Convex Situation

But somehow I can't believe
That anything should happen
I know where I belong
And nothing's gonna happen
--Tal Bachman

Noted a couple months back that I was impressed w/ Kyle Bass w.r.t. demeanor and thought process. This recent vid series reinforces those thoughts.

Understated but firm and well reasoned.

An overarching theme of these talks was the notion that we're transitioning from a deflationary to an inflationary environment. Not sure Kyle Bass tipped his hand as to whether he thinks we're doing that now. It does appear that he's assigning a signficant chance that we are in his probability spectrum.

I particularly liked his comment that, in adverse or defensive environments, you're looking for investments with 'convexity.' In this context, convexity means that the change in your investment exceeds the change in the underlying condition that you're protecting yourself against (see the aqua blue line here for representative shape of a convex function). In an inflationary environment, for instance, you want investments that preserve or improve your purchasing power.

Bass suggests that stocks are unlikely to display convexity in highly inflationary environments. He observes that, while the Zimbabwe stock market has been a top performer in nominal terms over the last ten years, if you factor in the loss in purchasing power of the Zimbabwe currency, then investors in Zimbabwe stocks have actually lost money. Rather than convexity, Zimbabwe stocks have exhibited 'concavity', or higher loss in value relative to the underlying inflation (e.g., black line here).

Gold and other precious metals, as Bass observes, have been performing with convexity. In an environment of currency debasement, gains in gold have outpaced loss in purchasing power via inflation.

Similar to Jim Rogers, Mr Bass appears to think precious metals are likely to hold up well in the environment ahead.

position in SH, gold, silver, USD