An Indecent Proposal Indeed

Oh it's late, but reader 212213 has brought to my attention Warren Lichtenstein's proposal (as reported by Reuters) to float "his" Steel Partners II Fund in order to errrr ummm attempt to do something redeeming. No... redeeming is not the correct word for that is what most of his investors would like to do following their 40% smelting. Irredeeming is perhaps the more apt term. For it would seem that the hedges so carefully and scornfully explained to dear Cassandra in the comments section of this post perhaps by Mr Lichtenstein himself (or one of his soon-to-be unemployed lackeys) would seem not to have quite worked out the way Mr Lichtenstein (or lackey) suggested they would. But the Lord workeths in strange and mysterious ways. Particularly the God of the Old Testament who was forever smiting that which wasn't entirely kosher and even some that were. Ignoring that, Mr Lichtenstein's fate should come as no surprise to readers of this blog, or anyone with even a double-digit intelligent quotient, for rarely was there a more cockamamied harebrained and self-serving basis for an investment fund than this one. And now, having left investors exposed to the elements and rusting; now, with only Pig Iron left of the Steel, Mr Lichtenstein would like a vote of confidence that would in effect grant him permanent capital in order to lighten his Limited "Partners" of yet more money.

I admit that I haven't seen Steel's letters to investors explaining recent performance or proposing a solution to the situation highlighted by Reuters. But I can tell you with certainty that a perfect storm was NOT responsible, but near-fraud, and almost-certain neglectful misrepresentation and stupidity are to blame. Strong stuff, yes, but below are the posts - most which in hindsight were reasonably prescient - which detail what in my market vernacular is a more cynical form of ponzi for it attempts to justify the scheme with bullshit bullshit bulllshit, to veneer over the S.O.P. of using the weight of NEW INVESTOR money to buy monstrously concentrated positions in illiquid securities at higher and higher prices. And as much as I hate reading old posts, it is worth trolling through these for the record.

Be Careful What You Wish For
December 27th 2005. Ruminates upon the differences between American and Japanese systems, introducing Activists (and Steel) as forces to be evaluated (then dismissed).

New Shock & Horror: Livedoor Fraud!! January 17 2006 Near-fraud and market manipulation discussed as adjunct to Horie's Livedoor shocker (or not).

Pirating Buccaneering and Steeling October 4th 2006 Detailed analysis of Tom Hudson's (Cap'n Hook?) bizarrely hilarious problems and activism in Japan. I think this was a great post, (please read!!) which foretold with uncanny accuracy The Great Unraveling of activists. Yet sadly all it achieved were two Spammer comments. Ummm I guess the Fund of Funds and Steel investors' missed this one...

Bully Steels Candy From Baby November 29, 2006 Brief discussion of the "sacrifice" of Myojo Foods, forcing its sale to Nissin (#2897), and paying the greenmailer Stel, rather than letting the unworthy carpetbaggers get their smelly paws on one of the crowning achievements of the corporate food industry in Japan: Instant Noodles!

How Do You Hide An Elephant?!? December 22 2006 Analysis of large-shareholder reporting shenanigans in japan. Porsche must have read this one...

Man of Steel May 8th 2007 See them here!! Photos of the camera-shy activist in Korea taken from the sacking of KT&G meeting. How tall is he?!?!

9513 to TCI: "......"%#&k &##" ! June 4th 2007 Like the waves of cannon fodder in WW1, yet another foreigner storms the fortress. Forecasts [correctly] the travails of TCI, and Steel.

When You Wish Upon A Star June 6 2007 Included some mention about Steel Partners and Tokyo Hostess Bars

Reprint of Bulldog Sauce Letter to Steel (In Full) June 12 2007 Very funny (at least I thought so, but no one else commented!) reprint of mock-letter from Bulldog telling Mr Lichtenstein to "Please Fuck-Off" [again]...

Team Japan 1 - Activists 0 June 30 2007 Detailed look at the implications of TCI vs Japan Power suggesting patience will be the victor. Remember Muhammad Ali's famous rope-a-dope?!?!

Megan's Law For Activists in Japan
July 19th, 2007 Comment on the labeling of Steel as "An Abusive Acquirer..."

Team Japan 3 - Carpetbaggers 1 July 24 2007 Yet another hostile acquirer rebuffed. Score now? See the board....

The World in 2008 - A Sneak Preview December 17 2007 My forecasts for 2008 including the demise of Steel Partners. Pretty damn good overall (Naked Capitalism highlighted it because of the unrequited forecast that Condi Rice would leave like a rat on a sinking ship. The one I am most proud of: "The best investment in 2008 will be disinvestment..." Need I have said more?

A Kindler Gentler Kind of Greenmailer May 6 2008 Recap of late-innings desperation by Steel to be nice and ask kindly for management to b uy their large unmarketable stakes in highly illiquid enterprises. Foretold of doom to come....and now arrived. I think this one was VERY funny, but as with most of the things I think are VERY funny, few others do...at least judging by the comments

A Bad Hair Day For Aderans' Management May 29, 2008 This is was one that jerked the chain of someone in Steel's organization. He rudely and amateurishly tried to argue the case, and then finally shut-up at the suggestion that Steel be transparent and show the time sales & prices to dispel the notion that it was a market-impact trade on illiquid securities. THIS IS A MUST READ IF ONLY FOR THE EXCHANGES IN THE COMMENTS.

Effingly Absurd Efforts July 22 2008 Effingly amusing post actually about home grown Steel imitator Effissimo, rooting for the lions to finish Steel off and put them out of their misery.

So where does the proposal leave investors? Between a rock and a hard place. Vote to float, and the ingrate who got you there is rewarded. Redeem, and you will get royally buggered on the exit, or perhaps pursuant to the fine-print, payment-in-kind which would be a rag-tag-bag of illiquid stakes in cheap-for-a-reason enterprises.

But the audacity of the suggestion is what should incense investors most of all. It would be like being a customer at a restaurant where you've been very obviously poisoned by the appetizer and main courses, so much so, that you've bee rolling and vomiting all over the floor and now are dry-heaving bile, when the owner personally comes up to you and smarmily asks what you'd like for dessert, and whether you'd like to reserve the same table next week, same time.

The Directors should fire Mr Lichtenstein and appoint a new manager to unwind the book WITHOUT FURTHER ENRICHING THE EXISTING MANAGER. Someone errrr like me!??!? Well, at least I would charge reasonable fees, be trying to figure out how to get my investors out of the Steel Partners Hell-hole rather than partying with Denise Rich in St Tropez, and not be self-serving other than put a bit of grub on my family's table, and perhaps most importantly, I would - as I have always been in the past - and contrary to current management, be a true and proper fiduciary.

The Enigma of Martin Armstrong (revisited)

Martin Armstrong's name is surfacing once again, as cyclically recurrent as perhaps predicted by his theories. One would be forgiven for possibly attributing this to the recent revelation that another Ponzi (Mr Madoff's) was surpassed that of his own. Or it might be that people were having second thoughts on the veracity of his theories given the state of the financial system and the bucking of the asset-price destruction trend by Gold, much the same way the Hebrews turned to golden calfs after dessicating in the desert for a while. Or it might be that Mr Armstrong has been writing again, (though this time from behind bars), and that it has received some traction by goldbugs, still enamoured by errrr ummm that about him they find attractive. Whatever the reality, Mr Armstrong is the nexus between them, and so I thought it opportune to re-post (with a few editorial clean-ups) an old post from Aug 2006 entitled "The Enigma of Martin Armstrong".

Anyone with anything to add (for the Record) on the specifics of PEI, it's trading, Japanese Repair Bonds, Cresvale, Marty's affiliation with Magnum "scion" Dion Friedland, should feel welcome and encouraged to do so here. Read on....


Monday, August 21, 2006

The Enigma of Martin Armstrong

Some memories fade, but are never entirely forgotten. The same holds true for certain personalities, particularly the bizarrre and eccentric. One such notorious individual is Martin Armstrong a.k.a. Princeton Economics a.k.a. self-professed expert in the history of money and things gold, and in keeping true to my theme, of things Japanese. He was accused of a large Ponzi fraud, of hiding the alleged spoils, and of being the purveyor of the notoriously unvaluable "Cresvale Bonds" that besotted Japanese corporate investors and populated their portfolios, much to their eventual chagrin. Coincidentally, as a result of some inexplicable synchronicity, I was wondering only a few weeks ago what's become of Mr Armstrong and was preparing a post to that affect, so it is timely coincidence indeed that, after languishing for six-and-a-half years in a Manhattan jail cell, he finally pleaded guilty to charges of "fraud" on Thursday, August 17th 2006.

For those unfamiliar, or too merely too young to know, Martin Armstrong was a confidence trickster, if not an outright fraudster for which he was accused. Martin Armstrong was also a Bad trader. A very VERY Bad (note upper case "B") and inept trader. And it is reasonably certain Martin Armstrong committed fraud to cover up his very bad trades. And then he committed more trades in an attempt to cover up his fraud on a hope and prayer all would eventually come good. Most of these were in Nikkei and in Gold. Contrary to the laughable ineptitude with which he implemented his "strategies", by most accounts he was smooth, suave and authoritative, in a way that encouraged people to entrust to him their money. Which he then duly lost. Many many hundreds of millions of US dollars. Perhaps billions of US dollars, but we don't know precisely because Mr Armstrong has not spoken other than (until this week) to deny his accused. The official court dockets (available on-line) from his 1999 indictment in the Manhattan district of US Federal Court read like a Shakespearean comedy. The more he traded, the more he lost. So much and so bad were his trades that his colleagues, and brokers mercilessly joked about it behind his back. He was, according to the same court docket, so consistently wrong-footed in his punts that he would have done far better flipping a coin to decide whether or not to be long or short. Or use the infamous "Ask the 8-Ball" Method. Or consult Nancy Reagan's financial astrologer, or even seek the advice of Anatole Kaletsky. Anything but use his own judgement.

Though his company, Princeton Economics, had head offices in the US, he traded from Tokyo in an office overlooking the gardens of the Imperial Palace. For Japan had a special place in his scheme. You see, ironically, the Japanese too, in undertaking their own form of financial-speculation-gone-awry known as Zaitech, had lost billions in late 80's and early 90's on dubiously-thought-out wrong-footed speculation and stock-market investment. Like Martin Armstrong, shell-shocked by large lossess, they were too ashamed and/or embarrassed to tell their shareholders that they had punted wrongly, or in UK football vernacular, scored the financial equivalent of an "own-goal". Not willing to come clean, they found themselves with a serious problem and yearned for a clever and tidy solution that would absolve them of the thing they feared most, which was NOT the losing of the money itself, but accepting responsibility for it, a dilemma not unlike that faced by I. Lewis "Scooter" Libby.

Enter Martin Armstrong and the almost forgotten Cresvale Securities. He too had a problem since his golden-tongued investment plans, proved rather less robust than hoped [and promised] and resulted in large trading losses for his clients. It seems from the prosecution's accusations that he was able to continue his scheme (until this point) and make payments to the clients who redeemed by using the proceeds from new investors. This, however was proving more difficult as losses mounted, and so he desperately needed new clients. Big clients. Well-heeled clients who wouldn't be asking for their money back any time soon. Such as money from the trust of someone deceased. Better yet, a dead-pet trust!!. Or even better: a Japanese corporate client that themselves had a big dirty secret to hide.

And so they found each other: the companies, like an inveterate gambler, desperate for an investment saviour who with promises of high returns - would, over time, regain their previous losses, rescuing them from certain the humiliation and shame that they most dreaded (not to mention a demotion to the Corporate Travel Office, or Janitorial Services Dept.) and Armstrong, now with a fresh load of clients, and more importantly, their cash. In between them stood Cresvale Japan, the securities firm who brought them together, gave legitamacy to both their pursuits, and took nice fees out of the middle in the process, and in so doing torpedoed themselves out of existence.

The scheme ( I am conjecturing here) worked something like this: Japanese Corporate 'Y' perhaps had lost $100,000,000 speculating through a subsidiary, selling say Nikkei Put Options or buying boatloads of overvalued shares after consulting with Madame Inoue's Buddhist toad (tip: this is one of my favorite posts!!). They were able to hide this financial pustule for a while by playing "pass the parcel". perhaps between offshore subsidiaries with different year-ends. Thus their consolidated accounts still showed these losses as assets at their full value on their balance sheets. So Armstrong/Cresvale proposed they swap $50,000,000 of new money for a "repair bond" with a maturity value equal to the full $150,000,000 ($100mm of losses + $50mm of new money) and then let Magic Martin do his thing. Here, they might have been sweet-talked, or they might have seen it more cynically as a win-win for If things went right, they would make their money back and everyone wins. If something went wrong, well they can blame the investment losses on Armstrong, call it fraud, and take write-offs, without having to take responsibility in the first instance. (note: this is sketch of the essence, not the actual details).

This is all interesting, but what really fascinated ME about this story is that in the mid-90s, certain un-named American value investors had eyed a number of Japanese companies that they believed "cheap" because they seemed to have large amounts of un-specified cash & marketable securities reported on their balance sheets, relative to their now-diminished market capitalizations. In some cases these balances were in excess of the firm's entire market capitalization. Many reasons were put forth explaining the phenomena such as: "empire building"; "small-float and closely-held"; "saving for a rainy day"; "deflation"; "management conservativeness"; "investor pessimism"; "adverse taxes upon large distributions"; "legal inability to conduct share buy-backs" etc. All these seemed somewhat plausible. Conspicuous by its absence, except as speculated by the most hardened, battle weary cynical gaijin observers was: "because it doesn't exist".

But clearly some people HAD to know about their losses. For other foreign banks (Paribas, Lehman, etc.) were in the so-called "repair bond" business. Other financial institutions had been counterparties to their sales of embedded Nikkei Put options. And many of the companies themselves were household names. Maybe their businesses were not as fraudulent as Armstrong's, but nonetheless their audited accounts and subsequent actions foraying into esoteric transactions were meant to deceive shareholders by masking losses and allowing them be amortized over many years.

Since I am here, writing this, readers must suspect that none of these things went according to plan. When the Armstrong fraud broke, many of the guilty Japanese Corporates had to come clean. Sort of. They claimed they were victims of fraud (and perhaps some truly were unsuspecting purchasers of Cresvale Bonds), but the "repair Bond" concept and angle was often lost on most external observers. Yakult Honsha (TSE#2267) was said to have $1bn of losses alone from their Armstron-relatedg assiociation, as well as engineering firm Chudenko (#1941); specialty chemcial maker Gun-Ei Co. (#4229) pharma co's. Kissei (#4547), and Towa Pharm (#4553), machine-tool giant Amada Corp (#6113), pneumatic specialist SMC (#6273), eletronic parts mfgr Alps Electric (#6770) advertising agency Asatsu (#9747), office furniture maker Itoki Crebio (#7972) and more than 50 other firms were deemed to be "stung" in the Ponzi's unraveling. Yakult's losses were apparently so big that they couldn't blame Armstrong for all of them with a straight face, but many other co.s did, and [perhaps as planned] were "absolved" of culpability for their original sins.

The epilogue was that Armstrong, accused of Fraud, sat in jail for contempt of court, and was not brought forth to trial for his alleged failure to turnover evidence and in particular, to tell authorities the whereabouts of $15mm of gold and silver coins and bronze statues he'd reputedly squirreled away. It was the longest such languishment for contempt in United States history. All the while, he's claimed that he was innocent of the fraud itself. I make no judgement here, but it seems likely from the court documents and testimony of accused accomplices at HSBC he that committed fraud in the form of the ponzi that used new proceeds to pay old losses. His brokers, Republic Bank, (now the behemoth HSBC) coughed up nearly USD$600mm for their part in not alerting authorities to the potential wrong-doing, which court documents allege, they were well aware. That said, a good portion of the suspected so-called "losses were not "embezzlement" or "theft", per se, as the newspapers and Japanese Corporates would have readers believe, but out-and-out ineptitude and shitty trading. The subsequent deceit and using proceeds of one investor to pay another, and, well, we know what that is called.

His reversal and decision to enter a guilty plea may reflect that Armstrong the man met Armstrong the fraudster. Or it may reflect Armstrong's understanding that having spent six years in jail, an admission of guilt might allow him to squeeze a few years of freedom in his (no pun intended) "Golden Years".

For investors, the only the protection they can afford themselves is doing appropriate due diligence and being highly skeptical of anything that purports to be "too good to be true", or turn base metals or paper into errrrr ummm gold.

And The Largest Fraudulent Conveyance Recipient Is...

Today, there are far more experts on the subject of Fraudulent Conveyance than there were several weeks ago. And rightfully so, since it is a fascinating concept - particularly in the $50bn case of He Who I've Promised Not To Discuss as one of my year's resolutions, and one that in days of old might have merited a lively discussion in the The Talmud. Roger Ehrenberg at Information Arbitrage discussed the perils in this case. It generated many passionate comments, yet, missed one of the most fascinating and salient aspects of the case which was kindly highlighted by reader "Shairon The Parliamentarian" (profile sadly unavailable):

Perhaps the singularly largest beneficiary as a recipient of fraudulently conveyed funds was the United States Government since many of the redeemers will have paid capital gains taxes upon the BLM redemptions with fraudulently conveyed funds. As a result, it will be incumbent upon them to disgorge said tax receipts back to the administrator for ultimate redistribution. Given the length of time many investors were "in", the capital gains, and thus the taxes thereupon would, one might assume, be very large.

Nothing like kicking someone when they are down! And it gets worse for Uncle Sam since (as has been widely pointed-out) the investment losses will offset investment gains for many taxpayers (only of course if ever again investment gains outside the US Govt Bond market resurface again within the statute of limitations for their carry-forward) for years to come.

Farewell, then 2008...

So, farewell then
two-thousand
and-eight -
end of Bush-folly
and the Bubble Of
The American Way.

To some
you were
eponymously
known as the
Year of The Rat.

To others
you were
just as aptly
annus horribilus

Volatility,
asset price destruction,
fear, greed, hubris,
fraud, collapse,
deleveraging and
revulsion were your
catch-phrases.

'Tis astonishing
what it takes to
convince The People
to live within
their collective
means.

I Am Shocked That You're Shocked...!!

The name Bernard L. Madoff has been upon everyone's lips of late - even those who know nothing about finance, hedge funds, or the subtleties regarding how to execute a good Ponzi. And I can understand the awe at the numbers - even though $50 billion is on the high side given its compounding of non-existent returns, for one cannot lose what they never had. Yet, despite the size, I remain shocked that industry people are "SHOCKED" or even just "shocked. While I will admit to being surprised that of all the possible Ockham-friendly explanations, Ponzi was the culprit, I can say with certitude that it was "relief" rather than "shock" that I felt, since the revelation finally solved a long-outstanding and personally troubling market non-sequitir.

Yet through all the analysis, uproar, indignation, and financial horror, I AM shocked that the media and commentators of all persuasions have left untouched the details that I find most fascinating. These pertain to contemplating Mr Madoff's inner monologue throughout, his relationship with his wife, how (if you believe the sons) he managed to avoid discussing the sordid details in conversations with his sons over Mom's Sunday-evening pot-roast and egg-noodles (did she cook or merely press her speed-dialer to book tables at Le Cirque and Daniel???) . Perhaps this is because I have never taken the study of psychology to any depth; perhaps it is because I myself am such a pathetic liar I cannot countenance a serious confabulation, but neither deters my morbid fascination with what Mr Madoff must have been thinking at various crossroads during the swindle, such as when he went for a slash in the mens room after delivering a congratulatory address to the Hadassah who were amongst the very people he was taking to the cleaners!! Did Mr Madoff go to Synagogue? Might there not have been moments during the one solemn service or another where he felt deep remorse and regret to such an extent he would end the charade there and then? And how many times did his inner-self feel near collapse as the proximity of discovery approached during the numerous occasions over the fifteen years - be Long-Term Capital (many industry redemptions), the Tech Wreck, or the publishing of the Barron's article. How much time did he put into contemplating what P&L would be contextually acceptable...in other words: did he agonize over whether -0.09% would be more reasonable than -0.12%? Did anyone help him in these ruminations? Did he devise a method for fabricating returns in the positive months - e.g. the way Luke Rhinehart did in The Dice Man?? Did he keep a little Black Book of all the lies and half-truths he told to various people in order to keep them straight? Is it really possible that FG's Walter Noel, Andres Piedrahita and Jeffrey Tucker REALLY didn't know what was up? Did he despise himself even more when he read about the "honest" Wall St. fortunes made by Dr Simons and David Shaw? What went through BLMs thinning head when another $100mm hit his account from the wire? Was it celebratory (popping a vintage Krug) or merely a sigh of relief at living to fight another day, to have another pedicure, another meal at Boulud's place, another massage (happy ending?) almost Sisyphusian given the lack of meaning for whatever meaning there might have been (family, love, tzedakah, good works?) would pale in comparison to the scale of what awaited just around the around the corner that would surely shred whatever meaning he might have self-deceived himself into thinking his life possessed.

Perhaps, though, I am getting too cerebral here. Perhaps a sociopath is entirely self-delusional. Perhaps the sociopath believes he has achieved what he has merely conjured and is an equal to Dr Simons and Mr Shaw. I do not know. But I continue to wonder...

A Satire-Free Day? No Thanks...

Happy Holidays To All !!

If You Can't Tell Who The Sucker Is....

Thumbing through the sell-side research from their multitudes of Strategists, I notice some recurring phrases, small and innocuous as they may be, that trouble me. Time and again, they repeat, in various contexts, the mantras: "when things return to normal", "when markets return to normal", and "when x, y or z normalizes" with "normal" implied to be that which has been common over the past decade-or-so in respect of liquidity, leverage, asset prices, equity risk premiums, speculative activity, growth. Mulling this over, I wonder to myself: "is this not just the perfect "recency bias" example, defined by wikipedia as "a cognitive bias that results from disproportionate salience of recent stimuli or observations"? For as I consider what precisely is meant by "normal", it seems to me that there is a reasonable good chance insofar as this IS "The Big One" (as Bridgewater Associates precsiently termed it nearly a year ago) that all these things - debt, leverage, consumption vs. income, relative asset prices - are ALREADY returning to normal, and the strategists, demonstrating the old poker joke about "if you look around the table and you don't know who the sucker is, its you....", simply haven't yet fathomed the appropriate interval frame of the normality to which things are returning towards.

In Japan, "normal" meant that in 2004 residential real estate prices were roughly 30% of late 1980s or early 1990s prices. In Germany , though nominal prices might be similar in many places to those prevailing two decades ago, the real price destruction would be probably be similar to Japan's. But what is "normal" for economic growth? Or what is "normal" for aggregate US consumption? Or the amount of debt a typical household can sustain? What is the "normal" leverage for a bank, or the normal return on equity o a listed company? What is a normal share of GDP for corporate profits in an economy experiencing deep recession? What is "normal" for sustainable government budget deficits? What is the normal income multiple of a banker or CEO to a policeman, a professional baseball player to a school-teacher or a doctor to a nurse? What is the normal amount of due diligence a bank should do before extending a loan and what is normal for the amount Honeywell Industries will earn per-share in the coming years?

These may seem disparate and unrelated, but I fear they are not. I fear that the final acceleration towards the denoument of Peak Credit, rooted as it was in poor fiscal policies and lack of regulation & oversight, greased with monetary ease and official foreign mercantile enablement, and driven by parochial and herd-like animal spirits, has distorted what is normal, what should be expected, and of course, what is, and will prove to be reasonably sustainable in the future. But the Strategists, the ones who've offended my sense of the normal, seem, in their sanguineness, to be implying that is was normal to extend credit as it was during the last eight years; that gains in asset prices (be they a a portrait of Dr GachetNYC apartments, Chelsea or Notting Hill pied-a-terres ?) are normal at somewhere nearer to the top of their seemingly almost-exponential three-decade rise; that it is normal that US households continue to live with negative rates of savings or consume en masse beyond their means; or cavalierly burn hydrocarbons at the elevated relative per-capita rates that they do presently; that past income-inequality, now rolled-up into massive eddies of wealth discrepancy that approach those which evoke those prevailing during the enclosures in England are normal, and that their sense of normalcy will swiftly return despite the continued pressure to the contrary upon the financial sector, and households to return to a normalcy of a much different mean than those of the recent past, which in their turn directly the impact the corporate sector with body blows from BOTH the cost and availability of their gearing and the ultimate demand for their products.

I do not believe (yet) that we are about to beat each with bones back to the stone-age. But I believe that what we've seen in leverage and credit growth during the past 15 years is NOT normal, nor is it sustainable - neither relative to history or in absolute terms. And this return to what is sustainable, and service-able has profound economy-wide, implications, and they are indisputably contractionary: deleveraging, higher savings rates, matching household consumption to income, and government revenues to expenditure. Add to this the impending pull of demographics, the emerging trend towards greater environmental consciousness and sustainability, and "normal" begins to resemble a mean-that is something of a much different magnitude, something still to the south of where we are that - in the big time series - we will continue to revert towards from our presently divergent location rather than - as the Strategists imply - a normal that is something we've already overshot.

Happiest Man in the World...?!?

It has always seemed obvious to me that pleasure should not be confused with happiness. Perhaps it was lingering from my readings of DT Suzuki years ago, or my upbringing, but it's always been an intuition that's accompanied me. So strange as it may sound, this fact is - or rather should be - an important consideration in policy-making, particularly when considering choices in developed economies, say between growth and the environment or, between the rate of growth (or contraction!) now and the rate in the future, as well as marginal tax rates amongst other things.

Such notions are all too often summarily dismissed, and baselessly so, since according to Matthieu Ricard, a French scientist and buddhist monk, "happiness" is tangibly within the mind, and he is working to scientifically demonstrate precisely that, with some fascinating results.

His optimism and peace are as infectious as the Dalai Lama for whom he traslates, and I recommend everyone take 30 minutes and listen to what Mssr Ricard has to reveal about his life, meditation, and happiness.

List to BBC "Heart & Soul" Interview with Matthieu Ricard - Happiest Man in the World

Urgent Response Required

Mr. Ogechukwu Kanma (Bank Manager)

Union Bank PLC


Lagos Branch


Lagos, Nigeria

Attn/President/CEO



Dear Sir,

I am Ogechukwu Kanma, Bank Manager of Union Bank PLC, Lagos Branch. I got your contact from the World Trade Center (W.T.C.) Regional office in Lagos, Nigeria although the details of my intention was not made
known to them. Actually, I listed your name amongst four other names and prayed over them and God revealed
you to me and I decided to contact you directly. I have a very urgent and confidential business proposition
for you for our overall mutual interest.

For the past 18 years, an American Business Executive, one Mr Bernard Madoff has made a number secret deposits valued at USD$50,000,000.000.00 (Fifty Billion American dollars) into an account at my Branch. I recently sent a routine notification to his forwarding address and called his telephone but got no reply. Then I see the news that he is in jail! On further investigation I found out in the fine print that for this type of account Mr Bernard Madoff must come personally to my branch to withdrawal the funds. 

This sum of USD$50,000,000,000.00 is still sitting in the Bank and the interest is being rolled over with the
principal sum at the end of each year. And he cannot come forward to claim it, since Mr Bernard Madoff is under house arrest with a designer ankle bracelet. According to Nigerian Law, in such cases, the money will revert to the ownership of the Nigeria Government if nobody applies to claim the funds.

Consequently, my proposal is that I will like you as a foreigner, with a foreign-sounding name, to stand in as the next of kin of to Mr. Bernard Madoff so that the fruit of this old man's labor will not get into the hands of some godless and corrupt government
officials. 

The plan is simple;


(1) I will like you to provide me immediately with your full names, address, social security number, and credit card details (including the expiration date and little number on that back that they always ask you for when you make purchase over the telephone), your mother's maiden name, your email, and driver's license number so that the attorney will prepare the necessary documents and affidavits, which will put you in place as the next of kin.



(2) We shall employ the services of two attorneys for drafting and notarization, and obtain the necessary documents and letter of probate/administration in your favor for the transfer.

(3) A bank account in any part of the world, which you provide, will then facilitate the transfer of this
money to you as the beneficiary/next of kin of Mr. Bernard Madoff. The money will be paid into your account
for us to share!! in the ratio of 60% for me and 40% for you. There is no risk at all as all the paperwork
for this transaction will be done by the attorney and my position as the Branch Manager guarantees the
successful execution of this transaction. If you are interested, please reply immediately via this private email address. 

(4) And don't worry about your bank being suspicious about the transfer as I will make sure to split up the wires into units of less than 10,000 ($9,999.99) to avoid detection on the Fed wire. If I make 10 of these per business day (excluding Nigerian Public Holidays & Fela Kuti's birthday) we will complete the transfers in only 500,000 business days!! Imagine the happiness of your soul to receive your 40% of USD$100,000 for the next 500,000 business days!

Upon your response, I shall then provide you with more details and relevant documents that will help you
understand. Please observe utmost confidentiality being certain that whatever you do DO NOT CONTACT THE SEC or anyone by the name of Arpad Busson as they might spoil our little deal. 

Rest assured that this transaction would be most profitable for both of us because I shall require your assistance to invest my share in your country - hopefully in a nice and safe hedge fund or fund-of-hedge-funds, preferably one with consistently high returns and low-risk. 



Awaiting your urgent reply via this email above, and please save me the anxiety of endless waiting.

God bless you.



/signed/

Mr. Ogechukwu Kanma


Union Bank PLC,


Lagos,Nigeria

Zero - The Loneliest Number?!?

In The Secret Bank of Japan Lexicon, I attempted to demystify all things ZIRP for financial Japan-o-philes. But as we are all ZIRPers now (or soon will be ZIRPers - Hi Merv!), I thought it might useful to update the lexicon to help Anlgo-Saxons familiarize themselves with the new paradigm of.... Z E R O, "oh", "null", "nil", "naught".

ZIRP (c) - The policy of pricing money as if it were free, thereby encouraging its creation in [errr hopefully?!?] unlimited quantities to any and all comers, for the stated purpose of avoiding deflation, though actually it is to make sure that those whose eyes were bigger than their stomachs don't explode, which ostensibly is less than desired by anyone. 

nearZIRP(sm)(c) - same as the above, only a few basis points higher; usually meant to keep at least one final bullet for the FRB in the eventuality things get even more FUBAR. Also can be used on the rebound in order to allow the FRB to keep the fallacy alive that it is symmetrical insofar as it takes similarly aggressive action against inflation as it is against deflation. (See also:  ZIRP-lite)

ZIRPtastic - The feeling of joy and bliss that overcomes the borrower of "free money" upon swapping US Dollar paper for something that will depreciate less.

ZIRPflation - The likely future consequence of ZIRP.

disZIRPflation - The temporary state of purgatory where core asset and commodity prices are falling coincidental to ZIRP, and/or nearZIRP.

ZIRPulation - Leveraged specutrage predicated upon borrowing Dollars at nearZIRP for investment in anything and everything nonZIRP.

ZIRP-sixed - Losing one's hedge fund either by maintaining long risky-asset positions enroute to ZIRP, OR, maintaining short risky-asset trades beyond their sell-by date (See Donchian Channel Breakout)

ZIRPcurve Risk - The aggregate embedded risk in a ZIRPified financial system where the paucity of short-end yield induces investors to "reach for yield" by going farther out on the curve, thereby squashing long-term rates towards ungodly low levels that cause a bubble in the long end, circularly making it near-impossible to shift policy or paradigms without inducing massive mark-to-market capital losses throughout the financial system. (See: "the folly of sequential bubble- blowing")

1st Law of ZIRP-o-dymanics - For every borrower there is a lender causing the net stimulatory benefits of ZIRP to be lost as savers now devoid of income curtail consumption.

2nd Law of ZIRP-o-dymanics - Exceptional circumstance of 1st Law where lenders are foreign, allowing the possibility that domestically , the net stimulatory effect might be positive.

ZIRPstamps - Food Coupons issued to OAPs (Old Age Pensioners) who live off of the interest from fixed-income investments, and as a result, now require income supplements.

ZIRPerrific - Celebratory "High-fives all around" in the Treasury War Room when stocks fall less than "a few percent", swap spreads converge, Jim Cramer finally shuts-the-fuck-up.

ZIRPBento - The FreeLunch(c) Box served in Financial cafeterias, but available to any and all comers.

ZIRPtomism - The belief that the power of positive-thinking and free-money will allow something-for-nothingism to live yet another day.

ZIRPquake - - Colassal dislocation in financial markets when eventual unwinding of ZIRP-related positions occurs.

neoZIRPeralism - Using all manner of monetary policy tools to insure the neoliberal regime suurvives. (See Income inequality, Public Interest, Beggar-Thy-Neighbor)

ZIRPing-on-a-String" - Economic state describing the ineffective outcome of employing ZIRP monetary strategies when the the root causes of America's ills has next-to-nothing to do with the price of money, and everything to do with unimaginable financial and regulatory policy mismanagement and neglect during eight years of the Bush Admin.

ZIRPatility - The phenomena describing the schizophrenic market adjustments to ZIRP as they attempt to fathom whether deflation or inflation will prevail.

ZIRPocracy -Describes capitalism's policy paradox where the market price is proffered to be essential to the optimal, (or reeasonable approximation thereof) allocation of a scarce resource excepting when it comes to finding clearing prices for stocks, real estate, and anything covered by TARP, TAF, TSLF

ZIRPlosion - - Eventual market relapse caused by putting-off until tomorrow what should be adjusted to today.

ZIRPO - The fourth Marx Brother.....

Sympathy For The Devil

Bernie Comes Out of the Closet

Not a year has gone by during the past fifteen that I have not contemplated what Bernie Madoff did (or didn't do) to make his money. Seventy to one-hundred basis-points-a-month. Net. Net. Net. During tempests, earthquakes, panics and crashes - even during the closure of the exchange itself, Bernie apparently minted coin like few others. Even Renaissance and Shaw tripped occasionally. Not Bernie. Yet no one new what he did. It was one of the best kept secrets in the world. Oh yeah, sure, split-strike conversions were the official line. But every skeptical arb trader knew this couldn't be true.

I also never came across an ex-Madoff trader the way one meets ex-Shaw, ex-Moore Cap, or ex-Citadel employees. Resumes are sent in reply to postings and guys have done the rounds, even if they weren't unhappy and making a moral statement. A spouse moves...whatever. Surely there must be disgruntled Madoffians somehwere, right?. Were they ummm underground? I mean, iterally? My friends at a large IB (who were soliciting business from them years ago) who'd been to their offices said it looked the bridge from the USS Enterprise (the Starship - The Next Generation version). Entry to the IM sub was strictly verboten. Uh huh. He said it was a paperless office. No paper trails. Hmmmm. Violators were fired. Weird. No one transgressed.

Whatever he did, he came a long way from arbing the odd-lots that were the reputed foundation of his activities. I knew his shop from London where he was one of the few to make markets in US stocks out of hours, and if my clients for whatever (mostly ill-advised) reason needed to trade instantly, Bernie would make a price. Not necessarily a good price, but a price. But one does so at their peril since the folk with material non-public information are more predisposed to want to trade outside hours, so the pick-off risk was huge. But he never complained.

Next thing I know, he's at the center of electronic trading revolution - an electronic market-maker facilitator at the center of trading universe. Yet even Timber Hill has bad hair days. Volkswagen ord-pref days. Not Bernie. Is he arbing the exchange fee structure? Is he algorithmically scalping cause he's seeing the order flow before it gets to the exchange? Maybe. Profitably? Who knows? But I didn't have a problem with an old jewish guy making markets. This is what we DO. But there are these investment funds - Fairfield Sentry and Kingate, and these are the issue. They are Madoff-only feeders reputed to be $7bn each. Are they funding his market-making? Why does he need so much capital? What the f*ck f*ck f*cking f*ck could he be doing in the equity markets with that muh capital and still keep it a secret AND deliver returns? They say they are doing these split strike conversions but I can't see how the numbers work. Nor can anyone else. The Wall Street Journal raises the red flags, in an article but it's dismissed as hyperbole disseminated by jealous competitors. But thge nagging thing is: there are lots of smart guys out there. More than sixty of them near Stonybrook with Simons focused on cracking the nut faster, better quicker, and this activity and result, I can understand. But there is no sign of such exactitude or intellectual firepower at Madoff. Just 70 to 100 bps per month, secretiveness, and dissonance.

In 2000, I advised a family-office on their alternative investments, and constructed a portfolio on their behalf. I had free rein (thanks! anon). Included in their legacy portfolio was a sizable Madoff position. As a fiduciary - and a conservative one - coming on the heels of LTCM which also lacked transparency and which made it hard for me to raiise capital - I dug, asked every welll-connected equity-finance, prime-broker, electronic trader and HF allocator type I knew and it still didn't add up. The best and brightest still had no more insight than I, though the skeptical shared my suspicions. So, I strongly suggested they "dump it". "One isn't being compensated sufficiently for not knowing, and something just isn't right here. Yeah maybe its OK, but I think it's not". But they liked "it" and they liked "him". "He's always paid", they said. "We've been with him a long time". Old school they were. Trusting. What the fuck did I know anyway?

Well it seemed to me that the "split-strike conversions" were profit shifting bookeeping tools. Money invested in the feeders did obtain split-strike conversion positions on their books that had an implied "yield" equal to their return but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles and were "phontom" positions vs. Madoff securities. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage from bank lines and financing sources. It could be in anything and everything. He could be doing mutual fund timing, or mutual-fund market impact trades. Credit arbitrage. Funding coiiup d'etats in Africa. or buying GSCI commodity swaps. More plausibly, he could be doing option and index-option market impact trades since he was ostensibly at the center of market flow, or he could be at the center of a loan-sharking network across America earning 50%pa, and here he was passing a paltry 9% back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have have thought he was both??!!

Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many others investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense. It just didn't add up. Even Jim Simons earns it. There is no free lunch.

There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of shit. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repurcussions down to the core of our society and values. "Sorry everyone....what you've been pursuing has all been a lie, a big ponzi, a rat-hole to nowhere....". Re-boot.

"Trib Explodes"....Read All About It In The errr Trib?!?..!!

Only last week in "Of Perfect Storms and Horses' Asses" did I lament the disingenuity of blaming A Perfect Storm for what was almost certainly human errors of judgment. But yesterday, the Chicago Tribune itself reported that Mr Zell blamed none other than "A Perfect Storm" for the woes of his highly leveraged buyout of the windy city's venerable broadsheet.

Sam Zell's timing was near-perfect in pulling the rip-cord on Equity Office Properties as put onto a pedestal here, but he must be called out in blaming the exogenuous environment for the Trib's travails. For it had virtually everything to do with the $13bn debt-laden financial structure Mr Zell sought-out and engineered, as evidenced by the ho-hum (relatively speaking, of course) reaction of The Washington Post Co. to the present financial and economic dislocation. Even the New York times, itself wounded from the turmoil, sports a comfortable billion of equity market value. Depending upon one's view of course. Mr Zell's decision to employ boatloads of debt and NOT put up copious equity might be seen as brilliant, shifting as it did, the majority of risk to the now-forlorn lenders for his pecadillo - a participation for which they are undoubtedly experiencing so-called "lenders-regret" (those with jobs at least). That said, it IS rather insulting to the employees and other constituents of the Trib web to lay the blame somewhere else - not least that phony cesspit of non mea culpa called The Perfect Storm.

Of course hardship is becoming more widespread. The Trib is not the only to suffer, and certainly will not be the last to seek protection from creditors. And sheltering both workers and constituents from reality serves little purpose in the longer run where business models are also unsustainable in the longer run. But the unwillingness of The Captain to speak frankly about motives and structures and absolve himself of culpability too, serves little purpose other than to prevent Mr Zells own ego-cleansing and vilification. For while Mr Zell will be stung for some chump change (in comparison to his EOP bonanza), he will NOT, unlike employees - who will it must be said - bear the brunt of the adjustment, go down with the proverbial ship.

Grasshopper Regret??

Do grasshoppers regret? Aesop never told us. Are we on the verge of a new world order - a New Order so-to--speak? No, not yet, for it seems as if we are pulling out all the stops to save the old one, despite the elevated suspicion that the old one is too deeply flawed for rescue. But it begs the question: what might you do differently given another chance - something germane to the question posed of Mr Aesop's grasshopper? Aptly-named New Order contemplated the "second chance" theme in a different context, with their hit "Krafty" (videos een below), which even if it doesn't help with your ruminations on the subject should brighten-up your Sunday with welcome fantasial blast-from-the-past - my favorite track on that LP ...

Whoooa There Bossy....

Just as there are progressives and conservatives in the political sphere, so to do similar dichotomies exist in the financial sphere. Trend-followers and contrarians are arguably the most generic categories. I make no apologies for being a contrarian - for one must understand oneself and be comfortable in one's own shoes to profit. Having said that, I am not stupid, for I have read the momentum literature from cover to appendices many times over, and so piss into the proverbial wind judiciously and with good cause. With that out of the way, I will suggest briefly - contrary to Stephen Jen and many other currency pundits - that the days of yen strength are numbered, and that come the end of this calendar year - particularly vs CAD, AUD, SGD - reversal is nigh.


My reasons are overly simplistic and undoubtedly, many will argue to the contrary but I believe a meaningful chunk of the carry trade has been unwound (and if one hasn't unwound yet, one probably won't!!); macro-specs are now all long; risk-avoiders are long it as an alledged safe-haven; and systematic traders and trend-followers are long because of the alignment of highs and lows. Strategists are yen-bullish. So who's left to buy? Not exporters, that is for certain. So who? BoJ? Ummm, no one needs reminding of their own current long USDJPY position, and the fact that they foolishly sold NOTHING in the intervening years of massive yen weakness. Moreover Japan itself has, for the past decade been diminishing their own home bias, undoubtedly a financial sojourn they deeply deeply regret. Then there are the fundamentals. And for Japan, they suck. Over-dependence upon exports, horrific and deteriorating demographics, worst Govt Debt to GDP ratio in the developed world, scarily making Italy appear positively prudent, and interest rates that as unappealing as anything out there, not even mentioning a political process almost as dysfunctional as that which enabled the sub-prime fiasco (exemplified by the near-suicidal attachment to whaling and the seeming inability of the Keidanren to garrot the lot of them in the name of Japanese self-preservation. Last, there is the chart. Yes the world is different. Yes leverage will be diminished going forward. But to a contrarian, none of this matters as these pictures are like a red cape to a bull.

I cannot tell you precisely when this reversal will occur. But I feel it in my bones when something has bungeed too far and is set to reverse, and I reckon it will be shortly after the new year. But it will sharp and vicious and bodies will assuredly be piled-up at the exits. This prognostication will undoubtedly come as music to the MoFs ears, for there must be little cheer these days in the Ministry, with the exception of feeling fortunate NOT to be a member of the Treasury team in Washington.

Symmetrically Bold and Decisive?

I read this week's leader in the Economist and it has irked me. "Bold and decisive action" is what it called for, to muscle the global economy back on a path to growth, and to address the threat of deflationary spiral. "Bold and decisive action" indeed! What irked me was not the call to arms, as it has irked others, for I will admit to being reluctantly though pragmatically sympathetic, but rather the hypocrisy of the call NOW by the self-professed champion of free markets.

For it should be obvious to all NOW, that the reason why we are here, NOW, is the very lack of bold and decisive action by leaders, monetary authorities and regulators to address the inexorable build-up of excess credit creation, asset-price bubbles, as well as unsustainable fiscal policies coupled with unaddressed mercantile and exchange-rate policies in Asia. As such, any editorial call-to-arms should be prefaced with a "mea culpa" for admitting that their prior apologetic stance towards policy and regulatory neglect was incredibly short-sighted, for it not only fostered unimaginably large mis-allocations of resources, but created problems of such magnitude that large-scale socialization becomes the only viable option to prevent something approximating systemic collapse. This last phrase may sound like hyperbole, but most - even the Austrians amongst us (including perhaps Hayek too, admittedly in his old age were he alive)- would admit it is closer to the truth than not. It seems fair then, that any such mobilization of resources, or call upon the populace (and its descendants) to foot the bill, either through the burden of debt, or the imposition of a future inflationary regime, must highlight and categorically admit past mistakes, clearly for the avoidance of future doubt.

Failing this, there remains (for such an Editorial Leader) possible redemption for their lack of a mea culpa, if they perhaps attempted to quantify the present value of past benefits deriving from said policy neglect (externalities included) against the present value of costs and lost output attributed to mother of all post-war busts. But alas, The Economist is silent. Sadly, I am not a sufficiently qualified macroeconomist to weigh up such a complex cost vs. benefit question. But it is my belief - whether derived through my financial Calvinist sympathies - that we passed that threshold sometime in the latter part of the last decade (1997 ?!?) at about the time that "irrational exuberance" was banished from the ex-FRB Chairman's metaphorical arsenal. And in passing that threshold, each dollar spent thereafter was a dollar yielding diminished marginal returns to the future for the sake of present consumption thereby disastrously delaying the confrontation with fiscal and financial realities that would be met, sooner later, by market forces if not address directly through policy. Yet, it ismmy hunch, that even if it were - in pure financial terms - an economic wash (which it may very well be), the erosion of systemic confidence, the squandering of the commercial flexibility and diplomatic advantage attached to the Dollar as the global reserve currency, the impact of volatility upon investment decisions, the unnecesary delay by (primarily) Anglo-Saxon nations in converging their lifestyles and finances towards sustainable levels with their deleterious effects would likely tilt the cost vs. benefit determination in favor of more prudent fiscal and monetary policies yielding more moderate growth punctuated with mild rolling recessions - a proverbial victory for the tortoise over the hare. That's my story, and I'm sticking to it, until plausibly convinced otherwise.

There was no shortage of American triumphalism following the dissolution of the Soviet Union. And be certain that I shed no tears for this event, for conclusions regarding the inherent lameness of Central-Plan Economics were not wrong. But make no mistake, the decade since "irrational exuberance" was banished should be seen as an unmitigated failure of the unmitigated market, and here too, we should shed no tears in writing its epitaph. Issues of grandest importance indeed. I just wish more of our opinion formers would have had the humility to accept their culpability.

Of Perfect Storms and Horses's Asses

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

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

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

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

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

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

Please Don't Tell Anyone "I Suck"

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

Buyer's Angst

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

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

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

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

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

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

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

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

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

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

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

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

Financial Haiku Open Day

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

Half Full

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


Remorse

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


Tapeworm

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


Aesop

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

That Credit Crisis Xmas Menu (in full)

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Aperitifs

Post Millennial NV Bubbly 

Chateau Kerviel, Cremant de Bourgogne

Brazilian Blood-Orange Emerging Market Caprinha

Crunchy Xmas Punch (Vodka + Kool-Aid)

* * * *

First Course

Sashimi Fillet of Quant Arbitrageur

Northern Rockfish Fricasee

Grilled-Icelandic Shrimp Cocktail

Swiss [Bank] Mini-Fondue

* * * *

Intermezzo

Short-Squeezed Lemon-Lime Sorbet 

* * * * 

Main Course 

Corn-Fed Not-So-Prime Sirloin Roast

TARPfish Brochettes (avec sauce surprise)

HF Manager's Po' Boy Special (with redemption sauce)

Mrs Watanabe's "Inside-Out" Carry-Trade Dragon Rolls (ZIRP filling)

Lehman-AIG Surf-n-Turf

served with... 

Fully-Coupled Asian Mercantile Gratin 

Julienne of Private Equity & Emerging Markets

Roasted Commodities of the Day (halved or quartered)

* * * *

Dessert

Congressional Oversight Pudding 

Destagflationary Tarte w/creme anglaise

Crepes Distressee

Unemployment Souffle 

* * * *

Cioffi & T+1

Petits Two's

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

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

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

Obama is a Marxist.

Obama is a Socialist.

Obama is a Liberal.

Obama is an extremist.

Obama is a closet anarchist. 

Obama is a Communist.

Obama is none of the above but IS the most leftist Senator. 

Obama is a Keynesian (OMG! no not that!)

Obama hangs out with terrorists.

Obama is Bill Ayer's Manchurian candidate.

Obama IS a terrorist.

Obama was a drug addict.

Obama is a drug addict.

Obama is a muslim jihaddi.

Obama wants big government.

Obama hates white people.

Obama wants to substantially raise taxes.

Obama LOVES taxes.

Obama hates free trade.

Obama LOVES free trade - especially NAFTA and illlegal aliens.

Obama is an instrument of the Annenberg foundation (which are communists).

Walter Annenberg was a secret co-conspirator of the Rosenbergs. 

Obama hates America.

Michelle Obama hates America.

Michelle Obama has an eating disorder. (she isn't fat?!? -ed)

Michelle Obama was crack whore.

Michelle Obama  IS a crack whore.

Obama will order federal marshals to come into your home and take your gun away.

Obama will allow criminals to keep their guns.

Obama will give your guns to criminals.

Obama had gay sex with Louis Farrakhham.

Obama will appoint Jesse Jackson Secretary of State.

Obama will appoint Jesse Jackson Chief of Staff.

Obama will appoint Malcom-X as Chief of Staff.

Obama is an illegal alien.

Obama hid his illegal alien relatives and is therefore a felon.

Obama will establish a US version of Soviet Union's NKVD.

Obama is a liar.

Obama was liar.

Obama will be a liar. 

Obama hates freedom.

Obama hates democracy.

Obama hates religion.

Obama hates the Jews.

Obama hates my family.

Obama hates small businessmen.

Obama hates plumbers.

Obama hates God.

God hates Obama. 

Ahmadinejad Loves Obama.

Obama loves Hezbollah (and don't forget Hamas!)

Obama DOESN'T hate gays.

Obama's father was a goat herder.

Obama refuses to recite the pledge of allegiance.

Obama will ban the Pledge of Allegiance.

Obama is an arab.

Obama drinks tea.

Obama's favorite music is "Puff Daddy".

Obama will take away your healthcare.

Obama donated money to the PLO.

Obama hates babies. 

Obama is NOT African-American...(He's Kenyan-Hawaiian). 

Obama hates the Constitution (and will re-write it).

Obama had sex with your grandmother.

Obama was caught on a secret videotape torturing puppy dogs.

Obama will plough under little league fields across America.

Obama will make Americans play "Cricket".

Obama will force college students to eat vegetables.

Obama will change the name of America to "West France".

(ok enough for now...) 

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