Tempting Offer?!?

I am not scatalogically-preoccupied. But on Page 53 of this week's Economist magazine - the European edition at least - is an advertisement for Bocconi SDA's Master's in Fine Food and Beverage with a picture of what appears, at first-sight to be a large Parisian sidewalk pile of excrement with the caption "Come and see how tasty a Masters in Management could be." Ummmm, thanks, but no.

With our current predicament fueled by such Masters, I couldn't help but chuckle at the sight (though my appetite, upon seeing and recounting it, now, to you, has decidedly been lost) and timing. Of course - for The Few Master's themselves, flush with their spoils and nouveau-elevated tastes that increasingly only they can afford - will undoubtedly recognize the mess-pile as a rare and valued Truffle, sure as their covetous and parochially selfish eyes can recognize a Vintage Krug on a purveyor's shelf at 30 meters (or more!). But one would be forgiven for wondering whether Bocconi's PR Agency boys and/or girls were looking for a little payback while working out their pink-slip notice period(s) recently handed to them as a result of the fallout of The Masters' financial follies.

Lest you think me unfair to said Masters (for the would-be's of this Bocconi course are arguably harmless), I will happily point out that I do not single them out, for the pavements are veritably littered with piles of crap, from the legislative capitals where lawmakers have whored themselves like street-harlots, while even those that didn't were too timid, ignorant, or fearful of electoral backlash to interrogate the foundations and wisdom of unlimited credit sans regulation or prudential tether, to suburbia and the American heartlands desperation to believe in tooth-faeiries, Santa Claus, Goldilocks, and pixie-dust as panaceas for unsustainable consumption over production, and at the collective level, unsustainable fiscal expenditure relative revenue.

Farewell Greg Newton

I learned today via Felix Salmon, and FT Alphaville's Paul Murphy of the sudden and very sad passing of Greg Newton, the former Metal Bulletin and MAR-guru, and prescient satirist of Naked Shorts. As Felix highlighted, Greg was not only one of the earliest must-read on-line commentators but he was probably the originator of the genre of on-line Financial Satire, a platform he employed to great effect in the lampooning of contrapreneurs, scamsters, hubris and simple outright financial stupidity - more often than not BEFORE its discovery by authorities, investors and mainstream financial journalists .

Greg was very supportive of Cassandra Does Tokyo from the outset as we shared a joy of satire, irony, expatriation from the lands of our birth, and a similarly skeptical view of markets and human nature. More impressive however, was that he courageously tackled important contentious issues and people head-on, despite threats of libel and legal action, without the bashful anonymous guerrilla sniping I've shamefully adopted. His bullshit detection skills were of the highest order, coupled with an unparalleled no-nonsense wit and punchy literary-style that always brought a smile to my face, typically accompanied by audible laughter, as I am certain it did to all readers, except perhaps those that he skewered.

But most important from where I sit, Greg Newton was a warm, kind, and thoughtful man, evidenced by the time and attention that he devoted to our correspondence and the issues he championed in Naked Shorts without recompense. I know I, too, will sorely miss him, and the world will be worse-off without his critical eyes.

Death Nell

If there is any doubt that the high-end of conspicuous consumption is stinging, just come and visit Aspen or Snowmass. Local Pitkin county radio this morning was discussing the closure of several well-known high-end retail stores - not for the season, but permanently. The reason cited: many of their clients, they said, had were reeling from being "Bernied". The slopes are eerily quiet. Kids who'd we' had booked into group lessons were nearly private. Chatting with a local high-end builder, he was quick to tell me that he has no backlog with current work ending in July. Yes he said he's been through three of these before and something has always come up. But this time, the something has yet to materialize.

Most ridiculous is the real estate porn infusing local glossy mags, still sporting prices beyond the realm of the absurd. Despite the confidence of local cognoscenti made wealthy from peddling slopeside or barren building lots with a view, this shoe has yet to drop, sure as Danny Bonaduce had freckles and a numbingly expensive cocaine habit, it will drop with a resounding THUD! If one needs any evidence on top of the increasing number of building sites abandoned by homeowners made skittish or insolvent, they need only look to the headline news today of the abandonment of Little Nell's Snowmass project due to inability to sell forward OR find adequate financing. Not surprising perhaps at a mind-numbing $3,000 per square foot. This leaves a rotting carcass in the center of Snowmass - an eyesore to other local residents who've recently overpaid, or worse, put a deposit on a project that will likely fall into receivership.

Like many a bull-market project and their champions, Little Nell and their partners undoubtedly committed the cardinal investment sin of extrapolating forward, that which should never have been - at least not if one is dependent (or will be dependent) upon munificent external finance at some time before completion, or the stupidity of strangers. Such fallibility is nevertheless human, and before this cycle is over, they will not be alone in having assumed they could borrow required sums to complete, and subsequently shift astronomically over-priced leisure housing to the yet-to-be-identified even more stupid would-be purchaser. But requiring more scrutiny perhaps is the description of the project itself ("luxury", "five-star", "exclusive", "gourmet", "world-class"), for such adjectives appear increasingly suspect, with their redemption more elusive than anytime in living memory.

Pause for Thought

I have very few problems with the authorities attempts to triage the patient (using Dr Roubini's analogy). I do of course have some more restrained opinions with respect to the nuances, but nothing (as a critic) that hasn't been more articulately or exhaustively covered by those more intelligent and cogent than I.

But as a trader/investor I will admit to being a little bit skittish at the thought of the P&L consequences of posting a trillion dollar purchase of US Govt Bonds, here...and now ...at these prices and yields. For if "price" IS any indication of market distress, and forward-looking expected return is (acknowledging the exception of a decade-and-a-half of JGB yields with a 1-single-digit handle) related to value, then by deductive analogy, one might posit that Treasury Bonds are not the part of the patient that requires such attention in the emergency room.

Yes, I understand it is a tool, in a larger policy context. And that there are perceived positive externalities (like causing long rates to artificially hover at lower levels than they might otherwise thermodynamically tend). But given the length and breadth of distress in the markets, and it would seem, on financial institution (and household!) balance sheets, if one were to post trillion-dollar tickets, there are far more attractive opportunities elsewhere.

Umm al-Fahm

I have TARP Tiredness; AIG-Overload; PPIP-Exhaustion; TALF & TSLF -weariness; and Bonus-Outrage Burnout, not to mention a bout of Pozni-Lassitude. It will undoubtedly fade with the goodness of time, but in the meanwhile, with nearly every critic, blogger, strategist, economist and commentator all over it, any musings I might have, seem more or less irrelevant at best, and a waste of time at worst.

Yet, such outrageousness is not monopolized by financial forces as evidenced by zealots marching in Umm al-Fahm, who are depicted (rather poorly and without aesthetic formation) in the adjacent photo capture taken yesterday:

And while attempting restraint in stirring the hornet's nest, I will suggest that pictures DO very often speak louder than words, the former image conjuring my memories of those most assininely-Patriotic-of-folk, The Orangemen, in all of their Portadown-glory as more elegantly,but just as ridiculously captured here. Need one say more...?!?!

Don't Dish it Out If You Can't Take It

The wind was blowing 30 knots, whipping ice-crystals into exposed orifii. In the near white-out, looking down from perch on the lift I was able to make out a lone young female boarder who'd missed her drop and now had a most long and heinous traverse. She was putting on a brave face, and through the howling of the wind, and in-between her apparent tears and sniffles I could hear her repeating the mantra "Boarders don't cry...boarders don't cry...boarders don't cry...."

Similarly, there is more than a little irony in today's FT report, highlighted by Gwen Robinson at FT-Alphaville (Tokyo) that numerous Hedge Funds are planning to sue Porsche over the sports-car manufacturer's perfectly-executed Hunt-like squeeze of VW shares that snookered hedge funds and traders, large and small, the all world-over. Now before I am accused of mimicking Private Eye's Glenda Slagg, let me say that I don't believe Porsche's actions were particularly noble, and were at best in the murky grey nether-regions of financial legality. Having said that, despite my career as a professional arb, I do (from a purely technical standpoint) admire Porsche's patient setting of the trap before springing it's blitzkrieg with Rommel-like precision over-running any and all VW shorts misfortunate in their timing, leverage or position-sizing.

I should indentify and empathize with the squeezed for I often root for the underdog and have always played The Game by the rules, and dislike when dishonesty and malfeasance triumphs (even temporarily), gaming the system, arguably at the expense of more virtuous or long-term investors (or HFMs own investors). I realize this sounds sanctimonious, but I too have been at the game long enough to have been on the other side - occasionally too early like the VW shorts - of virtually every type of shenanigan ever plotted. conjured, or imagined. And a meaningfully large percentage of these have been nudged, cheered, lead, architected, sculpted, orchestrated, and cajoled, by hedge funds - quite likely the very same ones now suing Porsche. Whether the predation of shorts, trading on material non-public information, tape-painting, end-of-day/week/month/quarter/year window-dressing, stop-fishing, front-running, option-leans, illegal short-sales, collusion with other like-minded similarly-interested investors, using OTCs or other paper-smoke-and-mirrors, options to avoid SEC filings, sponsoring bogus research, buying early release of research, worming clinical-trial results, cornering stocks, ambushing and killing entire hedge funds, front-running new-issues, death-spiraling Reg-d issues, mutual-fund timing, all these are just the run-of-the-mill man-made (often hedge-fund made) market-hazards one must contend with.

Yet, despite the aforementioned, the cautious and skeptical contrarian (if I be an example) can successfully overcome them. Diversification, prudent position sizing, keen observance of the structure of crowded trades, conservative leverage, understanding as precisely as possible when and why something is not doing what one expects or forecasts it to do, who (or whom) is responsible for a position NOT doing what one expects all can contribute to preventing the horror of being checkmated whether by an HF or a would-be Porsche. Lose a pawn? Sure! Maybe even sacrifice a knight. But live on, and learn. So, if I, an honest plier of the trade can withstand the humiliation of having my stock called back after some unscrupulous fund has ramped-and-lent and ramped-and-lent, or suckered into buying a dip in-front of an earnings torpedo, and still live to fight another day, because it is the nature of The Game, then surely those playing The Game with greater abandon adhering to fewer rules should take their lumps like men, and admit that from time-to-time Alekhine will somewhat epicly have them for lunch.

Cheney: "Rush is a good guy"

In his typical charismatic fashion, Dick Cheney let it be known in a national TV interview that he has no doubts "Rush" Limbaugh is a "good guy".

One might expect that the late Generalissimo Francisco Franco also ranks fairly high on the Cheney-scale of "Good-Guy-ed-ness".

USD$ -50,000,000,000,000.00 - The Horror

Blackstone's Stephen Schwarzman was commenting on The Horror of wealth destruction. So one should rightly ask: How much "wealth" has been obliterated? Ashamedly, I often seek the path of least resistance, though I've been more recently preoccupied, both of which are excuses for taking the easy route and referring to the FT quoting the Asian Development Bank's number suggesting $50 trillion has been smoked, vaporized, hacked-off,roto-rootered or otherwise removed from the mark-to-market asset side of the global balance sheet.

I was actually quite pleased to see this number - not because of schaudenfraude or a sadistic desire to inflict ill-will upon others, but rather because it confirmed the number I had (of my own lazy accord) roughly estimated of what Americans had seen their net asset values diminish which was twenty-trillion (20,000,000,000,000). This, relative to the ADBs estimate, also roughly jives with America's share of global GDP, (not wanting to quibble over a trillion here or a trillion there). This still leaves Americans with $20 to $25 trillion of net asset value by my very rough back-of-the-envelope calculations (though please don't ask me to show my work).

There are those who adopt a glass-half-full view of this, and hope we'll return back soon to the warm and fuzzy place of high asset values. Or one might take a glass-half-empty view and dismiss peak values and more!!) as never having actually existed or, been realizable, and see where we are presently as being still enroute to where Global NAV will ultimately bottom. For the moment, I'll take the middle ground and venture that having shed an awful lot of aggregate value (an entire year of global GDP according to the ADB!), we're a lot closer to where we're going than we were. Some limb, I've climbed out on, huh? But it in fact matters. It matters to the inflation vs. deflation debate. It matters to the keeping of one's head in regards to the scale of the problem and the potential resources that can rallied, marshaled (or sequestered and confiscated for the more authoritarian amongst us).

I know this is a facile way to look at it. I know it is not a matter of simply passing the hat to each and every for their contributions since the assets are mal-distributed beyond mosts' comprehension. But it seems fair to ask the question: Precisely how big is the problem (the eventual total hole in financial system's balance sheet) in relation to everything, in the US and globally. A further two trillion? three trillion? perhaps five trillion in the USA?? Mind boggle-ingly large numbers indeed. What is this as a percent of GDP? What is it as a percent of GDP spread over 10 years? What is it as a percent of Aggregate Net Worth? Ten percent? Fifteen percent? Can we translate this into a facile figure that allows us to contemplate how much poorer it makes America, in aggregate? Would it be another ten (or fifteen? or five?) percent poorer than it currently believes and, if so, is it possible we can apply our credit accordingly, and start again?? Would you trade 10% of what you thought you had (savings, pension, net home equity) for an end to the uncertainty, and a reasonable assurance it shan't happen again (in addition to warrants on the excised pot of shite)? IF the answer is categorically no, does this mean we are in for the mother of all political battles while the real economy burns? Will this battle be generational? Does it pit the ends of the mal-distribution against each other? How else can we parse the question?

I am not dismissing the validity of the debate over official action, and it's reasoned moral implications and differences over optimal implementation. But it seems such is the vehemence and vitriol of the debate over the mechanics - however valid - that it has run roughshod over the very broad and simple questions that include phrases such as The Long-Term Public Interest, sustainability, and fairness.

Needless to say, I don't have the answers. But I wonder if the descent into technical jabberwocky hasn't prevented public buy-in, instead, fracturing the polity into factions defending parochial interest, rather than asking, and attempting to non-partisanly answer the question: What is best for the vast majority of American people - not simply this month, or this tax-year, but in the context a generation, and their children. The risk, is the image conjured by that of Pontius Pilate arguing and accusing his legion,in the life of Brian, while Brian, ostensibly held prisoner, escapes due to the recrimination. If not apt, perhaps it should nonetheless replenish diminishing reservoirs of amusement.

The Perfection (of sorts) of Quantitative Easing

The Brits are now offically obsessed with quantitative easing, first not comprehending it, then wryly examining it, finally yielding to a stoic skepticism about it's parochial impacts. There is a certain anodine perfection to the phrase, quantitative easing, unlike anything else in the entire rather utilitarian financial or economic lexicon. It sounds wonderful, functionally-useful tonic, though certainly not dangerous or hazardous to our well-being. Yet it remains sufficiently innocuous so as to escape scrutiny and with it, the associated public examination that prying eyes bear. It is entirely Madison Avenue rather than inflated Goebbels-like propaganda or overly-wooden Soviet or Pyongyang slogans.

Once one begins to unwrap the phrase Quantitative Easing, it continues to enigmatically distract and intrigue, like Russian a Matryoshka dolls, opening one, only to find that it yields an empty shell, in which sits another nested figurine. Now make no mistake, I am talking about the phrase and not the substance. For those who perservere and look further, say (to continue our analogy) inside the first egg, one immediately encounters a measure of good feeling in the word "easing". One ignores quantitative at first, mostly because of some dormant maths-phobia. But the "easing" is offering tangible relief from something-left-unspecified, but, nonetheless something that must have been unpleasant. So far so good. After a deep breath, one re-approaches the imposing "quantitative". Ahhh, that's not so bad. It does have lots of letters, and "Q-words" are daunting - particularly those with twelve or more letters that are virtually impossible to construct upon a Scrabble board. But ignoring the feeling that it could just as easily inflate to fourteen or sixteen letters without impacting the meaning, the word actually confers a feeling that the subjects of its intention are getting more of something, and it's not costing them anything, - a bargain rarely seen in today's world, and one that defuses suspicion from all but the most cynical.

The architects of the phrase have been careful to avoid any suffixes with -tion, or -sion, thereby extinguishing unnecessary alarm or in the extreme causing the reader become panic-stricken. Inflation, deflation, recession, reflation, depression, castration, malnutrition, cessation, or the dreaded hyperinflation are nowhere in sight, their fearful suffixes kept as far away as phonetically possible. And for good reason.

When the disparate two parts are put together - "Quantitative....e-e-e-a-a-s-s-i-n-g" - one can imagine a free neck-massage by a friend or the relief one feels when winding down a manual jack to finally lower one's car after having worked hard and gotten filthy changing a tire. It recalls visions of opening a nicely chilled Laurent-Perrier 1998 Vintage Brut and slowly letting enough gas out to avoid a Tour-de-France celebratory ejection. Indeed, the two words "more" and "relief", (altogether now: "more relief"), indeed who could question or reject such a positively magnanimous offer?

Interestingly, I had a go at thinking of some alternatives of equal disarming grace and feel-good. And after more than thirty-minutes, I could not even begin to think of anything remotely as elegant. Complete defeat. Which begs the question: From where did it's coining precisely arise??!? Though first employed in Japan, and conceptually, wholly the child of rather utilitarian central-bankers, I am quite certain the term could not have been born in a government ministry, any branch of government or for that matter a financial institution. It's seduction and perfection can only be the brainchild of far more skillfully cunning Persuaders. It is time for them to step forward and accept credit where [no pun intended] credit is due.

What is Your Real Name?

I believe there is a problem with the lexicon describing our current sad state of economic affairs. Terms like "Bailout", and "Rescue" are simply inadequate, making it sound as if the collective "we" have somehow been gypped – now forced to shell out for something collectively we’ve never obtained. Even respectable media organizations are guilty of fanning the proverbial flames of linguistic indignation and its implied recriminations through mindless repetitive use. All which reminds me of a July afternoon in early 1980s when I was commiserating with one of my best mates at the LSE who had just obtained his examination results from the papers he sat for the first-year of his law degree. Head in his hands (when he wasn't shaking it to and fro'), he was utterly dejected, for he had failed each and every one, possibly obtaining the lowest aggregate score ever in the long history of the Law department. "I can't believe it!...I can't fucking believe it..." he kept repeating.

Now this particular year was a grim one economically and socially speaking in the UK. Toxeth and Brixton riots were still fresh in peoples minds; Arthur Scargill was agitating on behalf of the miners; almost everyone possessed a Billy Bragg LP, "gentrification" and "buy-to-let" were hitherto unknown phrases in the prevailing English dictionary, and there were, to the best of my knowledge, no celebrity chefs or Michelin-starred establishments on said shores. But they were glory years as a student evidenced by 20-pound-a-week rents and 35p-per-pint at "The Three Tuns" not to mention parity exchange rates for my USDs. My friend, armed with a keen wit and intellect and the gift of blarney, his guitar, strong voice and a long repertoire, was a sought-after bard at Pubs, bars, and parties both inside and outside student circles. He partied longer, harder, and more frequently effortlessly whiling away the hours, days, weeks and months with nary-a-thought of consequence. Until that sullen July.

What use are friends if not honest? So I cleared my throat, and said "Matey...yes it's a pain in the arse. You'll need to spend the summer revising and re-sit the papers in Autumn. But you've little reason for regret. You’ve objectively had a smashing year! You played with some of the best, met interesting people, slept with more-than-a-few attractive women, and made friends you'll have for life. I mean...it's not as if you studied and failed....THAT would be disappointing! THAT would be a more worrying failure!! You made choices, and have something to show for it, even if "that" proves ephemeral...no one can take it away" He thought about what I’d just said, and didn't fight me. He knew I was right, and his broad smile returned. "Fancy a pint?"...


Returning to the present, pejorative talk of "bailouts" and undeserved “rescues” just misses the point. Focusing upon bent bankers, snake-oil securities, or inept analysts, which were but symptoms, is somewhat misplaced since hey are not the root causes, and, as such, these facile recriminations however satisfying and apt, trivialize the breadth of culpability, and near-universal benefit of The People over the past two decades. For what we are witnessing is the arrival of the bill, getting around, as it were, to coming to fathoming the scale of it AFTER a long long long collective night out. We’ve HAD the fun (and I use the "we" in the broadest and most encompassing of terms). GDP, employment, consumption, wages, all were substantially higher than they otherwise would have been. Everyone earned more and everyone had work who desired it. Enjoyable trips were taken, and attractive shades periwinkle now adorn what might otherwise have been walls and ceilings of cracked and peeling fomerly-white paint. Purchasing power was buoyed by a dollar that was stronger than it ought to have been had nations lived on a balanced and current basis. Taxes too were collectively lower further buoying PCE. Yes, everyone benefited, though as is always the case, some more than others. Securitizations of cars, homes, CC receivables, Refi with equity withdrawal and HELOCs all were but more rounds on the tab to be (or not, as the may prove to be) paid for in the future. Homes were built, enlarged and landscaped. Offices multiplied like spring mushrooms. Nations were wired in fiber. Previously incurable diseases, cured by overly-flush investors. Yet other entire nations emerged (if only temporarily). A Wii now sits in every house, and a recent version of Windows on every desktop. Does anyone still use a CRT?? Everyone has several handsets despite the amusing antiquated cumbersomeness of those with a vintage of more than a few years. This happened not just in a year (or two) but over a decade, perhaps two, or even three so the comparison of the cost must surely be kept in perspective by comparing it to a decade (or more) of GDP - not the annual figure - to get a true sense of perspective. Yes, our binge was mostly about consumption, though this itself drove massive capex and investment (mostly elsewhere), by those wrongly extrapolating that our thirst would need to be quenched similarly and persistently, longer into the future than has been manifested by events.

So I propose that we need a new, more accurate linguistic to reflect what this is called since. “Bailout”, package, rescue, are inadequate insofar as they don't describe more precisely in its historical context what it is we are witnessing, and fail to address the universal nature of the benefits and, I would add, the culpability that descends throughout the polity. It IS a pity that thoughts of prudence, resilience, and sustainability were demagogically dismissed when these thoughts would have provided a tether to reality. But we can, at least being anew by calling it what it IS, and as such, I’d be happier with merely “The Bill”, “L’addition” "Il Conto", or more succinctly, "The Tab" - which for the sake of the avoidance of doubt, should include the more historical detail than less. But let’s stop the narrowly-focused pejoratives or value-charged labels (correct as they may parochially be) and take a moment to reflect on our past collective tangible and ephemeral revelries. Once there, understanding everyone has a piece if of political or economic shit on their shoe, one may begin to let go of the anger and accept that socialization of The Tab is not wholly unjust, and that the time for anger and incredulity in opposition (i.e. all those numerous political and economic forks to settle up before) has long since passed.

It's Official: Mrs Madoff is Delusional

Bloomberg reported that Ruth Madoff's lawyers are purporting that the USD$45mm in muni bonds and USD$17mm in cash on depo at Wachovia that she possesses are "unrelated" to the Grand Ponzi. In other circumstances, a wife's claim to have independent assets might be credible, particularly depending upon how long she's been beneficial owner, how they were acquired, what she did in her professional life (if any), and so one should at least entertain the claim. In this instance, it just demonstrates she is utterly unrepentant and delusional. If her kids won't take her in, perhaps justice would have her spend her waning days in a Jewish Retirement home populated with Madoff investors and spouses of Madoff investors.

Oh Sh*t...Even Index Arb Isn't Safe

When it rains, it pours so it is said. And indeed it does according to Kaminsky et.al's 2004 paper on the relationship(s) between capital flows, macro policies and the business cycle. It also duly applied in 2002 when dozens of double-digit billion corporations 'fessed up to various forms of malfeasance from diddling and manufacturing bogus research, looting the kitty by backdating options, re-striking awards at lows and so forth, to the outright fraud on a scale that would have made te likes of Alan Bond and Juergen Schneider blush.

And while the scale of AIG (it WAS a fraud!!), Madoff, and more recently Stanford Fincl might have sent even adventursome investors running for the safety of the Index Arbitrage bunkers, today, we are told by Reuters that even Index Arbitrage offers offers no comfort, with the arrest of Walsh & Greenwood for nothing less than getting caught with their snouts in their clients cookie jar, much like Pooh Bear's head was stuck in the honey pot.

The pair are accused of nothing less than "appropriating" client funds for personal use. More than 80% of assets it is believed. Undoubtedly, few will have heard of WG Trading, but like Madoff they've been around for decades, had a fine reputation believed to be running a respectable Index Arb shop. It seems however, they were buying racehorses, paying alimony, funding the remodeling at Le Cirque, buying big digs in fashionable neighborhoods, hot wheels, and everything else a Would-be Wall Street Entrepreneurial Titan should be seen to be spending it on. We know not if either had a Net-Jets fractional, or a lease on a jet-powered titanium tube with wings of their own.

Now, like Madoff, there perhaps should have been some red flags and by way of disclosure, I have no inside information or special knowledge of WG. But it is common knowledge that no one has made money out of index arb in the USA since the 1980s. Certainly not enough - after management fees to fund a Larchmont-lockjaw lifestyle of thoroughbreds, polo, and rare Aston-Martins. Index arb was a means of getting cheap stock loan inventory, having inventory (before the downtick rule) to sell long when it was in spirit, a short-sale, and having a position to to use at expiration to manipulate prices for associated option trades as necessary. It has been, in short, a dealer business since anyone who was not doing all three (like most of the broker-dealers in might now be termed "The Glory Years") wouldn't get a proverbial word in edgewise since those that had the natural axe would inevitably be better offered on the way in, and better bid on the way out. And like Madoff, when the tide went out, it became impossible to answer the questions regarding the ability to competitively fund positions as a non-bank, non-deposit-taking, non-prime-brokering institution in an era of balance-sheet reduction. Or perhaps they just burned the balance of their clients money, quite literally, on hay.

And so due-diligence just got a whole lot harder - both for investors and managers. Now, Mr Hedge Fund Manager, Mr Investor (or Mr Kroll on his behalf) will be poking around in YOUR rubbish bins. Like the French Fisc, they will be evaluating your lifestyle and working backwards to see whether or not YOUR income is commensurate with your returns. NOW, Mr Investor will want to see the audited accounts of not just the Fund, but the investment Management company. And there will be no excuse (except the embarrassment of riches) to deny such access. Mr Investor will want to know - in fact will need to know - about messy divorces and spiteful wives from hell. Yes, life in the future will be whole lot different after this one...

What Price For Market Liquidity?!?!?

What is the price for equity market liquidity in size? Anyone who has any doubts about what the precise number should or might beat present need only look at Phil Falcone's (Harbinger) sale of it's Fortescue (hey John H, read this!) stake to China's Hunan & Valin Iron & Steel group at 20% BELOW the so-called market, according to a Bloomberg news report.. And Fortescue is reasonably liquid, but apparently not liquid enough.

When I see such a tangible tell-tale of market-structure reality (typically the result of filings), I think of several topics that the thoughtful practitioners should ruminate upon:

(1) What is the meaning of this for the accrual and payment of performance fees upon "Last Market-to-Market" valuations? Seems Mr Falcone pocketed 20% of all the market impact on the way up.

(2) What does this say about the true value of certain activists true portfolio liquidation value, particularly those like Warren Lichtenstein's Steel Partners Japan Fund where the positions are equally large if not larger, but the turnover but a fraction of that in something like FMG.

(3) Audits should almost certainly carry serious caveat warnings about liquidity-adjusted valuations. I've raised this with senior audit partners at financial practices before and they've looked at me like I was the Devil incarnate. Yet their opinions are qualified regarding hundreds of minute details, yet it disregards perhaps the most important: mark-to-market is fallacy where positions are large and liquidity constrained.

(4) IF disposing of a 10% position requires a 20% discount, then imagine the intentional market-impact one can generate on the way in (both on long and short positions) which again is the cornerstone of incentive fees, and should highlight for allocators and investors the large potential for abuse, and near-certainty that before this is over, ALL peformance fees will be paid on a new industry standard of some kind of rolling three or five year window.

(5) Systemically, this is instructive on the essential need to avoid liquidation. Not avoid longer-term deleveraging, but wholesale point-in-time Mellon-like liquidation. Imagine for a moment that "failing banks" (currently insolvent, or near-insolvent) are liquidated, and the extreme market impacts of their sales upon asset prices will of course force others into insolvency merely exacerbating the situation. Th LTCM managed unwind is a reasonable model here. Warehouse the risk, unwind it orderly in due time. For forcing systemic liquidation does not equate to market efficiency. Price discovery in illiquid markets is likely to result in overshoot, and exacerbate systemic difficulties. This doesn't mean that said asset prices warehoused are over, or undervalued, but that selling position to make position is merely systemically sub-optimal with real negative cascade impacts upon employment and output.

Frankly Mr Shankly...

How did I miss this?!!? It was outside my realm of consciousness...until Thursday. But it's fabulous - both musically and lyrically, and it's been ricocheting non-stop off what few neurons I've left since Thursday eve. I know the song is quite to parochial to Morrissey, but I can't help feel there is a some greater macro relevance within. Perhaps it is the derisory view of dishonesty. Perhaps it's the Faustian bargain. Perhaps it's the suspicion that our Mr Shanklies are writing piss-poor poetry too. Perhaps it's the scathing coda...

An Excellent Read...

Silence due to travel, family business and obligations, all have taken precedence. Lots to say, just no time to say it, as the ratio of drafts to posts continues to increase uncomfortably.

Yet, amidst the decided market gloom, extreme pessimism of real economy data points, to the ultra-tail of pessimism (note: don't read this if you can't handle it), former bank analyst, John Hempton has prepared a fine and measured multi-dimensional analysis of systemic solvency in Bank Solvency and The Geithner Plan that is a must-read. It is not that it is optimistic. It isn't. But in comparison to tin-foil hat brigade's offerings, it is a welcome bit of sobriety. I am not alone in thinking this, as Dr James Hamilton at Econobrowser used Mr Hempton's post as a basis to Meditate on The Prospects for the US Banking System. It is, in any event, a welcome change from contemplations of a return to a neolithic existence, a Mad-Max or Blade-runner-esque future imminently awaiting us. So enjoy, and if you;ve comments, do please post them directly to the original post at Bronte Capita, or the link at Econobrowser where they'll be in better company and receive due review. In the meantime, I'll return to my Campari & Soda and the arcane study of French Property Law.

Pundit Rage

There is always a bull market somewhere so goes the old saw. Despite the sorry state of markets far and wide, and even sorrier state of the real economy that is lagging the former, a week of traveling, planes, trains, and hotels with attendant over-indulgence in popular newspapers, television and radio has revealed the latest rip-roaring and snorting bull-market: simple-minded interviewers wheeling out pedestrian interviewees from any remotely-related tangential financial discipline - most with paltry knowledge and understanding of the current economic crisis, economic history, and financial markets but all who are recriminating, pontificating, moralizing, wagging fingers, o denying and defending in a blind-leading-the-blind retributional media-equivalent of road-rage. If ever there were a moment to turn off the sound on the stupid-box, change the radio station to the local university's 24-hour indie music station, use the newsprint (FT excepted) for kindling or bog-roll (a Daily Mail recession-fighting tip?!?), limit one's consumption to the coterie of fine balanced and thoughtful blogs, or just read a book, preferably one written more than a hundred years ago, now is precisely the moment to do so. And like most bull-markets, this one too will eventually fall-in on itself out of internal fatigue, or perhaps more, optimistically through a mass-epiphany by their consumers that such simplified uninformed demagogic treatment is one of the reasons why we are here in the first place.

(inset pinched from an old Big Picture borrowing of the original screen shot)

"Camille's Reclining" Declining

Contrary to momentum investor hopes, buying high, or recent highs, can be perilous to your financial well-being for a very very long time, in nominal terms but more acutely in real and relative terms. Such an emblematic example was reported in Bloomberg yesterday:

Feb. 4 (Bloomberg) -- A Claude Monet painting of his wife Camille reclining in a flower-strewn meadow sold tonight at Christie’s International in London for 11.2 million pounds ($16.2 million) with fees.

It was bought by a Paris-based representative of Christie’s, taking instructions over the telephone.

The 2-foot 8-inch wide canvas, dating from 1876, had been estimated by the auction house to fetch 15 million pounds, making it the most valuable estimated work offered in London’s February series of Impressionist and modern art sales. Its final price was less than a bronze version of Degas’s best-known “Little Dancer” sculpture that sold yesterday at Sotheby’s for 13.3 million pounds.

The Monet’s price history reflects historical demand from art collectors. It had last appeared on the auction market in November 1999 at Sotheby’s New York, where it sold for $15.4 million.

In June 1988, at the height of the last art market boom, the painting sold for 14.3 million pounds with fees at Sotheby’s in London.

Twenty years, and nominally one hasn't made a penny!! And the real-term returns would undoubtedly be more negative than -50%, an astronomical difference between even something pedestrian like T-bills. Of course one presumably has had the privilege of Camille Monet's two-dimensional company for the duration which may be some consolation to those prefering Monet to say, Leroy Neimann. Van Gogh's "Dr Gachet" (see post) hardly fared better only coming back into the money 18 years after Daishowa's Saito rang the bell, and then only briefly, for today, Ken Griffin is no longer "bid", and impressionists, while still eye-wateringly expensive for mere mortals, are clearly no longer be the store of value in real terms previously believed.

So yes, price matters. Homes bought in hot markets this decade, tech stocks, EM bonds and stocks bought mid-decade, US Bonds and perhaps Gold bought now, are also reasonable candidates to suffer Dr Gachet's curse.

Simon Cowell is a D*ck

Simon Cowell is a d*ck. I don't think there is a more pleasant or articulate word to describe him, without referring to or repeating this base American expression. Maybe I haven't expended enough energy upon the task. Maybe Joyce, had he been alive, also would have arrived at the same place in the dictionary. Gore Vidal might do better, but it is his job, and he's paid for such eloquence.

That said, I actually like Simon Cowell. I admire his perception of, and focus upon, the clear and present reality of his "contest". He refreshingly cuts to the metaphorical chase. He is cringe-ingly honest. Cruel, yes indeed, but honest. And rarely wrong in his area of expertise, though needless to say I would hesitate to consult him on issues relating to good-banks and bad-banks, or the relative virtues of The Taylor Rule. Daresay I am no expert on things Idol (or X-Factor for those on the receiving end of Jim Rogers latest abuse). But, I will admit (somewhat ashamedly), that I have paused during occasional channel surfing sojourns, and watched his spectacle with a rubbernecker's combination of morbid fascination, bewilderment and bemusement.

While I suspect there is something unsavourily dishonest about the antics of some of the contestants who willingly submit themselves to the inevitable ridicule and abuse, beyond the strange desire for a few moments of celebrity, there appears to be (if my bullshit detectors are in order) a far greater number of contestants who are genuinely confused, surprised, not to mention seemingly devastated by the reception they receive from those on the far side of the judge's table. These people genuinely seem NOT to understand that their perception of reality (often longly and dearly held) is, and has been, continents apart from, not just the cruel, critical, honest eyes of the panel, but of - and I hesitate before invoking the phrase - the world of objective reality. Perhaps as a result of overly-sympathetic and/or sensitive friends and family, an overly-supportive "everyone's a winner" culture, or their own denial, they are, in a single word, clueless.

And as I am watch yet another now-teary-eyed hopeful [if not rightfully then accurately] crucified by Mr Cowell, I cannot help myself from making the comparison to American's similar bewilderment over the causes of the current crisis, and economic state which they collectively find themselves. They too, don't have clue and quite genuinely seem not to understand what has happened, what they did wrong, what got them here, or there, as if the words "reflection" or "introspection" were entirely foreign from the English language on these shores of the Atlantic. This reveals itself in the pronouncements from lawmakers, interviews with ordinary people, selective lynchings by the media without the wholesale indictment of the hand that feeds them.

Yet sober-minded people DO exist in America. It was thirty years ago that Jimmy Carter donned a cardigan and spoke of malaise, it's causes, and proposed solutions, (thrift, parsimony, hard-work, sustainability, quality vs. quantity, replacing the emptiness of consumption with more spiritual things, faith, morality, optimism). Little of said redemption recipe was heeded despite the inherent correctness of his advice. And for twenty-five subsequent years to the present, rather than seeing the wisdom in his words, America as seen them as sanctimonious choosing instead the absurdity of renting the public interest for parochial gain, worse-than-neglectful energy policy, managed healthcare, unrelenting geographic sprawl, the dismissal of pricing negative externalities, rights without responsibilities, self-regulation, ballooning expansion of credit without any reasonable tether to sustainability, billions in bonuses coincidental to negative-billions at the bottom of the income statement, sub-prime lending, LBOs, SIVs, ZIRP, internet bubbles, housing bubbles, commodity bubbles, government bond bubbles, persistent half-trillion-a-year current account deficits, lending to a borrower to withdraw equity leaving a wafer-thin margin upon an illiquid depreciating asset that recently doubled or tripled, the packaging of non-recourse under- or un-secured loans-to-already-indebted people without a Plan-B and calling them 'AAA', leaving the lights on everywhere when no one is around, electing a President (twice!) whose unashamed objective was to terrorize the Public Interest, or building low quality 2x4 wooden homes in hurricane alley on a floodplain is almost beyond comprehension. And undoubtedly one could add their own litany of petty tyrants that offend any semblance of prudential decency or common-sense. And while this is going on, lawmakers and The People occupied themselves with steroid use in professional sports, how to insure prophylactics and birth-control pills receive second billing to abstinence, the un-sanctity of gay marriage, 10 things not to do with a cigar, amongst others trivial pursuits.

But now, America has finished performing. Now, Simon Cowell-The-market has harshly declared judgment. It isn't kind. It isn't nice. It stings and hurts. But it is truthful and honest and correct. Yet it remains almost unfathomable that they still cannot see its own culpability, despite it cutting wide and deep into each and every crevice of the Polity - in media, in government, in individuals, in academia. There's anger. There's disbelief. Dreams have been shattered. The tears are coming. But please, don't beg. Don't cry. Stoically face up to it. Affirm culpability. Introspect. Deal with reality. And most importantly, learn from your mistakes...

Inflation(ists) vs. Deflation(ists) - Part II

I want to follow-up last week’s Inflation vs. Deflation post since the debate is of the utmost importance, financially, socially, and politically. Not that there are quick, microwavable answers. But I appreciate everyone's attempts so to all who contributed their opinions, be they intellectually-argued, divinely-inspired, dogmatically-held or viscerally-based, thank you.

This is admittedly a bitchy post. Gore Vidal bitchy. I don’t know why. Perhaps it is because when the camps are clearly drawn, caricatures and archetypes are easily derived. Yet we all fight against our biases, so bitchy as it is, I hope sensitive souls will take barbs and less-than flattering generalizations merely as a call to examine our biases and predispositions.

Here is what I've garnered from on and off-line comments after distilling them down;

1. Liquidationists - contrary to Hayek himself (tnx Sean!) - probably underestimate just how unpleasant and un-civic unfettered unwinding of current untethered debt-to-GDP ratios would be. I wouldn’t be surprised to discover that liquidationists are more predominant in "safe” jobs, or perhaps no jobs. They have a sense of moral outrage at [other] people gaming the system (which I share) that exceeds their moral outrage at the human cost of unemployment, chaos, lawlessness, and mob-rule (which I do not). But interestingly, amongst the ranks of the liquidationists are those that have themselves gamed the inflationist system, but like Mark Cuban, have abandoned the carousel and now wish to protect their gains against dilution so are pleased to maximum pain. They may call themselves deflationists, but they shouldn’t be confused with them since this lot has a parochial interest, be it morally-driven spitefulness or relative financial gain from finally being rewarded for their prudence and parsimony…provided the system doesn’t implode too too much.

2. Inflationists are buffeted by a determinism of actions and events; cause and effect - a sense of inevitability that is - I will posit - seductive like a Caribbean beach, Marx’s manifesto, or in hypothesizing a closed-form solution (without proving it) in having conjured logically plausible answers, but without (it seems to me), the intermediate-term lattice. “We ARE going to point "C" (Zimbabwe) from point "A-and-one-half" (where we are now) because of this and that, (always involving a moon-shot for Velocity) but point "B" is under-explored whether because it’s been assumed out of existence by adopting jump functions, or multiple paths that lead to the same place. But as an investor, first and foremost, I am terribly interested in point B which is actually more important [to me] than point-C, as many-a-hedge fund manager (and their investors!) with the long leveraged correlated complex of anti-dollar trades has learned in Q3 and Q4. Interestingly, many in this camp are NOT economists, which given the record of economists, I do not hold against them. But there is something admittedly cult-like about The Movement and its members. Not that it makes them wrong, or less likely to be right. It may make them more likely to be right for I may be confusing that thing which is akin to Mormon certitude, the tsk tsk tsk head-shaking by The Faithful at The Sinners, for what may be simple visionary-ism.

3. True deflationists, to some extent, have the easier path to defend since they will be right sooner or later, as even hyperinflation will "bust" eventually yielding to the very deflation authorities tried to avoid. Cheating (i.e. leaving the forecast period open) apart, deflationism CAN defensibly share reality with eventual inflation, though the hyperinflation feared by some is more difficult to reconcile with the “big-D”. But timing IS everything, and the shorter odds of the deflationists IMHO result from the inflationists might easily being off by a factor of several years - longer than one can continue to continuously post variation margin, longer than counterparties can remain solvent, and not before the assets expressing the pure and extreme view halve again (note: that is an alternative scenario – not a prediction). Which in almost any book, particularly a trading book, would make it wrong. They try to be agnostic (vs willfulness of liquidationists) this is not their true way. For most deflationists are, it must be pointed out, pessimists by nature. Maybe they are not perma-bears (not that there is anything wrong with that in Japan), but for many of the deflationists, have been waiting for this since 1987 .... and 1994.... and 1998....and 2002. You don’t even need to have the sound on when a deflationist comments for their body language gives away their inherent sense of worry. Their brows are more furrowed. Skin more pitted. They would never be caught dead in a bow-tie. And so one wonders: are they right in spite or because of themselves?

4. There are nuances. I am what [astute] reader-commentator (and unabashed inflationist) David Pearson terms "a deflationist overshooter". This is articulated or perhaps only implied in the original post, and reckons that: the weight of de-flation (de-leveraging, de-risking, precipitously de-clining core asset prices, de-capacitating financial system distress, de-employment shocks, secular de-consumption (savings) ratios, even demographics) trumps any triage, stitching or even bionic limb replacement conjured by central banks and Keynesian stimuli, by a large magnitude. And, this view conjectures, that by the time even the most interventionist authorities comprehend this, it will be too late for the inflationist "V" to ripen. AFTER that (two years?!? three?!?) when the majority of purge may be complete, and only then (year prior to re-election year 2012?) will the drastic measures be taken, which will be overkill and could very well/will lead to above trend inflation. Not hyperinflation. Above-trend inflation. It understands – as Jeremy Grantham suggested last weekend, that solutions will - like reducing greenhouse gases - likely require multiple types of adjustment including falls and write-downs in asset prices (particularly debt); debt-for-equity swaps, copled with some rise in nominal incomes and price indices. But like the deflationists, this view is predicated upon tinder being too wet to combust (again thanks David for the correct terminology), and authorities – in this new paradigm – having the impetus and fortitude to “do the right thing” in the heat of the moment, which, if recent history be the example is as likely or difficult as it is for one party living up to pre-coital promises in another universally-known heat-of-the-moment act.

5. Most comments have been yankee-centric - perhaps mirroring readers interests and geography. I can warm to risk appetites returning when Global ZIRP arrives and begins to push the mountains of cash investors hold, further out on the risk curve. And global fiscal packages diminish the nominal falls and begin - not necessarily to get traction - but just stabilize things. NOT intermediaries, or leveraged punters, but owners of capital whose initial forays will resemble a tug-o-war with the ongoing deleveragistas, happy to finally catch a bid in something. Don's comment was a good one. It highlights the historical assumption that the developed world would eventually close in on us, by rising to our level - not by dragging us down. But globalization is at least partially about convergence, and the leverage in the west papered over fundamental unsustainabilities about such rosy western convergence notions that must be confronted in the absence of cold-nuclear fusion, flux capacitors and unlimited resources.

We are between the proverbial rock and hard place; Scylla and Charybdis; or a fat arse and an cement park bench, and so there are no good solutions…only less bad, and probably more socially expensive ones.

I Won!!!

Damn those 419 scammers are good! I received this one (revealed below) today, slinking its way through spam filters, and I was soooo ready to claim my winnings. Yes, they are enterprisingly quick to embroider reality to catch a sucker, though I am not sure which is more surreal, or fanatstic...

UNITED STATES TREASURY
SWEEPSTAKE LOTTERY DIVISION
NATIONAL PROMOTION/PRIZE AWARD DEPT.
REF: SSL/61-ILGI0509/45
BATCH:SSL/15/096/GCO

DATE: 26/01/2009

RE: WINNING FINAL NOTIFICATION

Dear Winner,

This is to inform you of the release of the US Treasury’s Sweepstakes “Everyone Is a Winner Lottery” Promotional Program (part of the US Congressional Legislation entitled the “No Household Left Behind Act of 2009) held on the 26th January, 2009 in which your ticket number: 212005600545188 with Serial number: 4888/02, an entry automatically attached to your SS number, which drew the Lucky numbers: 41-6-76-13-45-8, consequently won the lottery in the Second category of the year 2009. You are therefore approved for a lump sum payout of USD10,000.00 (TEN THOUSAND US DOLLARS ONLY) in cash accredited to file reference number: KPC/9080333308/03 from a total cash prize of USD 1,600,000,000.000.00(ONE THOUSAND SIX HUNDRED BILLION USDs ONLY) to be shared amongst among the One hundred and sixty million households automatically enrolled winners in this category. Your funds are now deposited in a security company with your prize money insured in your email.

Due to the mix up of some email addresses, we ask that you keep this award from public notice until your claim has been processed and money remitted to your account as this is part of our security protocol to avoid double claiming or unwarranted abuse by Financial Institutions of this program by participants as it has happened in the past.

All participants were selected randomly from Social Security Rolls through a computer draw system and extracted from all households. Subject to economic conditions and Government solvency, this promotion will take place annually to complement existing US Treasury policy.

To file your claim, you can contact:

United States Treasury
Mr Timothy Geithner
Tel: +202-781-2200
Email: tim.geithner@ustreasury.gov

Or for more rapid (and recommended) disbursement, please contact our approved agent:

Union Bank of Nigeria
Mr Amos Mugambo
Tel: +234-1-8507693
Email: a.mugambo@hotmail.com

who will process your claim and insure remittance of your prize money to a designated account of your choice. Remember, for most rapid disbursement you are to contact our agents by email and within One Month of receiving this notice. After this date, all funds will be returned to the United States Treasury as unclaimed. For further processing and remittance of your winning funds you are fill and forward to our claim agent, the completed processing verification form below:

(1)NAME OF BENEFICIARY
(2)ADDRESS
(3)TELEPHONE
(4)DATE OF BIRTH
(5)OCCUPATION
(6)NATIONALITY
(7)COUNTRY
(8)TICKET NO.
(9)MODE OF PAYMENT(Bank Transfer or Certified Cheque)
(10)SS NUMBER

To avoid unnecessary delays and complications, please quote your reference/batch numbers in any correspondences with your recommended claim agent. Congratulations once more from all members and staffs of this program.

Yours Sincerely,
/signed/
Timothy Geithner
Lottery Director

(lest my cred suffer, for the avoidance of doubt, I have admittedly embroidered my actual Spanish Lottery Win ;)

Oh, and John, surely a "Lottery" would be more fun than Helicopter Drops, no?