Thursday, November 27, 2008

Of Perfect Storms and Horses's Asses

As much as I try to disabuse the employment of cliches, or limit myself to the less-than-ordinary ones, I occasionally slip whether out of laziness or fatigue.

But I cannot countenance hearing one more hedge fund manager diminish their culpability in their spectacular loss of untold millions or billions by laying the blame upon The Perfect Storm.

Now I read Sebastian Junger's book, (which was probably a hundred pages too long) and I saw Wolfgang Peterson's rather cheesey movie of the same. And as far as I can remember, the weather was shitty when they went out, and the reason they went was primarily greed. Once out there, they made bad decisions - again driven primarily by greed - which is why they ended up with Davey Jones. Moreover, forecasters saw the storm building so it wasn't a surprise except to those who were exceptionally ignorant, or supremely unlucky. But defying the forecasts of the building storm and choosing to navigate the waters was thus nothing short of hubristic arrogance, desperate greed, or if you were a passenger, and it wasn't your decision, very bad luck indeed.

Which brings me back to those who blithely blame the now-metaphorical Perfect Storm. You can see just how disingenuous such self-absolvement actually IS. They were not gingerly caught out. They intentionally piloted their Funds (and with them their investors) directly into harms way. They could have stay in port. They could have returned money since no one with such a flexible hedge mandate is obliged to invest, and nearly all pay legal respect (or at least lip-service) to their intention to Preserve Capital. None (and I mean the Info Memo's of which I've read too many) say "We're tits-in long-and-levered come hell, high-water or Perfect Storm". No. I am sorry but they defied forecasts, logic, common sense and as such have lost their right to blame the Perfect Storm.

Even journalists blaming a generic Perfect Storm for our current ills pay metaphoric homage to Junger's book, but this, too, is disingenuous, and patently disrespects all those forecasters who, since the beginning of The Great Leveraging in the mid 1980s have been warning about excess credit-creation, burgeoning cross-default risk inherent to various less-than-essential derivatives markets, balance-sheet zaitech, agent-principal dilemma, moral hazard, pari-passu and liquidity position risk, the constraining impact of persistent trade, budget and current account deficits, the inanity of NOT popping (or even ameliorating) likely bubbles, the threats posed by abnegating regulatory oversight whether for parochial profit or fear of foreign predation. So with all due respect, this was NOT a Perfect Storm, in the sense it was somehow spontaneously created to the surprise and amazement of all, but rather a result of our own creation, resulting from years of collective policy neglect, political pandering and rent-seeking that, far from being a surprise, has run to script similar to that foretold by numerous wise and observant men and women.

So to all you managers out there who are conjuring year-end letters to justify gates, or merely absolve yourself of blame, shame, thereby avoiding the necessary ego-cleanse, be advised that if you employ the "Perfect Storm" excuse, you will indeed look the "horse's ass" (yes that last cliche IS worn, but it is perhaps the most apt) at least my readers, and IMHO by your wiser and more prescient peers.

Please Don't Tell Anyone "I Suck"

The Financial Times reported that SRM Manager Jon Wood is suing the WSJ for revealing that he was down 85% in August setting up yet another court battle (recall he's still suing UK Govt over The Rock) that he will lose. Forgive me, but losing many billions of customer dollars as a fiduciary IS news - even during these days when a billion or two seems to be a rounding error.

Wednesday, November 26, 2008

Buyer's Angst

I have just returned from a continental shopping trip. Not your ordinary walk on the high-street, but a cross between a serendipitous search and actual more imminent need for some family-oriented bricks and mortar. Some skeptics (hi Charles!) will undoubtedly be rubbing their eyes at the thought and timing of this potential pecadillo. And this has not been lost on this writer, though in my defense I will suggest it is more opportune than the denoument of 24 months passed. But what was most fascinating about my recent sojourn was the first-hand peak into the market of discretionary and forced sellers by a real discretionary buyer (who importantly has a macro view).

I was looking in two specific regions of this nation – one characterized by a gentle climate with second homes purchased by numerous non-local primary lifestyle transplants that are peripheral to essentially agricultural countryside, though still proximity to transport and several conurbations. The other - a decidedly wealthy area, with an enviable proximity to diversified commerce, natural beauty, as well as a financial centre.

Many agents (along with their customers), however, are behind the proverbial curve, or at the very least are putting on the bravest of faces. They simply do not get it. Or rather IT. They are in denial, clinging to the belief it’s a financial sector phenomena or, at worst, a recession like the others without making the connection between what such a recession might do do to prices given the 150% increase in the values of certain properties in these grographical markets during the preceeding 5 years, on top of an approximate doubling during the 6 years before that, which assumes optimistically that the blood-letting in 88-93 was sufficient to purge the massive Reagan-induced credit growth. The compounded effect (up ‘til recently) has been eye-watering to the man-in-the-street who doesn’t own, or who has stretched to own and a meaningful deterrent to this observer’s prior entry to the ranks of landed gentry – not out of ability, but purely out of an offense to my sensibility of value. The Chelsky basement studio of miniscule NEVER “worth” GBP500,000 (let alone USD$1,000,000+ with the currency effect). Nor 400,000. Probably not even 300,000. Certainly not at exchange rates prevailing then, and probably not even now. That neither stopped people from bidding them up and trading them at those prices. The waterfront, the slope-side, the cliff-perched with the rare view, yes these of course do have rarity value. And when The People are flush, and lenders munificent, there is no telling what The Determined will pay, or, for that matter what is the correct price. This is precisely why momentum trading and trend-following strategies have great efficacy in long-toothed cycles. But without the fortuitous ability to go short, they would likely be pink elephants.

Historically, high-end real estate was property’s NASDAQ to median residential’s Blue Chip Dow, sporting higher betas. But fascinatingly, this time, until recently at least, there was a bizarre consensus that IT was a sub-prime problem, and not an economic one. IT affected the little guy. High-end jobs, and the winner-take-all economy would persist as jollily as before. Greenwich, Chelsea property, and prime secondary home values were safe. And while sub-prime markets indeed collapsed, NY and London prime vedically-levitated as if unaffected albeit with a dramatic fall in turnover giving pause for – if nothing else – hope that two decades of growing income inequality and flush emerging-market buyers would underpin both demand and prices. No one of course seemingly remembered the prime directive of forecasting, which is the aged-old-saw “Shit Happens”.

Fast-forward to late 2008 where asset prices have collapsed – be they equities (developed or emerging); commodities (except gold which is a mere 20% below highs) which are 50% off peaks; credit-risk (can spreads widen any further?); commercial real-estate (please look at S15REAL Equity or British Land chart) while shit-boxes in Florida, Vegas, CA and Arizona reportedly 40 or 50% of peak too. Yet the top-end remains in denial. Or alternatively, they have not yet been forced to sell their homes as others (even the best hedge fund managers with double-digit positive returns) have demonstrably been forced to liquidate their stocks, real estate, or commodity portfolios. There is clearly a lag, but sure as tides greatly rise and fall in Newfiendland, so too will the top end follow the path cut by other core asset prices, in similar if not greater magnitudes.

Instead what I heard from agents in the upper-end of a particular ”Prime” market was distinctly apologetic drivel such as:

It’s a micro-market...
It’s different this time…
Prices will not fall – they will just plateau and stabilize...
But it’s a very desired place…
Supply is so limited...
Enquiries have actually increased…
Our website traffic has been increasing…
People must have a place to live…
The Russians are coming…
When the new road [building, airport, blah blah] opens, a flood of buyers will enter…

They are counseling their clients NOT to panic. And to the sellers’ umm errr credit, they are heeding the advice…so far. “He is firm in his price”. No, she will not negotiate. “His cost is 2.5, and he’ll countenance a small loss, but no more”. Oh if I could only dictate to the trading gods the size of the loss I will countenance!! The emerging story is: “It was offered at 2.4mm and he turned down a bid at 2mm, and now its 1.8 offered, and there are no bids”. The more honest amongst the agents speak frankly at a time in which their allegiance to the seller is tenuous at best for they want to simply do a transaction, offering up bona-fide anecdotes like: “the family was squabbling about price. It was offered at 1.2mm a year ago (which was too high), and is now offered at 750k with no bidders. It will probably trade at 500k, when it does, and the buyer will have a “stolen” it. I liked that agent as she was the most honest of the lot, apart from being the most competent.

Other regions have out of necessity become more realistic. Dordogne has been flooded with distressed English sales, liquidating to stop the haemorrhaging in their primary residences, household budgets, to pay school fees, etc. The writing is on the wall. “Make an offer”, “looking for a quick-sale”, oh the sheet says EUR 1mm, but the actual offer price is 800k. Yes that’s 20% off admittedly elevated values before negotiation and a bid is countenanced. Country Life had not many more than a dozen props advertised in their mag this week, down from the three or four dozen not two months ago. Perhaps it is the time of year, but it’s more likely discretionary advertising budgets have been cut, and the buyers have simply disappeared. Where is the price today? Ask the bond-traders….for they will tell you: "where-ever the bid happens to appear!"

No, now, or soon, ALL manner of people are or shortly will-be out of work. Now, real businesses will go bankrupt. Now, everyone becomes cautious. Now, one’s worth has been halved and security diminished, and uncertainty increased. Now is NOT the time the seller has his or her way with prices. Now, the seller is lucky to find a bid, let alone a buyer. Now, the seller will lucky to have someone even view their property that they wish to sell. Now is the time the smart seller hits the bid when he finds it. Now, the smart seller is the one who can imagine and conjure images of how low prices can go, and how elevated the even-scarce bids are in comparison to but a few years ago.

In the same vein, too perhaps we will witness a return from outer space of art, antique and other emblematic late-cycle tell-tales. Transfer fees? Sports-ticket prices? Even the vaunted Honus Wagner T-104! Deflation? Yes, of sorts, but probably not the pernicious kind of the thirties but rather a demolishing of the last decades’ relative asset price bubbles - from the Gucci bag, to a year at Harvard, en primeur first growths to eccentric collectibles and five-star hotel room rates in comparison to their rack prices.

I do have a requirement for a family home, though I am not without a place to live. And I saw several places that would suit quite perfectly. But as an economist, trader, investor and pseudo-seer, I am choking at the thought of buying before the coming compression at the top-end. And this causes both anxiety and marital discord. I know what my instinct says, but this is obviously not "everything". Thoughts, strategy or advice anyone?!?!

Thursday, November 13, 2008

Financial Haiku Open Day

Haiku is part of my love-hate relationship with Japan, and to insure the absence of doubt, I greatly admire both the form and its masters. By contrast, my pathetic attempts are courtesy of London - conjured as they were on an overland walk from the City back to the depressing Hedge Fund alleys of Mayfair. I invite all - aficionados and amateurs alike - to have go and compose your own Financial Haiku in the comments section. Mine are actually quite dark thanks to the days news as delivered by the morning's FT, please lighten it up and redress my somber mood with some amusing satire!

Half Full

Empty new towers,
millions of pink-slips sent forth,
sour is the yoghurt


Where is the profit's trough?
Lower lows descending in fog.
O' never again!


Ubiquitous desire
is never satiated.
It's time to slumber.


Ants work - grasshoppers
fiddle. Turtles ARE Faster!
I've told you it's so.

Wednesday, November 12, 2008

That Credit Crisis Xmas Menu (in full)

* * * *


Post Millennial NV Bubbly 
Chateau Kerviel, Cremant de Bourgogne
Brazilian Blood-Orange Emerging Market Caprinha
Crunchy Xmas Punch (Vodka + Kool-Aid)

* * * *

First Course

Sashimi Fillet of Quant Arbitrageur
Northern Rockfish Fricasee
Grilled-Icelandic Shrimp Cocktail
Swiss [Bank] Mini-Fondue

* * * *


Short-Squeezed Lemon-Lime Sorbet 

* * * * 

Main Course 

Corn-Fed Not-So-Prime Sirloin Roast
TARPfish Brochettes (avec sauce surprise)
HF Manager's Po' Boy Special (with redemption sauce)
Mrs Watanabe's "Inside-Out" Carry-Trade Dragon Rolls (ZIRP filling)
Lehman-AIG Surf-n-Turf

served with... 

Fully-Coupled Asian Mercantile Gratin 
Julienne of Private Equity & Emerging Markets
Roasted Commodities of the Day (halved or quartered)

* * * *


Congressional Oversight Pudding 
Destagflationary Tarte w/creme anglaise
Crepes Distressee
Unemployment Souffle 

* * * *

Cioffi & T+1
Petits Two's

Tuesday, November 04, 2008

From Behind Those (Hate Radio) Eyes....

I will admit to you now, in the event that you have not already noticed that I have a problem. No, it is not drink (though do I enjoy my wine), nor anything sexually sordid, but rather that I have a morbid fascination with right-wing radio. It is, in my defence, likely a vestige (naive as it may be)  from my core philosophical belief that one must read, know and understand all points of view to pragmatically have any hope of winning the war of ideas, and hence public policy. Idealistic, and naive, but I cannot help myself, secretly wondering whether they really believe their own phantasms and vitriol.

On the eve of America's long-awaited-for leadership change (sadly prolonged since there is no mechanism for a government "to fall" as exists in Parliamentary systems), following four MORE years of the limpest administration in the history of the nation, which were it given the outlet to pass the reins, probably would have opted out, I thought it would be good to get to know the incoming President from the perspective America's right-wing night-time hate gang. Indeed Mr Obama is more multi-faceted that perhaps anyone knew, demonstrated by the long, but undoubtedly uncomprehensive list describing Mr (and Mrs) Obama. Cauustic as it may be, perhaps the most beautiful thing about America is how forgiving we are, and how willing, as a nation we are to accept people's faults and shortcomings - even those of our President. After all, we re-elected Bush for a second term!! So here is the view of our new President from behind the eyes of the ummm  ... errrr ... opposition.... 

Obama is a Marxist.
Obama is a Socialist.
Obama is a Liberal.
Obama is an extremist.
Obama is a closet anarchist. 
Obama is a Communist.
Obama is none of the above but IS the most leftist Senator. 
Obama is a Keynesian (OMG! no not that!)
Obama hangs out with terrorists.
Obama is Bill Ayer's Manchurian candidate.
Obama IS a terrorist.
Obama was a drug addict.
Obama is a drug addict.
Obama is a muslim jihaddi.
Obama wants big government.
Obama hates white people.
Obama wants to substantially raise taxes.
Obama LOVES taxes.
Obama hates free trade.
Obama LOVES free trade - especially NAFTA and illlegal aliens.
Obama is an instrument of the Annenberg foundation (which are communists).
Walter Annenberg was a secret co-conspirator of the Rosenbergs. 
Obama hates America.
Michelle Obama hates America.
Michelle Obama has an eating disorder. (she isn't fat?!? -ed)
Michelle Obama was crack whore.
Michelle Obama  IS a crack whore.
Obama will order federal marshals to come into your home and take your gun away.
Obama will allow criminals to keep their guns.
Obama will give your guns to criminals.
Obama had gay sex with Louis Farrakhham.
Obama will appoint Jesse Jackson Secretary of State.
Obama will appoint Jesse Jackson Chief of Staff.
Obama will appoint Malcom-X as Chief of Staff.
Obama is an illegal alien.
Obama hid his illegal alien relatives and is therefore a felon.
Obama will establish a US version of Soviet Union's NKVD.
Obama is a liar.
Obama was liar.
Obama will be a liar. 
Obama hates freedom.
Obama hates democracy.
Obama hates religion.
Obama hates the Jews.
Obama hates my family.
Obama hates small businessmen.
Obama hates plumbers.
Obama hates God.
God hates Obama. 
Ahmadinejad Loves Obama.
Obama loves Hezbollah (and don't forget Hamas!)
Obama DOESN'T hate gays.
Obama's father was a goat herder.
Obama refuses to recite the pledge of allegiance.
Obama will ban the Pledge of Allegiance.
Obama is an arab.
Obama drinks tea.
Obama's favorite music is "Puff Daddy".
Obama will take away your healthcare.
Obama donated money to the PLO.
Obama hates babies. 
Obama is NOT African-American...(He's Kenyan-Hawaiian). 
Obama hates the Constitution (and will re-write it).
Obama had sex with your grandmother.
Obama was caught on a secret videotape torturing puppy dogs.
Obama will plough under little league fields across America.
Obama will make Americans play "Cricket".
Obama will force college students to eat vegetables.
Obama will change the name of America to "West France".

(ok enough for now...) 

And to think Clinton couldn't even get past Thelma and Louise on healthcare!