comfortable owning it and as someone said: you should buy it only if you can afford to lose it
• you are adding a cost on top of something that was already too expensive
• you will have a massive headache to enforce the insurance contract (after you had a massive headache losing the item)

OK but what about the Inflation in the title?

Last week I started to write about a different topic. On Monday, Josh Brown wrote this incredible ‘vintage’ post. The same day me and my wife received hundred of messages from friends and family on our plans for the coming months: BoJo had finally disclosed his plan to exit the lockdown! The following thoughts will be quite London-centric because…it is the only reality that mattered to me in the last year, but I think a lot of similar dynamics will happen in other parts of the world as well.

There is without a doubt excitement about the prospect of being free again: free to travel, free to have holidays, free to party with your friends, free to have a brunch. My daughter started to go to the nursery in May last year (and thanks all the Gods that exist or not it never closed!) so as a family we never felt that ‘I saved so much money during lockdown’ feeling because of that new bill, but it is a real phenomenon. Everyone is ready to go out and get smashed.

On the other side, there has been a big exodus out of UK: people come here to work and enjoy the social life (pubs, discos, concerts, theatres and so on). Once you lose BOTH of them AND you realise you are not even welcome (thank you, Brexit), it is only natural that you pack your stuff and move somewhere else; but since you do not want to lose your furlough check, you do it without telling your (now former) boss.

So here they come May and June, when pubs and restaurants will reopen with a huge que of customers outside…and no one to serve them? In the past this labour demand would be covered by Europeans but now with the borders closed, not anymore. Maybe those roles will be filled by people previously working in retail; a positive aspect of the current crisis is that hopefully we realised we do not need that 5th H&M per square meter in every corner of the town. Maybe not. Given how fast the market reacts these days, this might be already an old news but I feel quite confident there will be a bounce in inflation. That said, it does not mean at all it spiral out of control.

The excesses and exuberance Josh is describing in his post will probably disappear as well once young lads are free again to have a life. There is a limit in fun you can have trading socks by yourself.

It has been such a weird period: parents I know have never been so busy while singles are begging for suggestions on any form of video entertainment because they exhausted Netflix and every other streaming platform.

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