Pregnant Thoughts

I've been traveling and too preoccupied with personal affairs to post, but arriving back at home I am pregnant with comments stemming from the sheer quantity of misinformed anger, vitriolic hyperbole, and near-lunacy from all corners of the polity regarding The Financial Crisis, The Credit Crunch, and The Bailout.

First the divide between the guilty and the honest. Indeed some are more directly responsible for neglect, fraud, incompetence. But Americans will remain in denial until they realize it is complex and that nearly ALL AMERICANS (except perhaps my late granny) and some Asians are culpable in one way or an another for how we arrived here. First Americans voted in this administration....TWICE! Not everyone. Maybe not even the majority. But those that apathetically didn't vote against them are guilty. They benefited directly and indirectly from the tax cuts, lack of energy policy, and the war expenditure by gaining employment and income they wouldn't otherwise have had. They benefited from low rates and easy money and lax regulation to buy homes and watched the value of those homes rise dramatically. They removed equity via refi and HELOCs at unprecedented rates, including my late mother who eschewed debt. It was too good a deal to pass up. Few invested it wisely or banked it. Most spent it. On new cars, or kitchen renovations, a Caribbean cruise or stainless-steel appliances. The consumption orgy was obvious to anyone who desired to look, and it touched everyone's lives - directly or indirectly. Few countenanced matching revenues with expendtitures, and most decried the idea by not electing fiscally sober souls to Congress or the Senate. America borrowed from the future to fund the present in all ways, whether via fiscal policy, monetary policy, people's pension funds, corporate balance sheets, or household asset values and expenditures. But now they [the American people] are incensed when the bill has arrived. They have no recollection, nor amazingly can they make the connection between the prior faux-prosperity and the current crisis. Perhaps this results from the fact that while real wages have been falling due to pressures from globalization, this plunge was ameliorated by the past decade. No they don't fly private, or dress their women in Armani garb, or drive leased Aston-Martins, but IMHO is undeniable that they were (until 2008) less-worse-off than they otherwise would have been had the Admin and Fed let things naturally recess in 2001, throttled subsequent credit and policed unbridled extension of credit by the shadow banking system. Someone, however, must explain this to them, so that capital can be extended to the financial system (in whatever the most appropriate, effective and just form) to restore confidence. Even a policy whereby authorities will in effect "insure" their jurisdictional terrain of the interbank market until deleveraging runs it course will in all likelihood be less expensive to the taxpayer than encouraging Mellon-like liquidation. But political and financial ignorance runs deep in this land and it would be ironic if it is precisely this populist ignorance that with hindsight will be viewed as the cause of a new depression, one that might have been ameliorated by wholesale intervention and recapitalisation.

Second. People should stop rueing the controls upon of short-selling. I realise that this is intensely unpopular view in my field, but with the likes of Mssr Hendry extolling the saintliness of his ilk, it needs some tempering. By way of disclosure, I have been an active (and at times aggressive) short-seller for more than seventeen years. There are disingenuous people who will have you believe it is both noble and right to sell short, maybe even god-given. Or that because its risky, or conveying information (however flawed it might be) it earns its rightful place. It has no such moral rectitude. At the best of times, it [short-sellers] may help ferret out fraud, or simply have no effect. But in the current environment, I believe the bans are correct for herd-like front-running of sales by eventual owners are in essence de facto collusion with the same as effect. Yes, it would have been better (as I've been a proponent) to have sustainable policies that would have avoided the asset price rises, over-leveraging, and subsequent revulsion. But we're here, not there, so get over it. Massive short-selling financials (whether deserved or undeserved) eats to the core of systemic confidence. It is of course not alone in compromising systemic integrity. Nor even primary. But these institutions are exceptional. And authorities are right and correct to do what they can do for the impact is the equivalent of whittling away at the systemic foundations and as a result accidentally having the building fall. The flip side is that because banks are exceptional, they should behave that way, not have been allowed to lever-up as they did. They should be repositories of sobriety, and prudent risk-management, NOT places for coin-flipping agents to shoot the moon in order to maximize short-term gain by gaming the Treasury put.

Third, the media has been pathetic and perhaps inflamed both the panic and sense of outrage at authorities acting as (IMHO sensible) liquidity provider of last resort. They have not tried to explain the truths of ultimate culpability to temper the misconstrued outrage. They can slay the easy targets, but educating people on the history of the credit bubble, and of course, their knowing or unknowing participation, would be a great public service. For Americans (and Brits too) never could something-for-nothing, the deal too good to be true, systemically flawed as it might be. Everyone want to eat their cake, and have it too.

Finally, the perils and absurdity of unbridled leveraged financial speculation (as widely practiced) has been demonstrated, with the fallout from hedge funds still to come. The result will be an eventual return to making things and stuff, both tangible and intangible, rather than mere money with money. American zaitech is dead. This will be wholly good thing in the longer run, though the shorter term pain it will inflict upon asset prices as leverage is further reduced will be significant, and will reveal - for those with capital, unleveraged and unencumbered - tremendous opportunity - particularly from the liquidation that will certainly ensue over the coming Q4.

Monkey and The Engineer

You might think your life hard, but I can say without knowing the details it was nothing compared to Country-bluesman Jesse Fuller's. As I've watched events unfold satirizing them along the way with increasing causticity, Mr Fuller's playful tune The Monkey & The Engineer has come recurrently to my mind for it's aptness, culminating in the events this week.

Once upon a time there was an engineer.
Drove a locomotive both far and near.
Accompanied by a monkey that would sit on a stool
Watching everything the engineer would move

One day the engineer wanted a bite to eat,
He left the monkey sitting on the driver's seat,
The monkey pulled the throttle, the locomotive jumped the gun
And did 90 miles an hour down the mainline run.

Big locomotive right on time, big locomotive coming down the line.
Big locomotive No. 99, left the engineer with a worried mind.

The engineer called up the dispatcher on the phone,
To tell him all about his locomotive was gone.
Get on the wire, switch operator to write,
Cause the monkey's got the main line sewed up tight.

The switch operator got the message on time,
Said there's a Northbound limited on the same main line,
Open up the switch I'm gonna let him through the hole,
Cause the monkey's got the locomotive under control.

Big locomotive right on time, big locomotive coming down the line.
Big locomotive No. 99, left the engineer with a worried mind.


(Credit to David Opie for lovely illustrations at http://www.monkeyandtheengineer.com/
Please buy the book for the sake of posterity)

There Is Always Someone Worse Off Than You

My mother was world-class in finding the silver-lining in every cloud. So in the event you may be feeling black-and-blue at having bought the dips on AIG common; gone "all-in" shorting the S&P Bank index earlier this week; having all your Merrill stock options struck > $25; watching your sell-stops on STT triggered at $31; or merely having your money fund loaded-up on Lehman Bros CP, you can take some solace in that fact there is always someone worse off than you, as yours truly can attest. For these trifles are only money. But never, never, NEVER - no matter how turbulent the markets may be - forget your spouse on your fifteenth wedding anniversary...

Tttttthhllllwwwwopp! (sound of cork popping)

So, at 15:45 EDT, it would appear that you can....place the knives back in the drawer; screw the top back onto the pill bottle; close the upper-floor window; return the "Meditation For Beginners" back to the bookshelf to gather dust; stop filling out the application for that evening course entitled "Retraining 103: HTML For [Former] Traders Who Can't Do Anything Else"; write that check for your children's school fees; and perhaps even open a bottle of the vintage champagne from your cellar that one of your service providers gave when you had sizable business to give, and he had an T&E budget, and toast to the fact the world as we knew it did not completely end...errrr....at least not on this September Thursday. Mine'll be a Veuve Grand Dame 2000 thankyouverymuch.

Ode to Lehman Bros

Debt is like
an onion

you taste it
with delight.

But when lines go
you wonder,

Whatever made
you bite.

Glass Half Full Kind of a Guy

So everyone is talking about the credit crunch and various financial institutions problems in terms of a capital shortage which strikes me the same funky inside-out black-is-white way "savings glut" was applied to describe the phenomena whereby American's were cajoled, no "forced", to import and consume a reasonably larger percentage than they produced and/or exported just because it was there or just because they could. I, on the other hand, see the current problems in terms of an excess of assets, or "asset bloat". For their capital was their capital, and no one forced them (except perhaps the spectre of Shareholder Activists writing letters asking for your removal as CEO) ) to lend to all manner of stupid and risky projects, poor credits, or absurdly securitized turds on dangerously poor terms and at pitiful spreads leading to excessively dangerous levels of capital gearing that in many circumstances (like deep recession) one would plausibly cause said assets to be behave in a correlated manner. Indeed, there was nothing other than the fact that they were highly conflicted and stupidly incented agents and not principals of the [now-diminished or wholly vaporized] equity capital they shepherded that made them do it, from the lowest signatory to the highest man with the over-sized corner office. In the process, they have cavalierly spoiled a reasonably good thing called the financial system - severely damaging it's health, longevity, and confidence therein.

Saving glut? Glass half-full? Capital shortage? Ummmm, I think not....and just so everyone is clear: the fixes (note I didn't say intermediate solutions) are deflationary.

Stop That Check!

In about the ONLY good news of the day, Bloomberg reported that Federal Regulators of Fannie and Freddie are blocking payment of the so-called Golden Parachutes to Mssrs Mudd and Syron. Could it be the case that this is the signal that marks the denoument of Crony Capitalism?!?!

I Whistle a Happy Tune...

I frankly was never one for show-tunes, regrettably sneering [privately] at thespians in my youth. But clearly, how wrong I was!! For sometimes they express more poignantly in music and song that which cannot otherwise be recounted with mere words. Sure Bob Dylan can render archetypes as the bard with verse. But does it compare to the lovely and angelic Anna Leonowens in Rodgers & Hammerstein's "The King & I" ?!??

[ANNA]

Whenever I feel afraid
I hold my head erect
And whistle a happy tune
So no one will suspect
I'm afraid.

While shivering in my shoes
I strike a careless pose
And whistle a happy tune
And no one ever knows
I'm afraid.

The result of this deception
Is very strange to tell
For when I fool the people
I fear I fool myself as well!

I whistle a happy tune
And ev'ry single time
The happiness in the tune
Convinces me that I'm not afraid.

Make believe you're brave
And the trick will take you far.
You may be as brave
As you make believe you are

You may be as brave
As you make believe you are

[LOUIS]

While shivering in my shoes
I strike a careless pose
And whistle a happy tune
And no one ever knows,
I'm afraid.

[LOUIS AND ANNA]

The result of this deception
Is very strange to tell
For when I fool the people
I fear I fool myself as well!

I whistle a happy tune
And ev'ry single time
The happiness in the tune
Convinces me that I'm not afraid.

Make believe you're brave
And the trick will take you far.
You may be as brave
As you make believe you are....

Ich Bin Ein Stockholmers....

After we've all vented and finished our shouts and screams of: "You f*#cking idiots", to mortgage bankers & brokers, bank managers, regulators, MBS originators, bent law-makers, ideologically-challenged regulators, hubristic risk-managers, and bank shareholders (especially the largest institutional ones of the mutual and pension fund variety who owned the big slugs), we can get down to learning Swedish, for it appears that there is no avoiding the fact that we are all Swedish now.

It's early days and there is undoubtedly outrage from taxpayers, who sadly shed their ignorance (and ultimate responsibility, for they elected the administration that encouraged, enabled and avoided prevention) only after the fact. And early days means debate must convene over the pro's and con's of further nationalisation and RTC-like fixes before the buoy of US Federal support is tossed. But its inevitability is so-to-speak a done deal sparing only the most virtuous and least encumbered whoever they may be. In Japan, this took nearly a decade and spared few, so adept were they at avoiding confrontation, and so afraid were they of public wrath. In America and western Europe, we will prove more impatient for solutions and more magnanimous with other people's money and so rescue more quickly. Then there will be the little matter of settling scores with the agents responsible. Sadly they will be hard to pinpoint directly, but I can tell you one thing: IF the public is to be saddled with the bill, they deserve the appointment of a Financial Truth & Reconciliation Commission. And it should be frank as possible. It should document graft, greed, tom-foolery and stupidity; it should locate the guilty and haul them before the People, and it should spare no one including themselves who are just as culpable for believing in "something for nothing" and enabling crony capitalism to [temporarily] triumph under the banner that "no public interest is in your best public interest". Shameful as it will be, America needs a dose of the sobriety it will provide if done properly, before it can move on. The guilty need to admit their sins and plead forgiveness - something that is not assured given the economic carnage and dislocation that will ensue.

Decades Later, ZZZBest Comes Clean

Most of you will not be old enough to remember Barry Minkow, and his ironically-named former darling growth company ZZZZ Best. Those who do will forever associate its overly-youthful founder (he was 16, as pictured above) with fraud, deception and, if you have a sense of humour, hilarity at the fact that grown-up professional investors drove the carpet-cleaning company's market value past $300mm at one point which is probably more than two billion in today's market-adjusted dollars. But Serge Debrebant in the FT Arts & Weekend tracked-down Mr Minkow and relates a warm and fuzzy story of leopard-spot-changing that is worth a gander .

For those not wanting to read the actually story, Mr Minkow, having served a reasonable stint in the big bouse, discusses his experience with the dark side, the incremental criminal evolution of many fraudstersactivities and his redemption. Having repented and seen the error of ways, Minkow is now, ironically, a committed fraud-buster, (for as he says, who better to catch a contrapreneur than a fraudster?!?!) and he goes on to describe some of his recent exploits at doing good to make up for doing bad in his personal "My Name is Earl" pursuit.

Newsbot Hair-Trigger

Whether you knew it or not (or believed it), some shops have strategies that are based upon bots that scour the web for market-moving events and significant news changes, and trades accordingly. Not passing judgments here, it is sufficient to say such pursuits are still in their early days, with some of the ummm errrr kinks yet to be worked out.

At least that is what can be inferred from the erroneous plunge in the shares of United Airlines (UAL) as recounted on Hardware News on Wednesday (hat-tip to NT for the link).

Yes, an obscure almost irrelevant mis-classification of known and stale info triggered sales that crashed the shares. While the bot-based strategy was deemed to be the initiating source, it was NOT the entire reason for the rout. Indeed, a cascade followed, presumably fed by stops, position initiation by trend-following and order sniffers, that caused sufficient moves to panic and trigger real investors to short-sell or puke existing positions, and/or limit automatic liquidity-providers uptake - at least until "the news is out". The situation wasn't helped by the company's teetering-on-edge financial position and near-serial use of chapter-11 protection.

Boys with toys indeed!!

Talking Holiday Homesick Blues

Picking up an International Property magazine such as those one finds in the BA lounge is good place for one to begin to imagine the full extent of changes to be wrought by recession, deleveraging, and higher energy prices (even taking into account recent falls and probabilities that they diminish more). Development after development of golf course, seaside, quay-side, urban-destination-side shitbox holiday homes and bungalows percolates through the pages searching for unwitting saps still unaware of what the future holds. Portugal, Greece, Spain Cyprus, Dubai, Turkey, FLorida Gulf coast and all manner of remote pacific isles (heretofore unheard of except by those prone to thumbing the Times Atlas of the world for amusement) beckons buyers with bikini-clad women, freshly-painted exteriors, lushly-manicured gardens in areas devoid of water, and bull-market tag-lines that implore readers to seize the good life they aspire-to and more importantly deserve, while touting the investment merits of past and future-promised returns. These are not the palaces and estates with split-panel multi-lingual Russian-English descriptions - themselves sure-to-be effected by the 50% drop in the RTS and assault on Mechel - but the ones being peddled to those that already have-been, are, or will soon be further squeezed in the vise of deep economic recession, asset-price deflation and restricted credit. Woe be he or she that is tempted by such disingenuous dross.

One need only cursorily observe the near-complete reversal of the virtuous feedback loop of seemingly unlimited cheap credit, low real-terms liquid hydrocarbon prices, declining savings rates, low and declining unemployment rates and proliferation of cheap air transport to understand just how vulnerable and absurd these development pecadilloes appear at present begging the question of who will ultimately take title of these, and at what primary and secondary market prices these will clear. Merely look at Spain's bust to see what lies in store - and this is all before the pain in the real economy has begun to be felt in its inverted glory.

Now, with we in the developed world face dramatically curtailed consumption, higher unemployment, lower core asset price and associated wealth destruction, probably higher taxes or higher imported goods prices from Asia (depending upon which course policymakers choose) creating a spiral that in the process will slaughter (amongst other things) such feeble and fatuous projects such as those pitched next to Panerai watches and Brioni suits.

In 2006, there were so many glossy property magazines being stuffed into the mailslots of SW London flats, one could only imagine the deforestation and coated-paper chemical cocktails required to support it. Such tell-tales are useful indicators in discerning "tops" and manias. Now in latter half of 2008, such panderings of real estate porn are down to a trickle, as estate agents stare forlornly at window shoppers from their desks. And as surely as Sterling is overvalued, developed nation wages will NOT be rising any time soon, and all this will be destructive destructive to corporate earnings (and thus share prices), the international second-home property spec bonanza for people who cannot really afford it is certain to follow the same fate, with few, least of all yours truly, shedding any tears over their transformation from perceived bricks & mortar to Castles Made of Sand.

Money Illusion Quote of the Day

An article in Business Week detailed the westward expansion of the LeFrak family, who recently bought a reasonable slug of Hollywood office space. BW highlighted that despite the high prices (~USD800sq ft) they paid, and deteriorating market, these were "so-called long-term investments" The youngest, Jamie, Gen3 of LeFrak dynasty was optimistically (or pessimistically depending upon your view of sound money) quoted as saying:

I want my great-grandson to say, 'Wow, you only paid $800 a square foot for that? It's worth $80,000 today..."

Farewell Fannie and Freddie

So farewell
then
Fannie Mae
and
Freddie
Mac.

You were
like the relatives
who wouldn't
leave....being
magnanimous by
sharing with your friends
the best bottles
from my
cellar.

And drinking
my beer...
but not
replacing
it.

At least
you could have had
the courtesy
to put some of
my warm ones
back in the
fridge.

Then...
You went
Berserk...
(with an
upper-case
"B")

Stealin' money
from my purse
and using my
charge cards
to pimp and party
with every lowlife
in town.

Some people
were happy
you were shacked-up
at mine, but
it wasn't
me.

But the thing
that I really
wanted to ask you was:
WTF-ingF were you
thinking?!?!

Couple of Questions RE: Ospraie...

Some years ago, when Russia defaulted, a quite successful and well-regraded global fund named Everest Capital run by Marko Dmitrievic (sic?) had a harrowing near-death experience resulting from sizable GKO positions. Their assets droppped substantially with losses and some redemptions, but they made their case to their investors about what they did, and (perhaps surprisingly in the Darwinian world of Hedge Funds) many stuck it out. Yes fifty percent (read 50%) below your high-water mark means working like a mutual fund plebe for a few years with NO performance fees. Yet they persevered, and the investors who stayed with them were satisfied as they got paid on their short S&P hedges at the turn of the century and tagged the BRIC phenom rising like a phoenix out of the tech-bust.

So one must ask "why NOT Ospraie?? Why is Dwight Anderson bailing out? Where is the longer-term story or table-pounding about the long-cycle? Surely most investors need/want something like a commodity specialists in their FoFs or engineered portfolios...why not Ospraie? Is it shame or is the world so Darwinian that everyone just wants their cash back to give it to the luckier, or more astute traders who for whatever reason got it more right, or less-wrong than Mr Anderson...this time. He's presumably got Lehman's cash (even if its 50 cents on the dollar in value) and accumulated fees from the last four years which even after a fifty percent haircut is wealth beyond most successful traders' wildest imagination which like Everest before him, provides a stable asset base to punt around in those things that he presumably knows best.

Or maybe he has been hit with self-doubt about his prowess, or perhaps doubt about the longevity of a commodity boom in an overlevered liquid-hydrocarbon-challenged world where demographics in the rich countries (and China) will soon turn demonstrably for the worse, and authorities may finally acknowledge that it's excess demand that is the real problem. For what could be worse for commodity prices than parsimonious scaling down and conservation, for whatever reasons be they ecological economical, or philosophical. I do not pretend to know the answer.

But I look back on Everest's commitment, to do their best for themselves and their co-investors and I see an admirable integrity. No closing because they are too far below the high-water mark. No shuttering due to shame or embarrassment. OK maybe it was tax or some unknown considerations. But not being uber-cynical, I still cannot help but wonder about Ospraie, for Mr Anderson is an admitted substantial co-investor in his Fund. And I wonder how this will look to those sitting on the fence in the debate over whether the HF model is stupid and wildly asymmetric - paying gobs on the upside, and bolting with the cash at the first chance when adversity strikes. Maybe EVERYONE wants out, and I am wrong to raise the question of integrity, asymmetric payouts and disincentives to continuity. Or maybe everyone is simply tired of paying "alpha fees" for beta. We'll probably know the truth soon, in any event.

Bad HF Poetry

So farewell
then
Ospraie -
Dubious
commodity
trader and
even worse
speller.

"Never send a man
to do
a machine's job"
said Mr Anderson's
nemesis.

Oooops.
Though apt, that
was the wrong
Mr Anderson
(from The Matrix -ed.)

At least
the right Mr Anderson
will be able
to say:
"At least I tried to
shoot the moon".

Your epitaph
will be:
"never leverage a portfolio of
highly correlated, over-pimped,
over-crowded traded after
they've moved unimaginably large amounts -
no matter how compelling the story"

(with usual apologies to EJ Thribb and PrivateEye, and thanks MM)