The London Almanack Revisited

I bought a stack of rather old books at an estate sale some years ago. Within the lot I purchased was a tattered, leather-bound, compendium containing six years of "The London Almanack" running consecutively from 1853 through 1858. Thumbing through its worn and mildewed pages I chanced upon general interest articles of the day, court circulars, ministry staffing, board-listings of companies and their periodic changes, social diaries, etc. What stood out was the ubiquity of The Military in just about every aspect of life, and the wholesale absence of Hedge Fund and Private Equity Managers amongst the notable and glitterati-of-the-day. There were the Royals, of course, followed by land-owning aristocrats and the clergy who were well-represented, statesmen and ministers, and the odd artist mentioned here and there, after which, finally, on the bottom rung, the very occasional dash across a page by a City of London financier or budding commercial scion. But atop the pedestal of admiration, clearly stood the man in uniform (and I do not mean the blazer, blue-oxford & khaki’s of HF/PE issue). Today, of course, the military man is wholly absent, and one would be challenged to find a statesman of note outside the most senior ministers or cabinet officials in the vicinity of the social stratosphere. Now, upon the pedestal of the nation's attention, predominantly sit entertainers (NB: sportsmen are entertainers) and money-men.

Of course, in the era of my tattered Almanacks, Britain was solidly an Empire – one that took more than a few muskets and large-cannoned stinkpots to hold the domain together. But one could argue that today, the US Military is no less important to America’s dominance, given the amount of collective wealth expended by our rulers upon soldiers and their toys, and that the The Generals and their Lieutenants shouldn’t be socially licking the shoe-bottoms of Harvard Law grads trading public company shares upon their materially non-public clinical data, or denied their walk down the Red Carpets of NY or LA. Yet outside of General Petraeus, who will now be remembered for his indiscretion in the bedroom, rather than his prowess in the theaters of battle, one would be challenged to recall a single US military figure outside the serious guy who got so furious at Bush-the-Second for stitching-him-up at the UN. This is not a slur, on General Powell, and is intended as the opposite for was a model public servant taking the bullet for his boss, though I do wish (and I'll bet HE wishes) that he'd shredded the shoji-paper-like evidence underpinning the planned campaign in Iraq, which, if he had, HE might have been America’s first black President. Back on topic, perhaps in some places, the military men still rate in the public's fascination and admiration. But today, both in NY and London, the society pages are equally devoid of uniformed men (excepting those wearing a football kit).

Commerce and trade were hardly admirable pursuits for a gentleman in the days of my London Almanack, whilst the business of money itself, was even lower still, as it was, unsavourily associated with usury. Yet between then and now, finance has not only been rehabilitated from its Shylock-back-street ex-communication during the middle ages, but so entirely transmuted in its peception that it sits at the pinnacle of desirablility. Moreover, I would posit, this is not for what it does or what it is, or its social function, but ENTIRELY for the very real bling and glamour that its pursuit delivers to its disciples. Yes, it sounds genteel, important and purposeful when embedded in the NYT Sunday Society page weddings & engagements blurb that refers to the Groom's activity as a Senior Analyst in the venerable buyout firm of Fiddle-Faddle Leveraged Acquisition Ventures, or a Global Macro CDS Long-Short Portfolio Manager at Diddle Doodle & Daddle Hedge Fund Management. But should it's pursuit and its many faceted pursuers deserve their central place in our admiration? For those waiting breathlessly, this is not today's question and nor, despite the barbs, am I judging, but, rather, observing.

And prognosticating...by asking a different question: "Will this place on the pedestal continue to be held in the future? Obvious Answer: Probably not. And this isn’t because The People have voted against Bain-like, Romney-esque balls-to-the-wall maximum edge-of-the-envelope extraction in favour of deeper social meaning – the latter being a direction the people are running away from as fast and furiously as possible. Nor is it because we have, over the last decade, seen a more-or-less continuous exposition of what passed as success for what it has all-too-often closely resembled: cheating, tunneling, gaming, corrupting, mis-representing, to the outright frauding, thefting, and private misappropriation-ing at the expense of others and the system a-la Boesky, Scrushy, Frankel, Skilling, Ebbers, Rigas, Lay, Madoff, Rajuratnam, Kozlowski, Cioffi, Waksman, Gupta, Mozilo, and so forth. Rather, it will be for the same simple reason that in 1856, few could have imagined that the day would come that neither Military officers nor Clergy would reign supreme. That, in time, social mores, usefulness and opportunity would not only make their pursuits redundant, but borderline despised. And just as disastrous and grotesquely-brutal wars pursued at public expense undermined the Military's glamour, dishonest financial extraction and exploitation does similar to finance today. And though the moment of knocking finance off its perch clearly is NOT here…yet, Galleon and SAC-like insider-trading scandals, the kind that the typical citizen viscerally feels to be deeply unfair, and that the cognoscenti have little doubt of their veracity however difficult they may be for public justice to fully prosecute and irrespective of how well-lawyered the directly and tangentially associated may be, hasten the moment such pursuits are purged from our collective fascination. The public's distaste results not from some puritanical Scarlet Letter-like prudeness, but rather because fairness, trust, and confidence, are essential to the functioning of institutions and our social system, with corruption and similar venality undermining the its most basic machinery.

* * * * * * * * * *

With each passing day, larger-than-life archetypically-villainous characters diminish in number. Pessimists may rue the state-of-the-world, and the contents of the evening news may, often enough, cause one to hide all sharp objects in the house, yet, ponder, for a moment, of the idealistic though no less prescient vision of the future conjured 35 years ago by the most vilified of recent Presidents, James Earl Carter. Cars ARE now substantially more energy efficient. The use of alternative energy IS increasing, and America is becoming less-hostage to middle-eastern interests for energy. Home thermostats ARE turned lower. Rivers ARE cleaner. The cardigan HAS made a comeback. Faith HAS become more uniquitious (though I have my doubts about the virtue of the latter two). The iron curtain is gone, and an entire generation in Eastern Europe excepting Belarus, knows little to nothing of the bleak totalitarianism that's become a fast-fading memory. In all the lands of the western hemisphere south of San Antonio there is but a single totalitarian regime (Cuba), though Gordon Liddy would have his ideological issues with Chavez as Paul Singer DOES with Christina K. Gone are the Somoza, Pinochet, Torrijos, Noriega, Fujimori, Stroessner regimes, as are those of the Generals in Brazil and Argentina. Gone is apartheid, the larger-than-life Amin, Bokassa, Kabila, Taylor, Babangida, Mubarak, Rawlings, Doe, Kaunda, Toure, Bongo, Mariam, the ben-Ali family, and Qadaffi from Africa changing the face of the continent, and the lives of the people, dramatically for the better. Saddam Hussein is no more. South Korea is a model democracy, and even Pyongyang has turned down the rhetoric and turned-off the centrifuges. The Burmese generals, too, have relented. And while there remain a few stubborn boogers clinging to nose of power, they are noteworthy for their place on the tail of the political distribution, rather than in the center. This was the Carter doctrine, and somewhat miraculously, it’s arrived.

I point this out because it highlights the increasing difficulty that a James Bond-type hero has in finding a villain of such repute outside the cantankerous vitriol of the blind Abu al Hamza, the apocalypticism of Asahara’s Aum Shinrikyu, gluttonous obscenity of ex-Soviet Oligarchs, or anti-social loners like McVeigh or Breivik. All this makes me wonder whether, if Bob Kane and Bill Finger were alive and penning a contemporary version of DCs' Batman, just who, or what the villains might resemble, and what might be that dark motivating force behind a 21st century Bruce Wayne.

"Having witnessed his father brutally bankrupted and humiliated by the purchase of what were rated as 'AAA' securities comprising of sub-prime loans, the elder Wayne was driven to secretly commit suicide in order to trigger an insurance payment so his family could seat, the young Wayne swore revenge on the criminal swindlers, cheaters Frat boys and similar who conjured and sold the bogusly-rated securities...
"

. or how about

"Wayne was driven to combat financial predation when as a child, a NY vulture fund bought obligations at pennies on the dollar and then held out at debt scheduling causing his father to lose his job and meagre income, forcing him to emigrate to America in order to feed his family, whereupon he died trying to get across the border. Wayne swore never to forget who was responsible ..."

Imagine the variety of sub-plots, and characterizations of the villains – “….the unscupulous and corrupt hedge fund titans driven by meglomanic visions of world political and financial domination through the hoarding of riches and creation of unlimited Super-PACs to push the evil agenda of environmental devastation and human slavery and.....” Abusrd hyperbole? okay, I got a bit carried away, but the thought of Batman hunting down a Fuld-like or Mozillo-like villain BEFORE havoc has been wrought in order to foil their gestating plots, or crashing a fundraiser at the Hudson Institute BEFORE their or the API's millions are employed on unleashing anti-climate change myths on the unsuspecting citizenry, or taking out vigilante justice upon the perps of a Chinese gang of miscreants reverse-mergering their P.O.S into some shell-co. with a US listing, or helping Alfred use the bat-computer (with some help from his friend Mitnick) to hack into the bank accounts of seemingly amoral HFT predators (and their programmers) in order to empty them into the bemused but thankful hands of Medecins Sans Frontieres, Sea Shepherds or UNICEF, would bring a smile to the face of those who honestly and unrewardingly play by the rules, and, perhaps provide subject matter for DC’s next generation of 21st century super-hero storylines.

I am well-off on a tangent now, and will veer back on point, I cannot help wondering whether, in our annals, we will appear (to future generations) so parochially-minded, and whether a century from now, Dick Fuld's, Paul Singer's or Steve Cohen's grandkids or great-grandkids will take public pride in the source of their patrimony. That is of course if the down-trodden hungry masses of the future continue to have the munificence to allow their offspring - who will have done nothing to earn it - keep their inheritance, with its attendant place in the pecking order reflected in the then-prevailing Almanack.

Dear Jeff

Dear Mr Gundlach

First congratulations on Doubleline passing the $50 billion mark. I've been told by others that the "first 50" big handles are the tough ones, so you must be breathing easier now. I've yet to encounter such quality problems myself, but trust your growth will continue with your performance.

Secondly, I noticed from your Ira Sohn presentations that you have been attracted to rather off-the-wall serendipitous "pair trades" of assets that reside decidedly in the counter-trend side of recent performance. I don't know what your risk manager or VaR has to say about these trades, but I, for one, nonetheless admire your willingness to stick your errr ummm trading blotter out and position yourself contrary not only to momentum aficionados, and all manner of feedback-trading trend-followers, but famous fund managers, pundits, financial journalists, whinging academics, and so it would seem, the entire world. As a human being, this isolation is enough to make anyone uncomfortable and question the wisdom of one's actions, but as an investor, seeking contrarian return, it likely results in elation, and you must find it difficult to not do "more of the same" at each and every opportunity.

Thirdly, it has not escaped my notice that a number of these have paid rather well and rather quickly without the attendant spankings many contrarians are known to suffer at all-too-frequent intervals. This is quite an achievement as any bottom-smarting, blue-arsed contrarian can attest, and one which should be both acknowledged and admired.

Undoubtedly, you must now be on the prowl for additional trades that exhibit similar properties of assets trading at opposite ends of the relative value and performance momentum spectrums, and where potential short and long candidates respectively are almost, without exception, universally-loved and detested. And so in case you've overlooked it (or are still in the position of putting on the trade and therefore not yet interested in advertising the trade to a wider and now-more-attentive audience (despite all the academic momentum research), I would suggest you have a look at "Gold vs. Japanese Stocks" and "Gold vs. Softs".

It is not worth wasting too much of your precious time on the details that you undoubtedly will research yourself, but suffice to say that Gold is "expensive" to almost every asset and asset class, owned in spades by the largest and most fickle speculatibve investors, and that dissing Gold makes one more unpopular than an Orangeman marching down the Falls Road in West Belfast. On the other side, as and when the JPY trades back towards 125 vs. the dollar, company growth, income statements, balance sheets, and forecast revisions will look a lot different (and rather more attractive) than they have since JPY traveled FROM 125 to the silly levels its been inhabiting for the past few years. Few Japanese, let alone foreigners remain long Japanese equity, the equity brokerage business is almost non-existent, and even most large investors have moved their regional equity desks from Tokyo to Singapore or elsewhere in Asia. Of course I needn't tell you to insure you hedge the FX.

With regards to Gold vs. Softs, I would suggest looking more specifically at Cotton. Gold presently buys more cotton than it has for as long as the charts I can find represent. Cotton remains the benficiary subsidies. This cannot, nor will it, last. All the necessary supply-side inputs are up since the early to mid 1970 - most of them dramatically land prices; fertilizer prices, GMO seed stock, pesticides; diesel and fertilizer feedstock prices; transport, labour. Water has become scarcer and more precious. Yet Cotton remains the odd nail sticking out, hovering at mean avg prices prevailing thoughout the 1970s, (and 80s and 90s and most of noughties). There remains precious little in a human's present-day non-tech shopping basket that (in USDs) remains available for purchase at anywhere near 1970s prices and little as ubiquitious or important or utilizing inflated inputs. This ignores the imminent impacts of climate change, the increasingly-attractive substitution many farmers will be induced to make as higher prices make alternatives more attractive. And in the event of deflation, and convergence of everything else towards cotton stationary price-level, one need only imagine where the price of gold might end-up (Hint 2008 deflation scare = $650/oz = -63%). But check out the long term chart for yourself. Of course OJ, Sugar, Coffee and Cocoa are also attractive, but none as attractive as cotton I think.

Wishing you success in your investment endeavors and your boldly-imaginative and brave counter-trend pecadilloes, I am,

Yours truly,

Cassandra


NB Full Disclosure - I have interests in industrial-scale cotton properties

Over-Cooked and Thrice Lucky?

Note to self: this feels similar to that unlikely moment of Bold Imagination which speculated where the Fat Tail (left) of he EUR/JPY was in 2007. Of course, that doesn't mean that one imagined it OFF THE CHART given that it now sits at, well somewhere  down
down
down
down
down
down
down... ... ... ... ... ... ... ... down sort of like **HERE**.  That was just luck - and don't think it was anything but. However, the determination of where was not.

Being presently agnostic and unemotional (unlike the visceral feelings I shared coinciding with the half-baked EUR/JPY above), I can't help but believe that the JPY is, in kitchen parlance, over-cooked.  Well-done. Scalded. Trop Cuit. Burnt to Crisp. That said, a similar Post Fukushima premonition in Spring 2011 was flat wrong by any reasonable measure. And one cannot forget that I thought (again erroneously) that the break in February earlier this year was "the move", and was more than "a trade', though fickle shorts were puked again.

Now, for the third time (a dozen stabs less than Kyle Bass), I believe that the "the move" is here and upon us - one that will take USD/JPY back from whence it came - to 125 and beyond, and JPYEUR back to the middle of the page. That is a 50% move. This may initially be due to "risk-off" or yet another whipping of the DGDF (dollar goes down forever) meme dear to the heart of FRB conspiricists, but once this proverbial ball gets rolling, we will look back upon this pretty chart as "the mother of all bases", or the most pronounced inverted head & shoulders ever seen in a major currency pair. Of course multitudes of reasons will spring forth to explain, in hindsight, why; and people with the position will grace the cover of Barron's (and their roundtable) touting the trade, their genius and prescience. But most of this will be fiddle-faddle, or dubious rationalization to fill airspace and column inches. For all of importance that will matter is that the herd will have been seen to turn, and leave, and the feedback loop will reinforce itself in all the wondrous and joyous ways speculators have learned to love.

It's uncomfortable (for me) in general to join the chorus, but in this case, I must open the hymn book and sing... Sayonara baby...

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Scrabbling for Solutions

When I reflect upon my life - one perhaps (optimistically) halfway complete, there are few constants from when I was a child, through to the present. Books. The Stock Market. Tacos. Backgammon. Skiing. BBC World Service, and Scrabble. Not the makings of an adventure film or fascinating biography in even the remotest sense.

Scrabble, in particular, has never failed to amuse me. I still have vivid memories from when I was quite young, of playing against my grandfather (the principled one who used to send back his Soc Sec checks because he didn't need them), who while waiting for me to conjure a play, would mesmerize me by performing hesitation-less 3-digit by 3-digit multiplication in his head - without staring off into distant Andromeda or even moving his lips! Despite English being his third language, not a game would pass without his employing an elegantly obscure word, without the assistance of a dictionary, though it was always there when I went to look it up after a challenge.  

I would often play against my mother, too. Unassuming though my grandfather was unassumingly competitive, by contrast, my mom appeared to just enjoy the company - never fussing over some of my more borderline creations - forays that would have sounded like Esperanto, were they to exist at all in any dictionary. As I think about it now, it had nothing to do with her lack intensity or competitiveness, or even intentionally letting me win. In hindsight, it was likely that she was just recognized that despite my precociousness, and unusual attention span for a nine year old, there were limits to how long an adolescent could concentrate, and thus the optimal thing to do was to play fast and let it pass, increasing the chance we'd complete the game to the end.

Today, I find myself playing scrabble much as I write - which is to say it is, entirely, for my own amusement. Just as some play solely to win, one could write soley in a vain attempt to bully an unfortunate reader towards one point of view.   Such a player never leaves an opponent an obvious dangling triple-word score; always minimizes the freebies, rarely opens up the board unnecessarily, and when losing, typically blames his letters. These people are painful to play against, (as well as being tedious to read). Though I like the thrill of a victory as much as the next girl, I do just enjoy the journey, patiently awaiting that precious opportunity to construct an unlikely, yet elegant, crossword-like play that simultaneously creates 5 or 6 different words - even better when one uses all of one's letters in the process. It is an uncommon moment scrabble perfection.

Public policy, like simple scrabble play is all-too-often one dimensional. This is seemingly out of necessity, reflecting the reactionary nature of most politicians, and thus resulting legislation, as well as the lack of consensus and resolve required to agree upon a vision of foresight. And that accurately describes the process in good times. In the dualistic reality of modern America, opposing forces rarely meet in the middle excepting the most banal of legislation e.g. "Banning Assault Weapons in Public Schools" (a bill that itself presumes there remain some private schools where your sprog can tote along his or her trusty Kalashnikov or Uzi).

Wouldn't it be nice, however, if meaningful inroads were made into solving our problems whereupon looking at the final language of a bill, both partisan sides could cast aside their dogma, read it and say "That IS much better than nothing. It could work and provide positive benefits to the non-campaign-contributing majority of my constituents...I can live with that". Something that achieves the most with the least. Something that is a proverbial "Win-Win" for the Public Interest. The political equivalent of an elegant solution - that most gratifying of multi-crossword scrabble play. Could there be such a play in front of us?

Some of the most serious political-economic problems of our times are: income inequality at the upper bound; high cyclical and possibly structural unemployment (and under-employment) with consequential output gaps, diminished consumption, and ballooning counter-cyclical entitlement costs; diminshed monetary velocity and consequential distortionary monetary policy by central banking authorities; household deleveraging; decaying public infrastructure resulting from years of underinvestment; and, finally, sustainable public finance represented by both primary and cumulative government deficits at or near their upper bounds. With the exception of the Koch Bros. and a handful of Randian-Bootstrapping others, most would not find fault in the list. What if a single initiative could positively impact all these problems AND if not be wholly mutually-agreeable then be sufficiently less divisive so as to be acceptable?

We found out last month from Olivier Blanchard at the IMF that Govt spending multipliers have been seriously underestimated in most models. This has profound implications for public policy in general and fiscally-conservative solutions in particular - something about which they have been eerily silent. In a nutshell, spending cuts, rather than narrowing budget gaps, just seemingly exacerbates deficits. And this realization occurs at a time when demand for expenditures - whether for countercyclical policy measures or stabilizers, or for nationwide investment in crumbling infrastructure is critically-elevated.

With spending cuts not viable, perhaps we should raise taxes - and - if so, which ones? Japan, as Richard Koo has pointed out, made a grave error in raising taxes in 1997, extinguishing an otherwise nascent recovery. But admittedly, they were highly regressive consumption taxes. And their GINI was nothing like the US today. It seems that with income inequality so great in the US, the Govt could significantly raise marginal rates (in whatever form) on the wealthiest without effecting consumption in the slightest since the marginal propensity to consume for this strata is so low. In fact, one might argue, marginal income is pooling in ever-larger eddies of safety, concerned not-in-the-least about returns, but just preservation. Yet WE NEED TO SPEND in order to keep the balls of the macroeconomy in the air (i.e. blood of the economy adequately circulating) so as to not induce economy-wide liquidation at a time of high aggregate indebtedness - a event that would cause irreparable and irrecoverable economic losses in output, skills and invested capital - all which are likely to be largely unnecessary. To summarize, we need to spend, but can't, and even though we have the means (in aggregate), we won't (or they who have the means won't), whether out of fear, moral turpitude, or just plain greed, and politically, cannot arrive at a place to mobilize the resources, to invest in what's needed, which creates the virtuous circle of keeping the economy humming by better distributing income, reducing Govt expenditure by reducing the need for countercyclical stabilizers and distortionary monetary policies. Whew.

Now, heartier peoples on the planet, during times of financial crises, have inhaled deeply before paying-up as the Koreans did in 1998 contributing family silver to national treasury for the greater good. Or, like the Germans, during good times, increasing the VAT to increase the likelihood of sustainable public finance. But in America, for whatever reason, contemplating such demands causes one to be associated with Mao and Stalin, rather than Gandhi, Rowntree, Cadbury or Raiffeisen. This, in itself shouldn't prevent the better policy from being pursued. Undoubtedly, too much blood-squeezing demands for revenue (as with draconian cuts in expenditure) are likely to yield negative returns (remember that "50% of a goldmine is better than 100% of nothing"). And there ARE negative wealth effects even if this is a Miser's illness, as well as potential emigration outflows and diminished immigration even before considering the possibility of virtue in Libertarian philosophical opposition to higher taxes. Yet where-ever one falls in this debate, this MUST be reconciled with the above if we are to begin to make inroads towards a viable and sustainable solution - and have that solution be generally considered just and fair by most citizens - including sufficiently large numbers of wealth creators.

To break the impasse between the means and the will, I propose that we mandate that some reasonable percentage of marginal income be mandatorily "invested" in a non-political non-governmental investment company that funds/invests in infrastructure and infrastructure renewal across the entire capital structure. The resulting debt, equity, leaseholds, revenue therefrom, or claims on resulting or related revenue streams that result will accrue to the contributors. Mandated investment might for example begin at 5% above $200,000 rising to say 20% above for example $500,000 - on a scale eventually governed by Schiller's suggestion of tying marginal rates to the GINI itself). Importantly, by design, these "investments" would have a broader mandates, longer time-horizons, lower hurdle rates of return - much lower than ludicrous PFI schemes in the UK, but which nonetheless are analysed and vetted as investments and not gifts, or transfers, resulting in an asset - be it a school, a bridge, urban subway system, housing, claims on future road or gasoline taxes, smart-grid, etc. It effectively forces recirculation without outright sequestration, while respecting accounting conventions.

This is structurally important, and would contribute towards solving (though obviously not completely solve) all the aforementioned problems simultaneously. Some key features are that it would:
(1) recognize that the eddying pools of capital, with lowest MPC, seeking safety are, beyond a point, stultifying to the economy;
(2) that by spending it or more accurately, forcibly investing it, creates skilled jobs with virtuous multiplier effects throughout public and private sectors;
(3) In the process, presumably creates long-life asset values to which value will be preserved (and grow) over the longer term since many quality infrastructure investments have productive lives much longer than their depreciated values (just look at the embarrassment of cash flows of NY Port Authority or NJ Turnpike Authority);
(4) through the creation of employment and productivity-enhancing infrastructure constructively REDUCES the Govt deficit by reducing the demand for countercyclical stabilizers;
(5) maintains integrity of property rights as ultimate ownership interests in the resulting asset values, potential future cash flows and/or return of invested capital, remains with the investor, resembling a closed-end fund.
(6) such interests could (and should) be traded in a secondary market. The market would discount these - at times heavily - but they remain an asset for patrimony and NOT a tax sequestration making them philosophically more palatable and diminishing potential negative wealth effects.
(7) Management should be beyond BOTH politicians, and investors control. Think Bernard Baruch. Investment and funding goals should be codified and agreed by the board of trustees - itself appointed from multiple constituencies else it be captured by Govt OR Investors. All investments and contracts should be completely transparent. Oversight by Trustees addresses fears of government largesse or inefficiency.
(8) Investments will likely yield further taxable gains (though initial investments if/when returned could left untaxed due to the quasi-social purpose.

Now, I have little doubt there are criticisms from all sides, and many shortcomings.
The proverbial devil is always in the detail. What precise objectives? What rates of return might be acceptable? How to allocate? Who to allocate? How to negotiate? Will it not just result in further regressive transfers of wealth from poorer to wealthier when it is progressive redistribution that is called for? How would it balance the Public's interest in most benefit for least returns, with the investors' hope/desire for most return for delivering least benefit? How will elections effect outcomes? How can it avoid/escape overt political pressure? Will it just spawn self-perpetuating bureaucracy? All valid, and so many more questions. Yet, I cannot help but think it could be a "scrabble-solution" to the difficult problems confronting us, overcoming the inability of opposing forces to meet in the middle.


(I would like to thank Steve Randy Waldman for his critical thoughts in the concept)

Another One Bites The Dust (updated again)

Things, people, and/or ideas believed to have integrity now seemingly compromised...(the updated and expanded version)



Wen Jiabao as "Humble Servant of The People
Lance Armstrong
Top Ten Lists
NYSE
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Austerity as an Economic Panacea
Harvard Students' Academic Honesty
BLS Statistics
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Patents
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The Food Pyramid
Purity of '.999 Fine Gold Bars
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"Top of the Pops" 
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The "risk-free" rate
LIBOR as a Benchmark
Public Sector Pensions
HFT as a Beneficial Provider of liquidity
Diversifying properties of Hedge Fund's
Einstein's Theory of Special Relativity 
Celtic Rangers
Macroeconomic Forecasts
John Paulson
FRB Open Market Operations
Standardized Educational Testing
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A Relaxing Cruise
WTI as Oil Benchmark 
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TEPCO
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Errr ummm Professional Wrestling is starting to look good by comparison - at least it makes no pretensions to be anything other than it is. What's left?

My (Not so) Golden Rules About Investing (And Not Investing)

Trolling the blogosphere, it seems to be the season for sharing one's so-called Golden Rules of Investing. So here goes.....

Cassandra's 25-3/4 (or so) Tungsten-Filled Golden Rules          

#25-3/4. Do as I do - not as I say - but do it without delay! (NB: 13F-HR's are too late!)  

#25-1/2. The trend is your friend....errrr....ummm.....except when its not.  

#25-1/4. Whatever kind of metaphorical market animal you are (bull, coq, chicken, weasel, whatever), always remember that Pigs Get Slaughtered.

#25. Buy "The Best of Breed" companies.....unless they are priced at levels preceding the moment when Pigs Get Slaughtered, or when the trend is not your friend, or I am saying the opposite of what I am doing.   

#24. NEVER short "Best of Breed" companies...except when Pigs Are Getting Systematically Slaughtered in other "Best of Breed" companies (but don't get piggy puking out the pigs). 

#23. Cut your losses short and let your winners ride - but not when pigs are getting slaughtered 

#22. No one ever made a dime by panicking ... unless apparently you're following the previous rule #23 which says you should cut your losses short and let your winners ride.

#21. NEVER double-down (except when you have material non-public information and deep pockets) or if you're Ed Thorp, or if you're playing at The Martingale Room. 

#20. "Systems" always stop working (Even if they DID actually work at one point). So forget about asking about their "system": what you really want to know about is their Plans B&C for when it DOES stop working (and why they're not using them NOW).

#19. Diversify to control risk - except if you are Eddie Lampert

#18. Don't own too many names - unless you're Ed Thorp or diversifying to control risk per the above rule 

#17. Invest in what you know - unless you don't know a whole lot about those things. 

#16. Buy when others are (almost finished being) fearful. 

#15. Buy when there is blood in the streets - but only after it has dried a little bit. 

#14. But NEVER buy when the blood in the street is your own. (See rule #23 above)

#13. Never catch a falling knife (unless you know why it's falling and/or approximately when it's likely to stop). Catching a rather dull falling knife, however, is OK. (NB: IF you ignore this rule and try to catch the falling knife, and discover it is hazardous, and the street becomes stained with your blood, see rule #23 above).

#12. Leverage is poison! (unless you're doing risk-parity and then it's sorta kinda seems theoretically OK, but then again, maybe not just when yields are near zero and everyone else is doing risk-parity or has risk-off asset allocations and...)

#11. Cranking up risk in order to target return when vol is low is like smoking a cigarette out of your butt-hole - it's just stupid. 

#10-1/2.  A great coder is worth at least six fraternity brothers.  

#10. NEVER allocate money to anyone who feels the need to sum their aggregate number of years experience to some impressively large number. 

#9.  NEVER invest with anyone with an improbably-inflated CV. If he's embellished his Starbucks-fetching experience while an intern into something rather more grandiose - imagine what he (and it will be an egotistical 'He') is capable of fabricating in regards to his investment strategy and performance!

#8.  NEVER invest with an investment manager who buys and then increases positions in less-liquid securities at higher and higher prices (unless those prices are likely to be demonstratively requited by per share growth metrics)

#7.  Be entirely skeptical of an investment manager who touts his self-professed superior research skills, proprietary channel checking methods, or interns sent to dumpster-dive to gain an edge. This is almost certainly first-class balderdash.

#6.  If your broker says you're his first call (and you believe him) you're an idiot.
Always assume you are the LAST one to receive a "tip" or sell-side research. Prop Desks, friends&family of potentially anyone in the research publishing & distribution chain, SAC, MW all will have had the chance to act upon it before you. 

#5.  If you pay an upfront load for the 'privilege' of investing in a fund, you're an idiot. 

#4.  If you invest in a hedge fund with anything less than annual incentive-fee crystallization, you're an idiot.  

#3.  The moment your Advisor, Letter-Writer,  Investment Guru mentions "Hyperinflation" or "Government Conspiracy" - run away in the other direction as fast as you can. 

#2-1/2.  To catch a gopher, you've got to think like a gopher.  

#2.  NEVER subsidize losers with winners - unless you're diversifying to control risk - where rule#23 will tell you to sell your losers and let your winners ride - unless the losers are "what you know" and therefore you SHOULD be investing in it - doubly-so if you have material non-public information, and especially if there is Blood In The Streets -  unless of course it's your own blood, in which case you should return to #23 and sell your losers - at least until tomorrow when you wake up and see that there is blood in the Street and you remember to be greedy when the others are fearful...

#1.  Never listen to other peoples Golden Rules - particularly those filled with Tungsten.

I Didn't Mean To Steal From You

Polite applause for the Financial Services Authority who upheld their April decision which found the now-Swiss-based Stefan Chaligné, manger of the near $130mm Iviron Hedge Fund, guilty of market abuse for his Dec 31st 2007 gratuitous ramping of US and European shares held in his portfolio. He was, the FT reported, fined GBP900,000, ordered to repay profits/fees resulting from the umm... errrr ..... [shenanigans, tomfoolery, charade, escapade, peccadillo] (please choose one), and banned for life from the UK Securities Industry. Mr Chaligné, it would seem, in the last hours, of the last day of the performance measurement and crystallization year, simply could not resist the temptation of buying more of that which he already owned, in sizes which - relative to exchange volume and liquidity - allowed him to his goose performance by nearly 300bps. ***Sigh*** It was not reported precisely how it came to the FSAs attention (the SEC? NYSE? Whistleblower? Jilted mistress or ex-wife) nor whether or why US authorities, too, who might wish to make a statement about the integrity of their preserve, have not sought similar charges or prosecution being that the sins certainly ran afoul of US securities laws forbidding the creation of false and misleading markets. 

Yet (polite) applause is still in order, I think, if for no other reason than because the FSA bothered to follow through at all on an ostensibly small, though apparently blatant case of abuse. This view is not setting the bar of justice (no pun intended) very high, but since such abuse is more-than-rampant, it is a signal to traders that they DO (however remotely) risk losing one of the best gigs in town if they are caught, not that this even is the end of the world since like Mr Chaligné and other before in similar predicament, can simply pack-up and move to, say, Geneva.
I emphasize "polite" because, according to the FT, in the appeal ruling, the three-member panel were willing to agree with Mr Chaligné that he "probably" wasn't trying intentionally to cheat his investors - apparently on the grounds that most were friends and family as well as himself. In the decision they say (to paraphrase) despite his obvious lying and willful neglect of civilized behaviour and the rule of law, it was insufficient to categorically brand him a sociopath whose intention was to profit at the expense family and friends, because (get this): what kind of guy would intentionally steal from his friends, family and self??!?. Well, where does one start with THAT one. 
First, what are family and friends to a sociopath? Not much besides cannon-fodder one would be forgiven for surmising. Perhaps his allowance was too small for his lifestyle. Perhaps he had penis-envy of the bigger-swinging dicks. Who knows. But, we do know that the fact of the matter WAS that he directly stole several hundred thousand euros. One can infer that he was below high-water mark before the ramp, since IF he was positive for the year with no hurdle, the theft would have been nearer to EURO 600,000. His argument thus may have been predicated upon the fact as he was on the wrong side of zero, and since he didn't have profits, he couldn't have been intentionally trying to steal money from them. But since he earned SOME performance fees as a result (but not 20%-like fees on a 2.7mm goosing) the ramps must have swung the fund from loss to profit for the year as a result. I think this is a bullshit excuse, and am surprised the FSA saw some merit to leave open the possibility it was somehow unintentional.

Second, the FSA only demanded he pay back investors the fees he dishonestly earned by ramping the shares. Sadly for his family, and his perhaps his now-former-friends, they likely lost a tidier sum on the difference between his average cost in and average cost out in addition to transaction costs and additional management fees charged on the subsequent, inflated, beginning of period assets. Experience suggests that the market can spot such ramps a mile away and unless it is one's intention to continue to buy gobs of stock, reversion will be short and sweet and without the ramper being able to liquidate his/her position. He should have been made to pay FULL restitution of imputed losses to investors. Mr Chaligné also asked that fines be directed to investors in the fund (himself!), and this is, again, absurd. Any fines should defray the agency's costs in pursuing the matter, for the market integrity which benefits the public interest, full-stop.
Third, he used the lamest excuse - i.e. the "Dog Ate My Homework" alibi, which in this case was that he was fearful that "his stocks might come under attack by short sellers". WHAT??!?? This is laughable, and in itself should cause he FSA to quadruple penalties and disregard any potential goodwill. Primarily because IF that was, in fact, a concern and not a completely irrelevant and oxymoronically bogus factoid, then the broker could have been given a limit order to maintain price, and IF the price DID come under attack by nefarious aliens or black-hats lurking and conspiring against his stocks, to support it, rather than sending it scurrying up the flagpole resulting from an order that specifically instructed his brokers to put the stocks up as much as possible. Second, even if we ignore this, as vigilantes are frequently told: two wrongs do not make a right. An experienced fiduciary - of the non-sociopathic variety - takes advantage of short-selling attacks to buy stock cheaper, and do it scale-down AT THE CHEAPEST PRICES. They then explain to their family and friends how smart they were buying stock CHEAP at the end of the year, rather than buying it at ever-upwards in a thin market, at prices that will certainly bugger them (financially). And then there is the chestnut about the quantity. IF the intention was to prevent getting devalued at year-end by short-sellers, there was no need to give orders of magnitudes of prevailing liquidity - especially on New Year's Eve, Dec 31st, typically a half-day of trading. It is uncertain why the FSA gave him the benefit of what should have been, beyond the shadow of doubt.

But what has NOT been contemplated, and the truly pernicious act of systematically painting a false and mis-leading market is the potential impacts the deception (not theft but deception) would have upon the decisions and perceptions of both present and future investors. As you may remember, this was the basis for the first 'shot across the bow' by regulators to Hank Greenburg at AIG (and which should have sent AIG shareholders scurrying for the exits). AIG for a decade traded at a large premium to other insurers and reinsurers because of its smooth earnings growth and, perhaps more importantly, its better-than-market underwriting results, which gave credence to its claim that it was a better, smarter and more disciplined underwriter. We now know they were managing (read intentionally smoothing) their earnings. And they were busted for this. But Hank was unrepentant. He implied it was NOT a sin because he didn't steal from investors - just moved earnings from one period to another, a common act in the insurance world (which AIG and Warren Buffet would help facilitate for you for a price). But you see, AIG was also using such unsavoury methods to transform the nature and characterization of earnings by turning underwriting losses into investment losses. So this wasn't understating earnings to save for a rainy day - the way reinsurers have operated since time began - but intentionally trying to fool all the insurance analysts and rating agencies and investors in order to convince them that AIG was better than they actually were. This illusion of quality likely caused much over-investment in AIG at higher-than-was-justified prices, and probably allowed them finance themselves at basis points less than might have otherwise been possible and grow at rates higher than otherwise possible. A seemingly small white lie causing large malinvestment. In fact, one might argue further that IF AIG had been seen as the not-so-special underwriter that they were, they might not have been able to insure the amount of subprime which they did. OK, these are a lot of ifs, but it IS a slippery slope in the descent towards insolvency. Or between increasing investor allocations or the liquidation of your hedge fund.

Mr Chaligné of course is no Hank Greenburg. And stealing from friends and family may not, after all, have been the primary objective. But the FSA should be chided for leaving the door open that it might have been vanity, when the very obvious greater sin went uncommented upon which has the grail of boosting performance to grow your business to entice more investors to give you their capital on the basis of that performance (and risk deception) which is, in the view of this investor, forever unforgivable.

No Wheelbarrows Required

To be sure, there is much derision being directed towards QE, in general and QE3 in particular. Permabearish writer-strategist-entertainers Faber & Edwards use such hyperbolic language as "The Fed Will Destroy The World", a soundbyte made for and lapped up by the ZeroHedge faithful frightened that QE is a conspiracy that is about to cause hyperinflation. Others are more measured and eloquent, but no less critical.

So it comes as some surprise that the eminent Johns Hopkins economist, advisor to TheGoldStandardNow.Org, and renowned specialist in Global Hyperinflation(s) Professor Steve Hanke, in an interview with Massar & McKee over at Bloomberg not only completely dismissed the idea that hyperinflation (or Hyperinflation) is lurking around the corner or ready to pop-up its head like a angry gopher, but explained that contrary to the popular belief that an excess of money is resulting from all the QE exercises - the alleged money that has caused paranoid chicken-littles to make a beeline to Home Depot and purchase a wheelbarrow for imminent use - Dr Hanke suggests that there is not enough money, and that it's this shortfall (not its price) which is holding back the growth of the economy.

Hanke's argument rests upon the fact while the Fed's balance sheet has indeed grown this "State Money" (as he terms it) is a small fraction of the overall money supply - which he terms Private Money, conjured privately by financial institutions, it has grown much less than the overall money supply has shrunk. So not only does Dr Hanke NOT fear hyperinflation, he believes the balance of risk remains DEFLATION, and that under the circumstances the Fed is not doing enough.

Now, it is important to understand that he is NOT a Krugmanerian. Or a SimonJohnsonian. Hanke believes the problem is regulation - both Dodd-Frank Basel III, the combination of which is causing banks not NOT to increase their balance sheets (depsite the excess of reserves) but to continue to Shrink their balance sheets. So he would very much prefer rollback of these to QE which is a far cry from liking QE. But he is pragmatic in ackowledging that under the circumstances of deleveraging, the Fed - far from causing inflation - is just barely keeping things from deflating, view not dissimilar to Richard Koo's interpretation. So in a nutshell, remove the chastity belts from the banks, and growth (and employment) will return.

Personally I am sympathetic towards the view that QE(eze) is a tempest in a teapot and will prove to have little to no inflationary impact so long as broad money is shrinking. And I also think there is potential merit in delaying Basel III should this be helpful to general confidence. As for the Fed's ability to exit QE if authorities make a U-Turn and follow his advice, he is less sanguine - a fear I do contemplate when trying to estimate how many phone-calls it would take to offload 4 or 5 Trillion dollars in longer-duration Treasury or MBS securities. For sound-money lovers, fiscal conservatives, Ron Paul or Paul Ryan or any inflation-phobist, however, it is worthwhile to listen to a rational view contrary to their own by on of their own.

Slow Burn

I chanced upon  an old friend, Tommy Crown, recently. We were both born in the same decade - and though I was older, he was more senior in all respects. While I was a product of the baby boom, he was a product of one of the golden ages in American film-making. It was good to see him again after all the years that have passed. We've both aged - no doubt - but his theme, The Windmills of Your Mind, remains as enchanting as ever.

Relatively speaking, my life has been ordinary, whereas Tommy's has been both enigmatic and exciting. At least comparatively-speaking for 1968. Then, it was the statesmen, politicians, writers and actors were envied, emulated and placed upon pedestals. Tommy, on the other hand, was a secretive financier. Arbitrage. Foreign Exchange. Private Geneva-based Swiss Banks with numbered accounts. A rarefied world not only unknown to, but obscure and unheard of, by most. He was rich and lived very well indeed. Tailored suits, finest restaurants, art auctions, a large house in the middle of the city with an interior compound complete with full-time butler, expensive cars, thrilling but patrician passtimes (polo, gliding etc.) the secluded beach house. How rich? According to the police, briefing the lovely insurance investigator (played by the lovely Faye Dunaway in a performance only outdone by Chinatown), he was divorced (wife got the kids) and worth... wait for it... FOUR MILLION BUCKS!!!   Messrs. Soros, Simons, Griffin and Cohen would be laughing in their beards should they chance upon Tommy and his feeble net worth now! And yet, despite that money, and  his hobbies, that didn't stop him from getting bored.

But that was more than forty years ago. And during the intervening time, Tommy's fine tastes have, without exclusion, been popularized and lifestyle replicated by all who can, and even surpassed in material terms (Tommy never 'flew private' and  had no insecure nouveau riche desire for 20,000, 30,000 or 40,000 square feet of gold-leafed, mirrored vulgarity or a ridiculuous oversized stinkpot. In fact, HIS beach pad was a an elevated platform set amidst the isolated dunes. During this intervening time, we have seen hot wars and cold wars, double-digit inflation, high double-digit interest rates - both at the long and short ends, recession, the deepest of bear markets and the most exhuberant of bull runs. Market Crashes lasting  months, a week, a day, or just hours. We have endured scarcity and swam in plenty. Suffered quadrupling of our energy staples in short times, and seen it diminish in price by 75%. We've witnessed leaders assasinated like ducks from a blind, airplanes flown into buildings, not to mention several nuclear accidents and meltdowns. We seen arbitrage, foreign exchange, and finance go from being mysterious to a place in our society where every newly-minted Ivy MBA doing an analyst stint at an IB or management Consultancy wants to be Hedge Fund Manager. Statesmen, it would seem, are no longer 'de rigeur', nor the envy of the educated and aspirational class. Oh, and did I mention that we've seen 'inflation'?

Yes, amongst all the volatility and tectonic change, inflation has been (along with environmental degradation, technological innovation) one of the few constants. Tommy Crown probably would have done alright. Some fine Art.  Prime Real Estate - both city and beachfront. A portfolio of Blue Chip Stocks. Some Precious Metals. Oh yes, Tommy's net worth if he stayed the course, wasn't leveraged (in the wrong place(s), at the wrong time(s)), would easily be worth a few hundred million (excluding what he stole in the bank heists). Yes, he probably has a large outstanding capital gains bill, but I trust Tommy structured his affairs to the best of his interests. 

When one looks back, the defining characteristic has been inflation. How unimaginably small his "rich" was. How cheap things were and how generalized inflation -  sometimes pernicious, sometimes benign, occasionally dormant, but always visible in the long run. But rarely if ever in a straight line, and never with a certainty that would encourage anyone to extrememely lever-up to express this process in a trade, or an all allocation outside the most longest of runs. All the while, society, trade, life has not collapsed and returned to barter or descended into Mad Max or Orlovian chaos. The debasement of money while seemingly certain, has not been and likely will not be, mirrored over shorter horizons. It is a slow-burn - not a napalm firestorm. You will read this tomorrow, next week, next month, next year even, and the changes excepting a few oddities -are likely to remain under the perceptive radar, though this is not the rhetoric of the fear-mongering gold bugs (whose asset it must be pointed out is expensive to everything in every currency).  This slow burn effect should make one wary of the imminent hyper-inflative doomsday trade, however compelling the demagogic arguments may appear to buy gold on margin or why silver prices will go to $80/oz this year or some other exponentially higher number next year. 

Make no mistake. When I am Tommy's imputed age, I will likely be worth hundreds of millions of dollars too. But forty years is long long time, and there will be untold and unpredictable wiggles and squiggles enroute that make the concentrated doomsday trade dubious and highly-suboptimal at best, and a royal waste of bluster for its heralding trumpeters.

Not Ordinary Foolishness

It's one thing to stretch the limits of tax deductions making an informed risk assessment of the probabilities of being raked over the coals for it. It is completely and altogether different thing to stretch the limits of available deductions when you know, for 100% proof-positive sure that you WILL be raked over the coals, if not by Agent Rudnick, then by the investigative press of the entire free world, and indeed probably the less-than-free world looking for potential a leg up. Why do I make such a distinction? For the obvious reason that willful pursuit of the latter (via the declaration of Romney-ette's Rafalca as a business expense) displays either (1) An appalling lack of judgement and forethought; (2) Complete idiocy (3) Wholesale arrogance (4) Foreskin-thin managerial abilities in regards to instructing one's accountants about the importance of probity of one's financial affairs (5) Less than Carnegie-like business acumen if Rafalca was infact intended to be a bona-fide entrepreneurial startup.

Supporters of the former Mass. Guv. will of course spin it differently. Given our fiscal mess, they might say Americans WANT (no, in fact NEED) someone who is adept at aggressive accounting tactics. Or Rafalca is indicative of just the kind of action-oriented entrepreneurial spirit that Americans need to emulate. And so forth. The question they should be asking themselves however, is, "WTF was he thinking?" Again, they might spin this straightforwardly as "He was, in the American Tradition, trying his best to keep what was his." 

I think however, the real answer, however true the possibilities #1 through #5 might ring is that, Mr Romney, along with many of his supporters, as a result of their power, wealth, and/or business success feels psychologically ENTITLED to aggressively push the boundaries of potential benefits, which ironically (though perhaps unsurprising to psychologists) is the character flaw for which he chastises the now infamous 47%. 

Hmmm. Can anyone spell P-R-O-J-E-C-T-I-O-N??!?  

What Became of Midas' Sons?

Despite one of my favourite old saws being "Never feel sorry for a guy with his own plane", I must shed a small tear today for the legendary insurance Hall-of-Famer Jack Byrne - the man responsible for the miraculous rehab of GEICO, architecting the sale of Fireman's Fund at the top of the market, and the construction of White Mountains into a powerful force in the industry. When in came to insurance, while not getting everything right (remember Olympus Re??!?), he has been pretty awesome.

On the home front however, things have not been going so well. One son, Patrick, tried to turn a couple of Hasids in Utah trying to move last year's merchandise into an internet household name, and, after squeezing and manipulating his own stock upwards became famous for paranoiac rants about aliens and naked short-selling when the market realised that the future for Hasidics in Utah is limited at best. OSTK is bumping along bottom now, and Byrne senior has long since jumped ship.

The other son after a stint in investment banking, and a hedge fund in which he was redeemed by his only investor - the Sage of Omaha - set up a reinsurance company Flagstone, which today, ignominiously sold itself to Validus for 70 cents on the dollar, and and about 3/5 of what investors' put into it (perhaps a touch more including some paltry dividends), reminding one of the joke "How do you make a million in the reinsurance business? Start with two million and give it to......"

One might wonder whether the Senior Byrne is thinking  of that other Old Saw - "From shirt-sleeves to shirt-sleeves in three generations...". But I think not. While the younger Byrne's clearly do not have dad's Midas-ian-Touch, that has not prevented them from feeding at the trough - clearly at their investors' expense.

Apprentice Sorcery

It has come to my attention that Knight's "algos" sorta kinda went crazy the other day. Not syphlitically demented it would seem according to CEO Tom Joyce, but Doc Brown or Wallace (& Gromit) errant invention crazy.

But the reality is, we don't know because Joyce hasn't told anyone what precisely went wrong. Given that it was (allegedly) just the market-making unit, the more apt picture might be the one at top left, where like Knight, our lovable "hero" Mickey, enlists the help of some servants, magically conjured, to speed the completion of his tasks at least effort. Of course he wasn't in full control of what he conjured with predicatble results.

Sound familiar? But such episodes are not limited to, nor even more prevalent than, technology, as Mssrs Kerviel, Leeson, and Adoboli can attest. Indeed, during my last year of university, and first years thereafter, I cut my teeth at one of the largest and most venerable bullion dealers. Though mostly upstairs, I spent a reasonable amount of time down on the floor in the weird and wonderful world of the Comex, a place where (unlike the Dukes Bros of OJ fame) one appreciates the size and depth of the market. It wasn't glamourous. Nor was it noble. But it was crazed and exciting. And there, one strange August afternoon, I bore witness to a similar algo failure in Gold Pit of 4 WTC. One floor trader, who'd gotten long, and then very coked-up (not the "I'd Like to Teach The World To Sing" variety) and not necessarily in that order, became convinced that he, in his coca-omnicience, was not only incredibly right, but omnipotent, proceeding to single-handedly buy everything and anything in order to move the market upwards, (a Knight-like programming error if ever there was one) until, under the weight of the market, and his losses, like Knight's algos, he too was forcibly turned-off and shut down, whilst everyone around him rubbed their eyes and shoook their heads in disbelief (before of course they proceeded to cover their shorts). It truly is a wacky world, one that Mr Joyce must, at present, be regretting.

Peering Under The Coin

I tweet not. Half because I constantly doubt the certitude of my own thoughts so if I am to expose to scrutiny, I feel the need to accompany them develop with their underlying structure. And half because I can never remember my frickin' password. That said, JCK over at Alea is parsimonious with words, and lets the subject speak for itself. Apart from being direct, and to the point, it is much more economical with one's time.

He posted two quite interesting things this week, worthy of scrutiny.

First, a long term chart of German Banks' foreign asset holdings with the tagline "Guess Who is Being Bailed Out".  Like the Japanese, once an activity is approved and adopted, Germans doing it till the proverbial cows  home, or one's metaphoric chickens come home to roost (or become roadkill). Though one may question the strings, one certainly cannot accuse them of recycling surplusses. Turning the bailout question question on its   head is a useful exercise. And while the Greeks are focus of many's wrath, and butt of most jokes, Asymptosis takes some tongue-in-cheek pot shots at the stereotypical PIGS depicted by Shorts and the conservative media in this post entitled "No, The Greeks Aren't Lazy..." , a follow-up to a similar 2011 comparison of the European's cup Semifinal matchup entitled "Hard-Working Germans vs. Lazy Italians? Not So Much". No, he is not an apologist for historical policies, and nails the cause (relative differences in productivity) and the primary reason (huge historical and ongoing German preference for machines over men), though doesn't weigh in on whether this is cultural ('vorschprung durch technik' fascination? ) or the result of historically-high relative wages and employment rigidities of German labour, or the representation of of workers on corporate boards who encouraged investment to stay competitive vs. the alternative...i.e. permanent loss of employment. I think the posts are important in counterbalancintg the prevailing and increasingly voiciferous pejorative view of the PIGS being lazy, feckless, and somehow morally inferior.

Second, JCK posted a chart of EU 27 Mortgage Debt as % of GDP By Country along with a few non-Eurozone comparisons (and the USA). As a man of few words, JCK highlights Italy ostensibly for comparison, and here again relevant to the points made above. By this measure, Italy is anything but  profligate (~17%). They seemingly own their homes and farms nearly free and clear. Banks - however much the market may hate them for their investment in the sovereign bonds of their government, is not on the hook in this regard. Nor are French banks as anyone who as ever tried to obtain a mortgage loan from a French bank can attest (~35%).  Greece too comes in just a hair over 30%. Germany at 42% trumps both, though is dwarfed by Denmark at nearly a 100%, the highly-levered UK right behind at 84% and the US at 75% - both latters more than double that of France. Ireland and Portugal are predictably on the tails given the prior real estate bubbles coupled with post-bubble contractions in GDP.

These numbers strike me as interesting for a couple of reasons.  The almost completely unlevered households of eastern Europe, at least as far as Mortgage debt goes, provides upside for capital and future growth. The  relatively low levels of mortgage debt-to-GDP, in individual countries and across the Eurozone are large and meaningful repositories of savings and represent very large intergenerational transfers of wealth - something they will need given the nature of the pay-as-you system of pension funding. The US, one might infer, has much encumberance upon their assets driven by HELOCs, refi at higher asset values and less-stringent equity requirements during the noughties. Similarly, one can look at it as the equity against which the state's claim (particularly within the more indebted states) may be reasonably set against, other things the same. It makes me more sangiune to see this vasst headroom in thehousehold sector - headroom lacking in the US at the household level, but granted at Govt level by the SS Trust Fund. Indeed, the biggest eye opener is in the non-Euro north - UK, Sweden, Norway and Denmark all with seemingly future banking issues given the quanitity of new loans made at highly-elevated capital values following years of median mortgage debt-to-GDP levels at uninflated capital values. Still think that those large and outsized NKR and SEK depos at that Scandi Bank is a safehaven??!?    

What Do You Call An Intentional Mistake?

Everyone makes mistakes. Perhaps, though, one would be forgiven for wondering if not some mistakes are more intentional than others, such as Gavyn Davies latest ooops highlighted by CB over at IBEX Salad, who stands out (in my opinion) by maintaining a detached objectivity in his attempts to keep the debate on the proverbial "straight-and-narrow". (Full disclosure: I am quite certain that Mr CB is not employed nor receives any remuneration from any hedge fund, HF affiliate, bent consultancy or research house, investment organization, think-tank or EU or Spanish or regional governmental body for his writing, nor does he manage a hedge fund that might benefit from his writing).

Such blatant tomfoolery of course makes one wonder. Like the cabbies and shoeshine boys who were offering stock tips in the late 1920s, seemingly everyone has now become an expert on the Eurozone and its near certain breakup.  Indeed it is hard to find anyone without a categorical opinion about the Euro, its flaws, its bankruptcy, insolvency right down to the psychological and technical factors that will insure its demise. The BBC this morning, in yet another example, interviewed a chap specifically to discuss Target-2 imbalances - one who confessed that he only recently began looking at the mechanism after his girlfriend asked him about it, and he couldn't answer her question, a Sunday-league expert whose lack of depth was matched only by his inquisitor.

Lightweight-ism, and popular overconfidence in their beliefs and opinions of pseudo-experts, however, are not the only danger for one trying to make sense of the world. There is a whole microcosm of newsletter-writers, faux- economists, and indeed market Cassandras churning out endless so-called, self-professed"research" (as opposed to this Cassandra's mostly satirical musings) all with plausibly convincing high-brow-sounding organizational names (though not ones you've ever heard of), dubious anonymous backgrounds, headlining partial-to--non-truths, manufacturing tales of doom on the basis of amateurishly-interpreted "facts" at best, and willful fabrications, at worst. This is not to say, or ignore the very real issues facing the Eurozone (as well as the US and Japan), the problems of the periphery in particular, and the potential for bad accidents and grossly negligent policy solutions in the future. But one should be highly mindful of probable charlatans serving up provocative suicide-inducing platters of impending doom, who are also trying to empty your pockets of newsletter subscriptions fees, trading-system advisory recommendation fees, or induce you to purchase (from them, or their revenue-generating affiliates) over-premiumed physical precious metals, brokerage services, or similar, or in the extreme, off-the-grid household solutions including a large supply of freeze-dried food to survive the impending financial armageddon.

Equally, if not more treacherous for those trying to make sense out of The Continent's predicament are the notorious professional investors (and their consultant/advisor/economists) unending categorical prognostications, known in English as, talking their book. They of course will term this as "putting their money" (or rather their investors' money) "where their mouth is". Here, I am sympathetic, since an opinion without a position lacks conviction, though one must ascertain whether the position is the chicken or the egg. My issue, and the caveat, here is that the *blag* is most frequently NOT from what one might term the ultimate asset allocating investor, but from entities whose business it is to position a trade, and profit from it in as short-a-line and time-frame as possible. Most often, they have no veritable political policy interest either (though money they donate to think-tanks or university chairs they endow may feel obliged to publish accordingly). The backdrop is not the the Econ-101 arena one imagines of a perfect market composed of near-infinite competitive-but-small participants. This is the back room fight-club where anything goes from investor collusion, to misdirection and misinformation, paying for column inches and other bully-pulpits, to downright *blagging* to achieve the immediate goal of the trade's objective since For "All's fair in love an war" according to J. Lyly's 1578 proverb, is it not?  The objective is to generate price moves and feedback-oriented, i.e. cause investor action getting others to further move the price to provide the objective as well as the exit. Mr Soros quite literally wrote the book on this, an integral part of reflexivity, a term he coined, and one must assume Mr Soros is not financially uninterested in the outcome.      

Teasing out "truth" in the face of rhetoric is notoriously difficult. And often, excepting policymakers and ordinary citizens impacted by what might seem like vigilantism, it is only academic, since price is the only reality for most market participants be they spec traders or investors. Yet one must try to distill "the trade"and the *blag* from amongst the cacophony , because herein lies the rub for those going along for the ride: the fat tail  on "the trade" (the market equivalent of a sharp stick in the eye) typically lies on the opposite side as the cacophony.

I don't know whether the Euro will survive. I (along with its architects) see its warts and faults. What I do think with more conviction is that one should be watchful positioning upon half-truths, and twisted info that appears directed towards serving the parochial self-interest of certain pools trading capital, not because they may not be right in the long-term (they may!) and because these are likely NOT your interests, given the relative location of the fat tail. Caveat emptor indeed!

OMG! They Killed Zucky...!!

Actually, they killed Zucky's unlucky punters. Yeah, well, what did you expect ? Paying stratospheric prices for something more or less impossible to value on any model is a mugs game. I have little sympathy for any involved.

Those seeking headlines are now falling over themselves pointing fingers at "the process", but surely this misses the most pertinent point: FB (and anything else flogged) is worth what The People will pay. The IBs, like Sotheby's auctioneers, are hired to maximize the proceeds to the seller. They have no frickin' idea "what it is worth". Skeptics (like me) will tell you they wouldn't pay more than $5 or $10 (already an impossible large margin of error. Optimists will point to all manner of metrics and prognostications that justify multiples many times greater than that. Old-timers will remember the days when one of the most trusty investment strategies was to short ALL IPOs, whereas their (privileged) sons (and occasionally their daughters) have subscribed and flipped their way to riches, watching and participating in debut price-vaults that would make the consigners of impressionist art at auction weep.

It is shock to my sensibility that people rationally seek deals that tether value to need in almost every aspect of their life, lose all sense of errrr umm rational expectation [value, measure, proportion etc] when it comes to the Hot IPO. And while 2-cent nickels can pile up unloved in the eddies of slow-growth, or earnings downgrades, the $5-dollar quarters attract financial magpies like a shiny pull-top from an aluminum can.

Maybe FB will metamorphosize into a GOOG, an AAPL, or an AMZN. Maybe not. But I see nothing in the process that is any different from an unwary punter paying $2000 (or $4000!!! for the '88)-a-throw for a "Le Pin", and subsequently complaining it wasn't as good as they thought it would be, or as good as Parker rated it.  This is NOT an apology for the bankers, or the touting analysts, who's honesty ranks just above Nigerian Scam Artist-Phishers and Payment Protection Insurance Salesmen. But the ultimate responsibility lies with the buyers who should look introspectively rather than point fingers.

Farewell W

It is a miracle that I am here. 

At the very least, because you, yourself, were improbable according to statistics and circumstance. 

Your father, navigated uncertainty and turbulence, coming to America circuitiously from Russia via Egypt.

Your mother - who also managed against the odds to arrive here from the Lithuania - was late in her years when she bore you - even by today's standards. 

She was told repeatedly by doctors that she would never have children. 

Despite these obstacles, your arrival, defied the odds....and was - in the truest sense - a miracle.

Improbably, but thankfully (for your children), you found my mother.

From which my siblings and I are of further miraculous result.  

Any manner of happenstance or wrinkle in events prior, and I would not be writing these words.

If that were all, it might be dismissed as unlikely, though simple fate.

But it is not.

From this miracle came ripples of magic that extended far-and-wide to those you touched.

Your magic is part of me.

It is why I like to cook; why I love mountains, why I enjoy throwing a ball with my kids; why I have patience; why I drag my children on hikes; why I can identify the birds from their songs, and crucial to why I love and feel pride in my children, the way you felt about yours.

Your touch, however, extends well-beyond me. 

I see your miracle in my siblings, my own children, and my nieces. 

I see the numbers of people you have profoundly touched in your life with your care, attention and smile - extended family, friends, neighbors, colleagues, as well as your students. I do so with both awe and admiration  - and I am humbled. 

Few have such impact or can visibly attest to such lasting and a meaningful impressions upon others. 

And fewer still, do so in as many different ways as you: as partner, leader, teacher, friend, organizer, advisor, sage, confidant, parent, and grandparent. 

You are a challenging act to follow, but the path you have made is profoundly good and worth heeding.

I will miss you a lot.