I Was Sooooooo Wrong

It takes some honesty and fortitude to confront one's mistakes. Everyone makes them, though not everyone admits to them, perma-bears (like ZH & MISH) being, being amongst the worst offenders. Many Hedgies, most likely for reasons of ego and hubris, also have great difficulty accepting culpability for their errors, evidenced by their letters, blaming everything and everyone but themselves and wayward theses. Hugh Hendry, at least, maintains the intellectual flexibility to thoughtfully, and articulately throw in the towel, whereas the most effective do not invest themselves so fully into their investment theses that they cannot cut-and-run without inflicting egotistical self-harm. Because I operate in the land of the diversified portfolio, excising errant positions has never been traumatic, nor do I self-flagellate with cutters-regret. So long as my distribution is skewed-right, and the tail not overly kurtotic, I am sanguine.

Macro is different. The calls are fewer. Gestation time to trade maturity is longer. False breakouts and devasting swoons create further potholes. One can be very right and still get completely hosed in one's expression (and timing) of the trade (just look at Corzine if you have any doubts!!). Needless to say, one should ideally approach one's positions with the same sense of detached objectivity described above. Many, however, find this challenging whether it is due to personal political bias that clouds reasoning, or the resulting delusion caused by the 24-7 talking of one's book, whatever the evolution in ummm … errrr… let's called 'objective reality'.

Rest assured, I make no claim to be better. My worst prediction - the one that haunts most, confronting me each and every day - was not a trade per-se (though there are no shortage of bad ones). Rather, it was a political-economic scenario that not only hasn't panned out, but evolved (and, continues to do so) in completely the opposite direction. This was my forecast for what I call "Peak Inequality", along with all the deterministic knock-on effects such a scenario would have upon everything from luxury goods, and trophy real estate and high-end everything-else. For a short time in 2008, I smugly felt vindicated witnessing halts in construction of premier projects, bankruptcy of uber-luxury developments and the failure of high-end props to catch a bid. As things stabilized and bounced, and embedded counter-cyclical stabilizers blew gargantuan holes in Govt fiscal income statements throughout the world, I believed that 1) markets would [wrongly in hindsight] press for austerity 2) consumption was too fragile to raise taxes generally or cut govt spending; 3)the highest inequality and lowest marginal top-decile rates in generations would be the obvious target; 4)this would occur across the DMs, and draw the line-in-the-sand for inequality; 5)For IF the authorities were to bail out and make beneficiaries of asset-owners (levered ones in particular) in a pull-out-all-the-stops attempt to reflate, I reasoned the moons would be aligned for the State to recapture a meaningful amount of this (via tax) as a quid-pro-quo for not letting the soon-to-be angry hordes do "a Romanov"; 6) This would go some way towards capping and sustainably financing a yawning fiscal gap while maintaining general consumption and employment with a more constructive balance than otherwise might occur were reflation to float top-decile boats with scant participation by the median.

It would be understatement to say I was wrong, so far was I off the proverbial mark. On the surface, Like ZHers and MISH, I committed the cardinal sin of letting my political ideals get in the way of assessing the true probabilities. I had thought that under the circumstance, political expediency and policy pragmatism would extract 'sacrifice' from, or or co-opt, the top decile beneficiaries, given the backlash against the financial sector and the levered, that would in other times prove tortuous or impossible. Saving the system, at public risk and expense, with all its attendant property rights, is, after all, useful to the beach-masters, and the old adage of 50% of a goldmine being preferable to 100% of nothing must (so I thought) ring truer during such moments.

I'd thought it would be obvious to largest asset owners, and the top-decile earners, that they had escaped by the skin of the proverbial teeth, and expected they would have been grateful (excepting Hank Greenburg), and that these people would have not reneged on their promises to the Supreme Being made as the plane was falling from the sky. Instead, they offered-up "austerity" rather than contributing, as the Koreans did in 1998, a bit of the family sailver. Mark Blyth @Brown said: "Democracy is 'asset protection for the rich'….Don't skimp on the payments!". But the incessant rise in inequality is, a sure sign, they've been skimping on the payments. This has had profound implications: delaying and muting recovery, swelling deficits unnecessarily, undermining fiscal confidence, and exacerbating political divisions and preventing pragmatic action where and when required.

While some has resulted from unabashed or calculated "smas-n-grab", globalization has laid the substrate for great windfalls for some while undermining real median incomes. This is not meant pejoratively, or suggest anything should be done to throttle the trend or pace of globalization, but rather as a statement of fact. But the strength of the current should be noted by those who argue against the ill effects of inequality on the basis of libertarian personal fortitude. Formerly domestic pursuits (entertainment) now have global audiences. Software, healthcare, and yes, asset management) often have fixed development costs and mind-boggling scalar effects producing unimaginable wealth while median wages are throttled by competitive global labour markets and technology that increasingly allows outsourcing to ever-lower cost venues. These dynamics have incredible inertia, and are lifting vast numbers out of poverty elsewhere, and are difficult to decry. But somewhere, in this process, democratic insurance payments have been missed, and responsibilities by the beneficiaries, ignored, resulting in a listing economic boat, a mis-firing distributionalengine, a drought of sorts, an entirely unnecessary and man-made creation as a result of the rules of the game as drafted.

If one use the Lord of the Manor, as an analogy, he would have had the property rights over his domain, but in exchange, would assumed responsibilities and obligations both up and down the food chain. He would support (albeit with a lower-case 's') those below during bad times, and would have fiscal obligations to the that above (not meaning god for the avoidance of doubt), and if required, raise men for armed conflict. Failing on either account might very well threaten the property rights granted, or worse, his life. They were not inalienable, despite his position. Today, the same metaphorical "Lord", has all the rights, and they are inalienable, but none of the responsibilities outside a modicum of fiscal contribution to the State which can, with effective counsel, be minimized to great extent. His properties are, excepting rights of Eminent Domain, fully enclosed in the medieval sense. The Modern State, over time, has assumed many of the responsibilities, with the provision of a social safety net, and a tax rate that can be raise or lowered according to the requirements of public finance. That is, until recently, it seems, with the War on the State, a war on what remains a social work-in-progress that is "government", one which at its extreme in the USA is seemingly stuck in a Mondale-esque deer-in-the-headlights inability to adjust (or even reform) the rates (and structure) of tax to meet the obligations and responsibilities of the State to her people. The Grover Norquists, if nothing else, have succeeded in framing the popular political-economic debate such that it is believed [in that parallel universe that exists in parts of the nation] that austerity is divinely good, that hyperinflation is around the corner, that the state should barely exist, and shouldn't have a strong sense of the public interest. And we can witness the result: no new taxes, less progressively on existing taxes, starved public investment, unnecessarily higher unemployment and lower wages, hardship, and an incessant rise in inequality that most economists believe is inimical to growth and a well-balanced economy. Few desire sharing their income - whether rich or poor. And few would choose to shoulder responsibilities, if they could be avoided. But we, and the economy upon which we depend, and/or thrive, all share fates and fortunes that are inexorably tied, that if not demand, then certainly benefit from civic responsibilities (mostly economic in modernity) that are not transmutably-minimalist, but should remain flexible so as to respond more pragmatically.

Yea, I got it wrong, which I wish wasn't the case. But I do not regret my lost investment opportunities. Rather I fret about the future threat property rights, of lawlessness, of the lost economic potential, of the diminished social mobility, and of the resulting coarseness and divisiveness that stems from all these negative pressures.