Monday, January 21, 2008

Out With The Tide

Change is nigh. There are many things, and much flotsam, that I (perhaps contentiously depending upon your values) will be pleased to see [permanently] wash back out to sea, as the unnaturally not to mention imprudent high tides in credit and leverage recede.

10. The Robb Report.
The virtues of a closet full of automatic watch-winding machines; How to avoid choosing a naff colour for your Bentley; Tips for in-air catering when flying private; Getting the most out of that "charritable" contribution"; Recruiting honest indentured servants; Please. It's publication cannot cease soon enough.

9. 2&20.
Everyone knows it's a stupid way of compensating people, that , it promotes asymmetric risk-taking and creates irreconciliable agent/principal dilemma. I can think of a hundred more clever ways to compensate talented people that aren't stupid.

8. Jim Cramer.
Ahem. The world is littered with talking heads of the past, who flamed into irrelevancy. People even tire of the great, such as HL Mencken, who spent his last days mostly unread, writing books for a small audience. You'll know the worst is over when CNBC cancels "Mad Money" in favor of "The Bill Gross Hour" dedicated to the preservation of [my] capital.

7. Momentum Investing.
It has worked in the past. We don't know why it works. There are few solid reasons why it should work, and plenty of reasons why it might NOT work in the future. YET it continues to work. I have a low conviction on this one, but would nonethless be pleased to see its back, if only because in general, it so-offends my sense of rationality, and in particular because so many good and honorable men have eventually been worn down and reduced to chasing momentum, itself recursively reinforcing the phenomena.

6. Leveraged Carry Trades
IF you were designing a global monetary system charged with something as important as the setting of prices to determine the efficient allocation of resources in the coming intervals, would you really give nearly infinite leverage to the most feckless and mindless of headless-chickens so that they make the system virtually unmanageable and who's sole purpose is seemingly to assist in the driving of market prices as divergently far from something resembling an intermediate-frame equilibrium that the system itself might be threatened?!?!? In my mind, it makes about as much sense as The advantaged ,monopoly position of "The Specialist" on the NYSE, which is only a notch more ethical than the tampered one-armed bandit.

5. Destruction of Pristine Wetlands for Shitty Timeshares
Yes, you too can own an island fraction-ownership share in The Comoro Islands, or get in on the ground floor of the next Dubai: Tristan da Cunha!. Never mind that there is only 2 scheduled flights a month. It's waterfront and it's yours! Well sort of. Along with 72 other suckers who buy it. IF it gets built. Perhaps there is some vig in """, a place where people can trade interests in half-finished developments that might, during the next bull-market in credit, (and when cold-nuclear fusion as an energy source is commercialized), get completed.

4. Hummers Hummers and Hummers.
Is there anything that says "I am a dick" more than a Hummer? Obama could get some easy mileage from a "Humvee Tax". Nuff said.

3. Ubiquity of Private Equity.
What do YOU want to be when YOU grow up? I want to be a Private Equity Buyout Specialist!" "You do? Well, as long as we're dreaming, I want to be King!!" The assumptions for IT to make sense on a nearly-mass, or simply crowded scale (London take note), themselves made no sense. What were they thinking? And what were the lenders, and their bosses, and their bosses' shareholders or trustees thinking? Was it mass "ergot" poisioning?!?!

2. Rising Inequality.
Stupid levels of inequality are economically disingenuous and socially destructive, as are stupid levels of equality. There is a huge range in-between in which to experiment. Near-exponential returns to leveraged asset owners, at the expense of ordinary savers and pensioners, was cruel in the extreme. As my five year-old so poignantly taunts: "See ya! Wouldn't wanna be ya'..."

1. Extremely Stupid Macroeconomic Policies.
OK, guys, when the worst of the tempest has passed, let's get down to business and agree on a couple of things: IF we're going to have an open exchange rates system determined by floating rates, no more accumulation of foreign reserves for mercantile advantage; no more setting of domestic monetary policies without consider of, and some respect for, the impacts upon the ROW; Guys (mostly suck-ass elected officials), please keep your fiscal policies in check - especially military spending which is a bit passe; General harmonisation of say, social and consumption taxes helps prevent the most abusive of arbitrage; Carbon taxes all around; And, rich peoples, will you please figure a way to pay for the negative externalities you;'ve shifted to the poor places; bio-fuels? Nope, not from food crops please. And poor people: emulating the western "Les Groseilles" or the consumption-oriented noveau riche may seem like the ticket to keeping your peoples docile, but its really a ticket to nowhere and oblivion; And rich have to lead by that? Like with children, Parents must lead forst and foremost by setting and living a good example! We have a word for those who fail in this regard, and He (and its usually a He) is called "a hypcrite".


Anonymous said...

Being a great fan of HLM, let me remind you that he coined the word "booboisie" for a reason. Next time you are in an elevator, or outside in a crowd, stop and look up. You will soon find a number of momentum investors joining you.
As for 2 and 20, all I would ask is that we allow
negative numbers into the computation. SAC et al would need to set aside reserves for claw back if required. It might change their perspective. As to everything else, AMEN.

"Cassandra" said...

ivan h - its not the amt of the incentive that irks me, i just think it should be "banked it" before being paid (or discounted allowances accrued for future impact and unwind costs under condition of uncertainty). One shouldn't be allowed to use the weight of money to do an impact trade in ones favor and collect whole fees when only the "positive" half (from mgrs perspective) of the impact has been baked. A long-term hold back would do the trick with a % annual release, and (as you say) symmetrical clawbacks on the downside in subsequent years.

Mencken was vilified for being right about the absurdities of the roaring twenties. Just like the show-kitchens in Gourmet or Bon Appetit will be seen once the tide washes out, to be absurd, in a gruesome Nancy Reagan sort-of-way

Anonymous said...

Re: incentives, agreed. Re: HLM, for your delectation and amusement, if not already familiar, google "The sahara of the bozart"
for, if nothing else, a masterpiece of ridicule.
Best regards, IH

Anonymous said...

As I start to write this (7:35PM ET), the Nikkei is 12,704.92, down 621.02 (4.66%) -- and still plunging as I write -- after a similar plunge yesterday.

Any comments as to why? Is it export dependence -- payback time for decades of mercantile manipulation of exchange rates to build an economy too dependent on the US consumer? Or is it some side effect of the carry trades?


You have a extremely interesting blog, Cassandra.

"Cassandra" said...

Nice to hear from you JM!
There was IMHO as I mentioned 3 or 4 posts ago in "GET ME OUTTA HERE" some large-scale unwinding, that involved both long and short positions. "Who" or what is anyone's guess, but the volume pick-ups and outperformance of high-short interest stocks were tell-tales IMHO. There must have been a coterie of currency-hedged longs some of whom have throw in in the towel, but the fall in the nikkei has handsomely outstripped the rise in the yen, blowing away my forecast some time ago that that as long the US held up the yen would likely strengthen more than the nikkei would weaken.

The case for elevated worry in Japan is clear:
- evaporation of machinery orders from china
- yen +20% vs. USD & Euro
- Fears (rightly) of a US demand implosion
- rates already pinned to nearZIRP
- worst fiscal position in OECD (not even dented during one of Japans longest post ww2 expansions)
- increasingly probability of synchronized global slowdown
- shitty demographics

There are clearly people that want out - be they long-only, banks' prop desks or HFs. But as often happens, people underestimate the impact of their demands for liqudiity when several fight for the exit during times of turmoil, making it perhaps less the fact that so MANY people are desparately seeking exit, so much as buyers have walked away either because they've been K.O.'ed (i.e. large arb/market-maker types) or due to leverage restrictions, or desire to keep dry powder. This feels like value destruction into a vaccuum rather than predatory or anything nefarious. There will undoubtedly be more ripple from deleveraging to come. Next stop: gold & prec metals & energy complex (check out nice temporary ST op to short coal!!).

Sorry nothing more profound. There is cheap cheap stuff out there of all variety which in the bigger picture is at or near enought to nadir to buy scale down as long as anyone wants to sell, at least versus other stuff that will other follow shortly or underpperform on the vicious bounce sure-to-come when authorities concede some further easing when not expected. Shorting into vapor is rarely wise

Anonymous said...

Very interested in "Next stop: gold and Prec metals". Can see energy drop, but harder to see gold, unless we're talking real deflation. Are gold bets that leveraged?

Due to over active imagination, have just placed insultingly low bids on BSE and BOVESPA indexes. Friends in India looking for strength at year end in their market. But in that deflation scenario, which is certainly possible, might usual P/E/G measures all blow down too? Just curious.

#3 is one of my favorites for the trash heap since PE is just another name for LBO or morons borrowing hugely and betting on public's gullibility. Like, the heartless taking advantage of the helpless in #2.

Anonymous said...

Great post Cassandra. Especially the on the carry traders.

"Cassandra" said...

OV - Are gold bets that leveraged?

---yes, methinks. Futures certainly are, and much physical trade is financed, at least in part. And many spec positions are part of multi-strat or other such HF that is levered.

As for deflation spiral impact upon PEGs, i supppose in the extreme, pessism would become so severe that forward earnings would invert, and growth could be come negative before turning negative after which PEG has meaning. PEG-based strategies are not real winners anyway, and in any event are typically used in relative or rank-ordered comparisons, but as withn any factor there are limits to their usefulness.

As for PE, I am in the camp that a little PE is alright, particularly in the smaller enterprise where listing brings little advantage and compliance/admin is expensive per unit of market cap. Being private can bring stability in such cases. Myh issue as a doe-eyed liberal is that slash&burn&rape PE serves no one interests except the financial visigoths, but that there are negative externalities associated with such thuggish behaviour that are not in the Public's Interest, even taking into account the potential short short-term economic gains resulting from such raiding parties.