So, farewell then
two-thousand
and-eight -
end of Bush-folly
and the Bubble Of
The American Way.
To some
you were
eponymously
known as the
Year of The Rat.
To others
you were
just as aptly
annus horribilus
Volatility,
asset price destruction,
fear, greed, hubris,
fraud, collapse,
deleveraging and
revulsion were your
catch-phrases.
'Tis astonishing
what it takes to
convince The People
to live within
their collective
means.
Wednesday, December 31, 2008
Monday, December 29, 2008
I Am Shocked That You're Shocked...!!
The name Bernard L. Madoff has been upon everyone's lips of late - even those who know nothing about finance, hedge funds, or the subtleties regarding how to execute a good Ponzi. And I can understand the awe at the numbers - even though $50 billion is on the high side given its compounding of non-existent returns, for one cannot lose what they never had. Yet, despite the size, I remain shocked that industry people are "SHOCKED" or even just "shocked. While I will admit to being surprised that of all the possible Ockham-friendly explanations, Ponzi was the culprit, I can say with certitude that it was "relief" rather than "shock" that I felt, since the revelation finally solved a long-outstanding and personally troubling market non-sequitir.Yet through all the analysis, uproar, indignation, and financial horror, I AM shocked that the media and commentators of all persuasions have left untouched the details that I find most fascinating. These pertain to contemplating Mr Madoff's inner monologue throughout, his relationship with his wife, how (if you believe the sons) he managed to avoid discussing the sordid details in conversations with his sons over Mom's Sunday-evening pot-roast and egg-noodles (did she cook or merely press her speed-dialer to book tables at Le Cirque and Daniel???) . Perhaps this is because I have never taken the study of psychology to any depth; perhaps it is because I myself am such a pathetic liar I cannot countenance a serious confabulation, but neither deters my morbid fascination with what Mr Madoff must have been thinking at various crossroads during the swindle, such as when he went for a slash in the mens room after delivering a congratulatory address to the Hadassah who were amongst the very people he was taking to the cleaners!! Did Mr Madoff go to Synagogue? Might there not have been moments during the one solemn service or another where he felt deep remorse and regret to such an extent he would end the charade there and then? And how many times did his inner-self feel near collapse as the proximity of discovery approached during the numerous occasions over the fifteen years - be Long-Term Capital (many industry redemptions), the Tech Wreck, or the publishing of the Barron's article. How much time did he put into contemplating what P&L would be contextually acceptable...in other words: did he agonize over whether -0.09% would be more reasonable than -0.12%? Did anyone help him in these ruminations? Did he devise a method for fabricating returns in the positive months - e.g. the way Luke Rhinehart did in The Dice Man?? Did he keep a little Black Book of all the lies and half-truths he told to various people in order to keep them straight? Is it really possible that FG's Walter Noel, Andres Piedrahita and Jeffrey Tucker REALLY didn't know what was up? Did he despise himself even more when he read about the "honest" Wall St. fortunes made by Dr Simons and David Shaw? What went through BLMs thinning head when another $100mm hit his account from the wire? Was it celebratory (popping a vintage Krug) or merely a sigh of relief at living to fight another day, to have another pedicure, another meal at Boulud's place, another massage (happy ending?) almost Sisyphusian given the lack of meaning for whatever meaning there might have been (family, love, tzedakah, good works?) would pale in comparison to the scale of what awaited just around the around the corner that would surely shred whatever meaning he might have self-deceived himself into thinking his life possessed.
Perhaps, though, I am getting too cerebral here. Perhaps a sociopath is entirely self-delusional. Perhaps the sociopath believes he has achieved what he has merely conjured and is an equal to Dr Simons and Mr Shaw. I do not know. But I continue to wonder...
Thursday, December 25, 2008
Sunday, December 21, 2008
If You Can't Tell Who The Sucker Is....
Thumbing through the sell-side research from their multitudes of Strategists, I notice some recurring phrases, small and innocuous as they may be, that trouble me. Time and again, they repeat, in various contexts, the mantras: "when things return to normal", "when markets return to normal", and "when x, y or z normalizes" with "normal" implied to be that which has been common over the past decade-or-so in respect of liquidity, leverage, asset prices, equity risk premiums, speculative activity, growth. Mulling this over, I wonder to myself: "is this not just the perfect "recency bias" example, defined by wikipedia as "a cognitive bias that results from disproportionate salience of recent stimuli or observations"? For as I consider what precisely is meant by "normal", it seems to me that there is a reasonable good chance insofar as this IS "The Big One" (as Bridgewater Associates precsiently termed it nearly a year ago) that all these things - debt, leverage, consumption vs. income, relative asset prices - are ALREADY returning to normal, and the strategists, demonstrating the old poker joke about "if you look around the table and you don't know who the sucker is, its you....", simply haven't yet fathomed the appropriate interval frame of the normality to which things are returning towards.
In Japan, "normal" meant that in 2004 residential real estate prices were roughly 30% of late 1980s or early 1990s prices. In Germany , though nominal prices might be similar in many places to those prevailing two decades ago, the real price destruction would be probably be similar to Japan's. But what is "normal" for economic growth? Or what is "normal" for aggregate US consumption? Or the amount of debt a typical household can sustain? What is the "normal" leverage for a bank, or the normal return on equity o a listed company? What is a normal share of GDP for corporate profits in an economy experiencing deep recession? What is "normal" for sustainable government budget deficits? What is the normal income multiple of a banker or CEO to a policeman, a professional baseball player to a school-teacher or a doctor to a nurse? What is the normal amount of due diligence a bank should do before extending a loan and what is normal for the amount Honeywell Industries will earn per-share in the coming years?
These may seem disparate and unrelated, but I fear they are not. I fear that the final acceleration towards the denoument of Peak Credit, rooted as it was in poor fiscal policies and lack of regulation & oversight, greased with monetary ease and official foreign mercantile enablement, and driven by parochial and herd-like animal spirits, has distorted what is normal, what should be expected, and of course, what is, and will prove to be reasonably sustainable in the future. But the Strategists, the ones who've offended my sense of the normal, seem, in their sanguineness, to be implying that is was normal to extend credit as it was during the last eight years; that gains in asset prices (be they a a portrait of Dr GachetNYC apartments, Chelsea or Notting Hill pied-a-terres ?) are normal at somewhere nearer to the top of their seemingly almost-exponential three-decade rise; that it is normal that US households continue to live with negative rates of savings or consume en masse beyond their means; or cavalierly burn hydrocarbons at the elevated relative per-capita rates that they do presently; that past income-inequality, now rolled-up into massive eddies of wealth discrepancy that approach those which evoke those prevailing during the enclosures in England are normal, and that their sense of normalcy will swiftly return despite the continued pressure to the contrary upon the financial sector, and households to return to a normalcy of a much different mean than those of the recent past, which in their turn directly the impact the corporate sector with body blows from BOTH the cost and availability of their gearing and the ultimate demand for their products.
I do not believe (yet) that we are about to beat each with bones back to the stone-age. But I believe that what we've seen in leverage and credit growth during the past 15 years is NOT normal, nor is it sustainable - neither relative to history or in absolute terms. And this return to what is sustainable, and service-able has profound economy-wide, implications, and they are indisputably contractionary: deleveraging, higher savings rates, matching household consumption to income, and government revenues to expenditure. Add to this the impending pull of demographics, the emerging trend towards greater environmental consciousness and sustainability, and "normal" begins to resemble a mean-that is something of a much different magnitude, something still to the south of where we are that - in the big time series - we will continue to revert towards from our presently divergent location rather than - as the Strategists imply - a normal that is something we've already overshot.
In Japan, "normal" meant that in 2004 residential real estate prices were roughly 30% of late 1980s or early 1990s prices. In Germany , though nominal prices might be similar in many places to those prevailing two decades ago, the real price destruction would be probably be similar to Japan's. But what is "normal" for economic growth? Or what is "normal" for aggregate US consumption? Or the amount of debt a typical household can sustain? What is the "normal" leverage for a bank, or the normal return on equity o a listed company? What is a normal share of GDP for corporate profits in an economy experiencing deep recession? What is "normal" for sustainable government budget deficits? What is the normal income multiple of a banker or CEO to a policeman, a professional baseball player to a school-teacher or a doctor to a nurse? What is the normal amount of due diligence a bank should do before extending a loan and what is normal for the amount Honeywell Industries will earn per-share in the coming years?
These may seem disparate and unrelated, but I fear they are not. I fear that the final acceleration towards the denoument of Peak Credit, rooted as it was in poor fiscal policies and lack of regulation & oversight, greased with monetary ease and official foreign mercantile enablement, and driven by parochial and herd-like animal spirits, has distorted what is normal, what should be expected, and of course, what is, and will prove to be reasonably sustainable in the future. But the Strategists, the ones who've offended my sense of the normal, seem, in their sanguineness, to be implying that is was normal to extend credit as it was during the last eight years; that gains in asset prices (be they a a portrait of Dr GachetNYC apartments, Chelsea or Notting Hill pied-a-terres ?) are normal at somewhere nearer to the top of their seemingly almost-exponential three-decade rise; that it is normal that US households continue to live with negative rates of savings or consume en masse beyond their means; or cavalierly burn hydrocarbons at the elevated relative per-capita rates that they do presently; that past income-inequality, now rolled-up into massive eddies of wealth discrepancy that approach those which evoke those prevailing during the enclosures in England are normal, and that their sense of normalcy will swiftly return despite the continued pressure to the contrary upon the financial sector, and households to return to a normalcy of a much different mean than those of the recent past, which in their turn directly the impact the corporate sector with body blows from BOTH the cost and availability of their gearing and the ultimate demand for their products.
I do not believe (yet) that we are about to beat each with bones back to the stone-age. But I believe that what we've seen in leverage and credit growth during the past 15 years is NOT normal, nor is it sustainable - neither relative to history or in absolute terms. And this return to what is sustainable, and service-able has profound economy-wide, implications, and they are indisputably contractionary: deleveraging, higher savings rates, matching household consumption to income, and government revenues to expenditure. Add to this the impending pull of demographics, the emerging trend towards greater environmental consciousness and sustainability, and "normal" begins to resemble a mean-that is something of a much different magnitude, something still to the south of where we are that - in the big time series - we will continue to revert towards from our presently divergent location rather than - as the Strategists imply - a normal that is something we've already overshot.
Happiest Man in the World...?!?
It has always seemed obvious to me that pleasure should not be confused with happiness. Perhaps it was lingering from my readings of DT Suzuki years ago, or my upbringing, but it's always been an intuition that's accompanied me. So strange as it may sound, this fact is - or rather should be - an important consideration in policy-making, particularly when considering choices in developed economies, say between growth and the environment or, between the rate of growth (or contraction!) now and the rate in the future, as well as marginal tax rates amongst other things.
Such notions are all too often summarily dismissed, and baselessly so, since according to Matthieu Ricard, a French scientist and buddhist monk, "happiness" is tangibly within the mind, and he is working to scientifically demonstrate precisely that, with some fascinating results.
His optimism and peace are as infectious as the Dalai Lama for whom he traslates, and I recommend everyone take 30 minutes and listen to what Mssr Ricard has to reveal about his life, meditation, and happiness.
List to BBC "Heart & Soul" Interview with Matthieu Ricard - Happiest Man in the World
Such notions are all too often summarily dismissed, and baselessly so, since according to Matthieu Ricard, a French scientist and buddhist monk, "happiness" is tangibly within the mind, and he is working to scientifically demonstrate precisely that, with some fascinating results.
His optimism and peace are as infectious as the Dalai Lama for whom he traslates, and I recommend everyone take 30 minutes and listen to what Mssr Ricard has to reveal about his life, meditation, and happiness.
List to BBC "Heart & Soul" Interview with Matthieu Ricard - Happiest Man in the World
Thursday, December 18, 2008
Urgent Response Required
Mr. Ogechukwu Kanma (Bank Manager)
Union Bank PLC
Lagos Branch
Lagos, Nigeria
Attn/President/CEO
Dear Sir,
I am Ogechukwu Kanma, Bank Manager of Union Bank PLC, Lagos Branch. I got your contact from the World Trade Center (W.T.C.) Regional office in Lagos, Nigeria although the details of my intention was not made
known to them. Actually, I listed your name amongst four other names and prayed over them and God revealed
you to me and I decided to contact you directly. I have a very urgent and confidential business proposition
for you for our overall mutual interest.
For the past 18 years, an American Business Executive, one Mr Bernard Madoff has made a number secret deposits valued at USD$50,000,000.000.00 (Fifty Billion American dollars) into an account at my Branch. I recently sent a routine notification to his forwarding address and called his telephone but got no reply. Then I see the news that he is in jail! On further investigation I found out in the fine print that for this type of account Mr Bernard Madoff must come personally to my branch to withdrawal the funds.
This sum of USD$50,000,000,000.00 is still sitting in the Bank and the interest is being rolled over with the
principal sum at the end of each year. And he cannot come forward to claim it, since Mr Bernard Madoff is under house arrest with a designer ankle bracelet. According to Nigerian Law, in such cases, the money will revert to the ownership of the Nigeria Government if nobody applies to claim the funds.
Consequently, my proposal is that I will like you as a foreigner, with a foreign-sounding name, to stand in as the next of kin of to Mr. Bernard Madoff so that the fruit of this old man's labor will not get into the hands of some godless and corrupt government
officials.
The plan is simple;
(1) I will like you to provide me immediately with your full names, address, social security number, and credit card details (including the expiration date and little number on that back that they always ask you for when you make purchase over the telephone), your mother's maiden name, your email, and driver's license number so that the attorney will prepare the necessary documents and affidavits, which will put you in place as the next of kin.
(2) We shall employ the services of two attorneys for drafting and notarization, and obtain the necessary documents and letter of probate/administration in your favor for the transfer.
(3) A bank account in any part of the world, which you provide, will then facilitate the transfer of this
money to you as the beneficiary/next of kin of Mr. Bernard Madoff. The money will be paid into your account
for us to share!! in the ratio of 60% for me and 40% for you. There is no risk at all as all the paperwork
for this transaction will be done by the attorney and my position as the Branch Manager guarantees the
successful execution of this transaction. If you are interested, please reply immediately via this private email address.
(4) And don't worry about your bank being suspicious about the transfer as I will make sure to split up the wires into units of less than 10,000 ($9,999.99) to avoid detection on the Fed wire. If I make 10 of these per business day (excluding Nigerian Public Holidays & Fela Kuti's birthday) we will complete the transfers in only 500,000 business days!! Imagine the happiness of your soul to receive your 40% of USD$100,000 for the next 500,000 business days!
Upon your response, I shall then provide you with more details and relevant documents that will help you
understand. Please observe utmost confidentiality being certain that whatever you do DO NOT CONTACT THE SEC or anyone by the name of Arpad Busson as they might spoil our little deal.
Rest assured that this transaction would be most profitable for both of us because I shall require your assistance to invest my share in your country - hopefully in a nice and safe hedge fund or fund-of-hedge-funds, preferably one with consistently high returns and low-risk.
Awaiting your urgent reply via this email above, and please save me the anxiety of endless waiting.
God bless you.
/signed/
Mr. Ogechukwu Kanma
Union Bank PLC,
Lagos,Nigeria
Wednesday, December 17, 2008
Zero - The Loneliest Number?!?
In The Secret Bank of Japan Lexicon, I attempted to demystify all things ZIRP for financial Japan-o-philes. But as we are all ZIRPers now (or soon will be ZIRPers - Hi Merv!), I thought it might useful to update the lexicon to help Anlgo-Saxons familiarize themselves with the new paradigm of.... Z E R O, "oh", "null", "nil", "naught".ZIRP (c) - The policy of pricing money as if it were free, thereby encouraging its creation in [errr hopefully?!?] unlimited quantities to any and all comers, for the stated purpose of avoiding deflation, though actually it is to make sure that those whose eyes were bigger than their stomachs don't explode, which ostensibly is less than desired by anyone.
nearZIRP(sm)(c) - same as the above, only a few basis points higher; usually meant to keep at least one final bullet for the FRB in the eventuality things get even more FUBAR. Also can be used on the rebound in order to allow the FRB to keep the fallacy alive that it is symmetrical insofar as it takes similarly aggressive action against inflation as it is against deflation. (See also: ZIRP-lite)
ZIRPtastic - The feeling of joy and bliss that overcomes the borrower of "free money" upon swapping US Dollar paper for something that will depreciate less.
ZIRPflation - The likely future consequence of ZIRP.
disZIRPflation - The temporary state of purgatory where core asset and commodity prices are falling coincidental to ZIRP, and/or nearZIRP.
ZIRPulation - Leveraged specutrage predicated upon borrowing Dollars at nearZIRP for investment in anything and everything nonZIRP.
ZIRP-sixed - Losing one's hedge fund either by maintaining long risky-asset positions enroute to ZIRP, OR, maintaining short risky-asset trades beyond their sell-by date (See Donchian Channel Breakout)
ZIRPcurve Risk - The aggregate embedded risk in a ZIRPified financial system where the paucity of short-end yield induces investors to "reach for yield" by going farther out on the curve, thereby squashing long-term rates towards ungodly low levels that cause a bubble in the long end, circularly making it near-impossible to shift policy or paradigms without inducing massive mark-to-market capital losses throughout the financial system. (See: "the folly of sequential bubble- blowing")
1st Law of ZIRP-o-dymanics - For every borrower there is a lender causing the net stimulatory benefits of ZIRP to be lost as savers now devoid of income curtail consumption.
2nd Law of ZIRP-o-dymanics - Exceptional circumstance of 1st Law where lenders are foreign, allowing the possibility that domestically , the net stimulatory effect might be positive.
ZIRPstamps - Food Coupons issued to OAPs (Old Age Pensioners) who live off of the interest from fixed-income investments, and as a result, now require income supplements.
ZIRPerrific - Celebratory "High-fives all around" in the Treasury War Room when stocks fall less than "a few percent", swap spreads converge, Jim Cramer finally shuts-the-fuck-up.
ZIRPBento - The FreeLunch(c) Box served in Financial cafeterias, but available to any and all comers.
ZIRPtomism - The belief that the power of positive-thinking and free-money will allow something-for-nothingism to live yet another day.
ZIRPquake - - Colassal dislocation in financial markets when eventual unwinding of ZIRP-related positions occurs.
neoZIRPeralism - Using all manner of monetary policy tools to insure the neoliberal regime suurvives. (See Income inequality, Public Interest, Beggar-Thy-Neighbor)
ZIRPing-on-a-String" - Economic state describing the ineffective outcome of employing ZIRP monetary strategies when the the root causes of America's ills has next-to-nothing to do with the price of money, and everything to do with unimaginable financial and regulatory policy mismanagement and neglect during eight years of the Bush Admin.
ZIRPatility - The phenomena describing the schizophrenic market adjustments to ZIRP as they attempt to fathom whether deflation or inflation will prevail.
ZIRPocracy -Describes capitalism's policy paradox where the market price is proffered to be essential to the optimal, (or reeasonable approximation thereof) allocation of a scarce resource excepting when it comes to finding clearing prices for stocks, real estate, and anything covered by TARP, TAF, TSLF
ZIRPlosion - - Eventual market relapse caused by putting-off until tomorrow what should be adjusted to today.
ZIRPO - The fourth Marx Brother.....
ZIRPerrific - Celebratory "High-fives all around" in the Treasury War Room when stocks fall less than "a few percent", swap spreads converge, Jim Cramer finally shuts-the-fuck-up.
ZIRPBento - The FreeLunch(c) Box served in Financial cafeterias, but available to any and all comers.
ZIRPtomism - The belief that the power of positive-thinking and free-money will allow something-for-nothingism to live yet another day.
ZIRPquake - - Colassal dislocation in financial markets when eventual unwinding of ZIRP-related positions occurs.
neoZIRPeralism - Using all manner of monetary policy tools to insure the neoliberal regime suurvives. (See Income inequality, Public Interest, Beggar-Thy-Neighbor)
ZIRPing-on-a-String" - Economic state describing the ineffective outcome of employing ZIRP monetary strategies when the the root causes of America's ills has next-to-nothing to do with the price of money, and everything to do with unimaginable financial and regulatory policy mismanagement and neglect during eight years of the Bush Admin.
ZIRPatility - The phenomena describing the schizophrenic market adjustments to ZIRP as they attempt to fathom whether deflation or inflation will prevail.
ZIRPocracy -Describes capitalism's policy paradox where the market price is proffered to be essential to the optimal, (or reeasonable approximation thereof) allocation of a scarce resource excepting when it comes to finding clearing prices for stocks, real estate, and anything covered by TARP, TAF, TSLF
ZIRPlosion - - Eventual market relapse caused by putting-off until tomorrow what should be adjusted to today.
ZIRPO - The fourth Marx Brother.....
Monday, December 15, 2008
Thursday, December 11, 2008
Bernie Comes Out of the Closet
Not a year has gone by during the past fifteen that I have not contemplated what Bernie Madoff did (or didn't do) to make his money. Seventy to one-hundred basis-points-a-month. Net. Net. Net. During tempests, earthquakes, panics and crashes - even during the closure of the exchange itself, Bernie apparently minted coin like few others. Even Renaissance and Shaw tripped occasionally. Not Bernie. Yet no one new what he did. It was one of the best kept secrets in the world. Oh yeah, sure, split-strike conversions were the official line. But every skeptical arb trader knew this couldn't be true.
I also never came across an ex-Madoff trader the way one meets ex-Shaw, ex-Moore Cap, or ex-Citadel employees. Resumes are sent in reply to postings and guys have done the rounds, even if they weren't unhappy and making a moral statement. A spouse moves...whatever. Surely there must be disgruntled Madoffians somehwere, right?. Were they ummm underground? I mean, iterally? My friends at a large IB (who were soliciting business from them years ago) who'd been to their offices said it looked the bridge from the USS Enterprise (the Starship - The Next Generation version). Entry to the IM sub was strictly verboten. Uh huh. He said it was a paperless office. No paper trails. Hmmmm. Violators were fired. Weird. No one transgressed.
Whatever he did, he came a long way from arbing the odd-lots that were the reputed foundation of his activities. I knew his shop from London where he was one of the few to make markets in US stocks out of hours, and if my clients for whatever (mostly ill-advised) reason needed to trade instantly, Bernie would make a price. Not necessarily a good price, but a price. But one does so at their peril since the folk with material non-public information are more predisposed to want to trade outside hours, so the pick-off risk was huge. But he never complained.
Next thing I know, he's at the center of electronic trading revolution - an electronic market-maker facilitator at the center of trading universe. Yet even Timber Hill has bad hair days. Volkswagen ord-pref days. Not Bernie. Is he arbing the exchange fee structure? Is he algorithmically scalping cause he's seeing the order flow before it gets to the exchange? Maybe. Profitably? Who knows? But I didn't have a problem with an old jewish guy making markets. This is what we DO. But there are these investment funds - Fairfield Sentry and Kingate, and these are the issue. They are Madoff-only feeders reputed to be $7bn each. Are they funding his market-making? Why does he need so much capital? What the f*ck f*ck f*cking f*ck could he be doing in the equity markets with that muh capital and still keep it a secret AND deliver returns? They say they are doing these split strike conversions but I can't see how the numbers work. Nor can anyone else. The Wall Street Journal raises the red flags, in an article but it's dismissed as hyperbole disseminated by jealous competitors. But thge nagging thing is: there are lots of smart guys out there. More than sixty of them near Stonybrook with Simons focused on cracking the nut faster, better quicker, and this activity and result, I can understand. But there is no sign of such exactitude or intellectual firepower at Madoff. Just 70 to 100 bps per month, secretiveness, and dissonance.
In 2000, I advised a family-office on their alternative investments, and constructed a portfolio on their behalf. I had free rein (thanks! anon). Included in their legacy portfolio was a sizable Madoff position. As a fiduciary - and a conservative one - coming on the heels of LTCM which also lacked transparency and which made it hard for me to raiise capital - I dug, asked every welll-connected equity-finance, prime-broker, electronic trader and HF allocator type I knew and it still didn't add up. The best and brightest still had no more insight than I, though the skeptical shared my suspicions. So, I strongly suggested they "dump it". "One isn't being compensated sufficiently for not knowing, and something just isn't right here. Yeah maybe its OK, but I think it's not". But they liked "it" and they liked "him". "He's always paid", they said. "We've been with him a long time". Old school they were. Trusting. What the fuck did I know anyway?
Well it seemed to me that the "split-strike conversions" were profit shifting bookeeping tools. Money invested in the feeders did obtain split-strike conversion positions on their books that had an implied "yield" equal to their return but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles and were "phontom" positions vs. Madoff securities. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage from bank lines and financing sources. It could be in anything and everything. He could be doing mutual fund timing, or mutual-fund market impact trades. Credit arbitrage. Funding coiiup d'etats in Africa. or buying GSCI commodity swaps. More plausibly, he could be doing option and index-option market impact trades since he was ostensibly at the center of market flow, or he could be at the center of a loan-sharking network across America earning 50%pa, and here he was passing a paltry 9% back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have have thought he was both??!!
Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many others investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense. It just didn't add up. Even Jim Simons earns it. There is no free lunch.
There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of shit. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repurcussions down to the core of our society and values. "Sorry everyone....what you've been pursuing has all been a lie, a big ponzi, a rat-hole to nowhere....". Re-boot.
I also never came across an ex-Madoff trader the way one meets ex-Shaw, ex-Moore Cap, or ex-Citadel employees. Resumes are sent in reply to postings and guys have done the rounds, even if they weren't unhappy and making a moral statement. A spouse moves...whatever. Surely there must be disgruntled Madoffians somehwere, right?. Were they ummm underground? I mean, iterally? My friends at a large IB (who were soliciting business from them years ago) who'd been to their offices said it looked the bridge from the USS Enterprise (the Starship - The Next Generation version). Entry to the IM sub was strictly verboten. Uh huh. He said it was a paperless office. No paper trails. Hmmmm. Violators were fired. Weird. No one transgressed.
Whatever he did, he came a long way from arbing the odd-lots that were the reputed foundation of his activities. I knew his shop from London where he was one of the few to make markets in US stocks out of hours, and if my clients for whatever (mostly ill-advised) reason needed to trade instantly, Bernie would make a price. Not necessarily a good price, but a price. But one does so at their peril since the folk with material non-public information are more predisposed to want to trade outside hours, so the pick-off risk was huge. But he never complained.
Next thing I know, he's at the center of electronic trading revolution - an electronic market-maker facilitator at the center of trading universe. Yet even Timber Hill has bad hair days. Volkswagen ord-pref days. Not Bernie. Is he arbing the exchange fee structure? Is he algorithmically scalping cause he's seeing the order flow before it gets to the exchange? Maybe. Profitably? Who knows? But I didn't have a problem with an old jewish guy making markets. This is what we DO. But there are these investment funds - Fairfield Sentry and Kingate, and these are the issue. They are Madoff-only feeders reputed to be $7bn each. Are they funding his market-making? Why does he need so much capital? What the f*ck f*ck f*cking f*ck could he be doing in the equity markets with that muh capital and still keep it a secret AND deliver returns? They say they are doing these split strike conversions but I can't see how the numbers work. Nor can anyone else. The Wall Street Journal raises the red flags, in an article but it's dismissed as hyperbole disseminated by jealous competitors. But thge nagging thing is: there are lots of smart guys out there. More than sixty of them near Stonybrook with Simons focused on cracking the nut faster, better quicker, and this activity and result, I can understand. But there is no sign of such exactitude or intellectual firepower at Madoff. Just 70 to 100 bps per month, secretiveness, and dissonance.
In 2000, I advised a family-office on their alternative investments, and constructed a portfolio on their behalf. I had free rein (thanks! anon). Included in their legacy portfolio was a sizable Madoff position. As a fiduciary - and a conservative one - coming on the heels of LTCM which also lacked transparency and which made it hard for me to raiise capital - I dug, asked every welll-connected equity-finance, prime-broker, electronic trader and HF allocator type I knew and it still didn't add up. The best and brightest still had no more insight than I, though the skeptical shared my suspicions. So, I strongly suggested they "dump it". "One isn't being compensated sufficiently for not knowing, and something just isn't right here. Yeah maybe its OK, but I think it's not". But they liked "it" and they liked "him". "He's always paid", they said. "We've been with him a long time". Old school they were. Trusting. What the fuck did I know anyway?
Well it seemed to me that the "split-strike conversions" were profit shifting bookeeping tools. Money invested in the feeders did obtain split-strike conversion positions on their books that had an implied "yield" equal to their return but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles and were "phontom" positions vs. Madoff securities. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage from bank lines and financing sources. It could be in anything and everything. He could be doing mutual fund timing, or mutual-fund market impact trades. Credit arbitrage. Funding coiiup d'etats in Africa. or buying GSCI commodity swaps. More plausibly, he could be doing option and index-option market impact trades since he was ostensibly at the center of market flow, or he could be at the center of a loan-sharking network across America earning 50%pa, and here he was passing a paltry 9% back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have have thought he was both??!!
Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many others investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense. It just didn't add up. Even Jim Simons earns it. There is no free lunch.
There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of shit. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repurcussions down to the core of our society and values. "Sorry everyone....what you've been pursuing has all been a lie, a big ponzi, a rat-hole to nowhere....". Re-boot.
Tuesday, December 09, 2008
"Trib Explodes"....Read All About It In The errr Trib?!?..!!
Only last week in "Of Perfect Storms and Horses' Asses" did I lament the disingenuity of blaming A Perfect Storm for what was almost certainly human errors of judgment. But yesterday, the Chicago Tribune itself reported that Mr Zell blamed none other than "A Perfect Storm" for the woes of his highly leveraged buyout of the windy city's venerable broadsheet.Sam Zell's timing was near-perfect in pulling the rip-cord on Equity Office Properties as put onto a pedestal here, but he must be called out in blaming the exogenuous environment for the Trib's travails. For it had virtually everything to do with the $13bn debt-laden financial structure Mr Zell sought-out and engineered, as evidenced by the ho-hum (relatively speaking, of course) reaction of The Washington Post Co. to the present financial and economic dislocation. Even the New York times, itself wounded from the turmoil, sports a comfortable billion of equity market value. Depending upon one's view of course. Mr Zell's decision to employ boatloads of debt and NOT put up copious equity might be seen as brilliant, shifting as it did, the majority of risk to the now-forlorn lenders for his pecadillo - a participation for which they are undoubtedly experiencing so-called "lenders-regret" (those with jobs at least). That said, it IS rather insulting to the employees and other constituents of the Trib web to lay the blame somewhere else - not least that phony cesspit of non mea culpa called The Perfect Storm.
Of course hardship is becoming more widespread. The Trib is not the only to suffer, and certainly will not be the last to seek protection from creditors. And sheltering both workers and constituents from reality serves little purpose in the longer run where business models are also unsustainable in the longer run. But the unwillingness of The Captain to speak frankly about motives and structures and absolve himself of culpability too, serves little purpose other than to prevent Mr Zells own ego-cleansing and vilification. For while Mr Zell will be stung for some chump change (in comparison to his EOP bonanza), he will NOT, unlike employees - who will it must be said - bear the brunt of the adjustment, go down with the proverbial ship.
Sunday, December 07, 2008
Grasshopper Regret??
Do grasshoppers regret? Aesop never told us. Are we on the verge of a new world order - a New Order so-to--speak? No, not yet, for it seems as if we are pulling out all the stops to save the old one, despite the elevated suspicion that the old one is too deeply flawed for rescue. But it begs the question: what might you do differently given another chance - something germane to the question posed of Mr Aesop's grasshopper? Aptly-named New Order contemplated the "second chance" theme in a different context, with their hit "Krafty" (videos een below), which even if it doesn't help with your ruminations on the subject should brighten-up your Sunday with welcome fantasial blast-from-the-past - my favorite track on that LP ...
Thursday, December 04, 2008
Whoooa There Bossy....
Just as there are progressives and conservatives in the political sphere, so to do similar dichotomies exist in the financial sphere. Trend-followers and contrarians are arguably the most generic categories. I make no apologies for being a contrarian - for one must understand oneself and be comfortable in one's own shoes to profit. Having said that, I am not stupid, for I have read the momentum literature from cover to appendices many times over, and so piss into the proverbial wind judiciously and with good cause. With that out of the way, I will suggest briefly - contrary to Stephen Jen and many other currency pundits - that the days of yen strength are numbered, and that come the end of this calendar year - particularly vs CAD, AUD, SGD - reversal is nigh. 
My reasons are overly simplistic and undoubtedly, many will argue to the contrary but I believe a meaningful chunk of the carry trade has been unwound (and if one hasn't unwound yet, one probably won't!!); macro-specs are now all long; risk-avoiders are long it as an alledged safe-haven; and systematic traders and trend-followers are long because of the alignment of highs and lows. Strategists are yen-bullish. So who's left to buy? Not exporters, that is for certain. So who? BoJ? Ummm, no one needs reminding of their own current long USDJPY position, and the fact that they foolishly sold NOTHING in the intervening years of massive yen weakness. Moreover Japan itself has, for the past decade been diminishing their own home bias, undoubtedly a financial sojourn they deeply deeply regret. Then there are the fundamentals. And for Japan, they suck. Over-dependence upon exports, horrific and deteriorating demographics, worst Govt Debt to GDP ratio in the developed world, scarily making Italy appear positively prudent, and interest rates that as unappealing as anything out there, not even mentioning a political process almost as dysfunctional as that which enabled the sub-prime fiasco (exemplified by the near-suicidal attachment to whaling and the seeming inability of the Keidanren to garrot the lot of them in the name of Japanese self-preservation. Last, there is the chart. Yes the world is different. Yes leverage will be diminished going forward. But to a contrarian, none of this matters as these pictures are like a red cape to a bull.
I cannot tell you precisely when this reversal will occur. But I feel it in my bones when something has bungeed too far and is set to reverse, and I reckon it will be shortly after the new year. But it will sharp and vicious and bodies will assuredly be piled-up at the exits. This prognostication will undoubtedly come as music to the MoFs ears, for there must be little cheer these days in the Ministry, with the exception of feeling fortunate NOT to be a member of the Treasury team in Washington.
Wednesday, December 03, 2008
Symmetrically Bold and Decisive?
I read this week's leader in the Economist and it has irked me. "Bold and decisive action" is what it called for, to muscle the global economy back on a path to growth, and to address the threat of deflationary spiral. "Bold and decisive action" indeed! What irked me was not the call to arms, as it has irked others, for I will admit to being reluctantly though pragmatically sympathetic, but rather the hypocrisy of the call NOW by the self-professed champion of free markets.
For it should be obvious to all NOW, that the reason why we are here, NOW, is the very lack of bold and decisive action by leaders, monetary authorities and regulators to address the inexorable build-up of excess credit creation, asset-price bubbles, as well as unsustainable fiscal policies coupled with unaddressed mercantile and exchange-rate policies in Asia. As such, any editorial call-to-arms should be prefaced with a "mea culpa" for admitting that their prior apologetic stance towards policy and regulatory neglect was incredibly short-sighted, for it not only fostered unimaginably large mis-allocations of resources, but created problems of such magnitude that large-scale socialization becomes the only viable option to prevent something approximating systemic collapse. This last phrase may sound like hyperbole, but most - even the Austrians amongst us (including perhaps Hayek too, admittedly in his old age were he alive)- would admit it is closer to the truth than not. It seems fair then, that any such mobilization of resources, or call upon the populace (and its descendants) to foot the bill, either through the burden of debt, or the imposition of a future inflationary regime, must highlight and categorically admit past mistakes, clearly for the avoidance of future doubt.
Failing this, there remains (for such an Editorial Leader) possible redemption for their lack of a mea culpa, if they perhaps attempted to quantify the present value of past benefits deriving from said policy neglect (externalities included) against the present value of costs and lost output attributed to mother of all post-war busts. But alas, The Economist is silent. Sadly, I am not a sufficiently qualified macroeconomist to weigh up such a complex cost vs. benefit question. But it is my belief - whether derived through my financial Calvinist sympathies - that we passed that threshold sometime in the latter part of the last decade (1997 ?!?) at about the time that "irrational exuberance" was banished from the ex-FRB Chairman's metaphorical arsenal. And in passing that threshold, each dollar spent thereafter was a dollar yielding diminished marginal returns to the future for the sake of present consumption thereby disastrously delaying the confrontation with fiscal and financial realities that would be met, sooner later, by market forces if not address directly through policy. Yet, it ismmy hunch, that even if it were - in pure financial terms - an economic wash (which it may very well be), the erosion of systemic confidence, the squandering of the commercial flexibility and diplomatic advantage attached to the Dollar as the global reserve currency, the impact of volatility upon investment decisions, the unnecesary delay by (primarily) Anglo-Saxon nations in converging their lifestyles and finances towards sustainable levels with their deleterious effects would likely tilt the cost vs. benefit determination in favor of more prudent fiscal and monetary policies yielding more moderate growth punctuated with mild rolling recessions - a proverbial victory for the tortoise over the hare. That's my story, and I'm sticking to it, until plausibly convinced otherwise.
There was no shortage of American triumphalism following the dissolution of the Soviet Union. And be certain that I shed no tears for this event, for conclusions regarding the inherent lameness of Central-Plan Economics were not wrong. But make no mistake, the decade since "irrational exuberance" was banished should be seen as an unmitigated failure of the unmitigated market, and here too, we should shed no tears in writing its epitaph. Issues of grandest importance indeed. I just wish more of our opinion formers would have had the humility to accept their culpability.
For it should be obvious to all NOW, that the reason why we are here, NOW, is the very lack of bold and decisive action by leaders, monetary authorities and regulators to address the inexorable build-up of excess credit creation, asset-price bubbles, as well as unsustainable fiscal policies coupled with unaddressed mercantile and exchange-rate policies in Asia. As such, any editorial call-to-arms should be prefaced with a "mea culpa" for admitting that their prior apologetic stance towards policy and regulatory neglect was incredibly short-sighted, for it not only fostered unimaginably large mis-allocations of resources, but created problems of such magnitude that large-scale socialization becomes the only viable option to prevent something approximating systemic collapse. This last phrase may sound like hyperbole, but most - even the Austrians amongst us (including perhaps Hayek too, admittedly in his old age were he alive)- would admit it is closer to the truth than not. It seems fair then, that any such mobilization of resources, or call upon the populace (and its descendants) to foot the bill, either through the burden of debt, or the imposition of a future inflationary regime, must highlight and categorically admit past mistakes, clearly for the avoidance of future doubt.
Failing this, there remains (for such an Editorial Leader) possible redemption for their lack of a mea culpa, if they perhaps attempted to quantify the present value of past benefits deriving from said policy neglect (externalities included) against the present value of costs and lost output attributed to mother of all post-war busts. But alas, The Economist is silent. Sadly, I am not a sufficiently qualified macroeconomist to weigh up such a complex cost vs. benefit question. But it is my belief - whether derived through my financial Calvinist sympathies - that we passed that threshold sometime in the latter part of the last decade (1997 ?!?) at about the time that "irrational exuberance" was banished from the ex-FRB Chairman's metaphorical arsenal. And in passing that threshold, each dollar spent thereafter was a dollar yielding diminished marginal returns to the future for the sake of present consumption thereby disastrously delaying the confrontation with fiscal and financial realities that would be met, sooner later, by market forces if not address directly through policy. Yet, it ismmy hunch, that even if it were - in pure financial terms - an economic wash (which it may very well be), the erosion of systemic confidence, the squandering of the commercial flexibility and diplomatic advantage attached to the Dollar as the global reserve currency, the impact of volatility upon investment decisions, the unnecesary delay by (primarily) Anglo-Saxon nations in converging their lifestyles and finances towards sustainable levels with their deleterious effects would likely tilt the cost vs. benefit determination in favor of more prudent fiscal and monetary policies yielding more moderate growth punctuated with mild rolling recessions - a proverbial victory for the tortoise over the hare. That's my story, and I'm sticking to it, until plausibly convinced otherwise.
There was no shortage of American triumphalism following the dissolution of the Soviet Union. And be certain that I shed no tears for this event, for conclusions regarding the inherent lameness of Central-Plan Economics were not wrong. But make no mistake, the decade since "irrational exuberance" was banished should be seen as an unmitigated failure of the unmitigated market, and here too, we should shed no tears in writing its epitaph. Issues of grandest importance indeed. I just wish more of our opinion formers would have had the humility to accept their culpability.
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