Is Something Wrong with Certain Kinds of Trading?

Beautiful as France is, it's ski resorts are filled with pesky, queue-barging coquins with all their attendant bad manners, trampling upon one's skiis, and mayhem creation. It cannot help royally tick one off after civic-mindedly and patiently waiting in a queue and/or letting others take their deserved turn. As disturbing is to meander down to the hotel swimming pool after breakfast only to find that a contingent of Germans have staked out all of the pool chairs with their towels, never mind that they are off sightseeing on the tour bus, or being buffed and pedicured in the spa. Not dissimilar are the feats of the notorious Frigate Birds who routinely make their diets eponymously stealing the fish caught by pelicans, boobies or other more industrious birds.

What is their common thread? For one, they are reasonable analogies for a flavour of low-latency, high-frequency, order-sniffing, front-running strategies that parasitically intermediate real buyers and sellers, but only after excising a requisite toll that CUNY's Donefer (thanks to TD at Zerohedge for posting the presentation bullet points) estimates to be in the range of USD$15 to 25 billion. Of course not all short-term traders are predatory. and not all predatory traders are short term. However, given the estimated sized of frigatted profits, responsible civic-minded investors should at the very least ask some questions about its legality. desirability, as well as the enforceability of restrictions (not necessarily in that order) and the philosophically slippery slope and unforeseen externalities any restrictions might ultimately yield.

But before I have my say, allow me first to express my admiration at the undertaking. I admire it's cleverness, its technical feats, it's use of probability and game theory, and it's predation upon what is essentially others' doltishness, not having yet come to terms with technology or conceived of others' misuse . Having said, that, this still doesn't mean we - the royal "we" - should admire it or even encourage it, but we can still admit it IS clever - in the same way that the locals in Hong Kong would watch the Barings booth, and sell futures whenever the Barings phone rang on the floor, having learned that most of their index arb was long stock and short futures and that a knee-jerk sale was a reasonable bet for a scalp, or like the clever URL-nappers who registered and held hostage names like HOTELLS.COM and HOTELSS.COM and all other poorly spelled permutations, re-directing mis-hits to other places until the purveyors grudgingly bought back the misspelled real estate. Saints or sinners - what sayeth you? Or perhaps you nihilistically matters not in the least.

But really, how should we feel about it?? That USD$15 to 25 billion is coming from somewhere - probably your mutual fund, your defined-benefit pension fund, and possibly your own pocket via your P.A. While it's true that no one dies as a result of the clever gamester-ing, almost everyone is hurt, albeit small. Is this sufficient violation of the public interest to warrant action? Let's examine the boundaries: At one end, "front-running" of the contrapreneurial sort (i.e. on 100% information) is decidedly illegal in most civilized markets. At the other end, speculative buying on reasoned information or no information (like that peddled by CNBC) is wholly acceptable and encouraged. But predatory, parasitic order-sniffing strategies lay somewhere in-between though closer to Darth Vader than Alec Guinness, for one might aptly describe it as front-running on 75% probable information where said information is cleverly inferred from quasi-public, though admittedly obscure and difficult to tease-out information. This is not an easy case to find fault or guilt, even for the likes of Solomon. Call it legal-to-the-letter, but with substantive externalities negative to the public's interest.

But perhaps there are some redeeming qualities to the undertaking of parasitic trading based upon hidden order-revelation and algorithm-spoofing that shakes the electronic tree yielding the sought-after fruit? Perhaps they add liquidity - qualitiatively or quantitiatively? Errrr, methinks not. Their pings, probes, posts and cancels, add nothing to market quality or integrity. Their "firm" 100-share bid or offer is a quintessential poison chalice. You taste it at your peril and ultimately with regret.

One must look outside the marketplace for their "positives". They do spawn technological advances, and neaten the parks and libraries in Stonybrook, LI while increasing the municipal coffers in Chicago. It might be thought to generate tax revenue, though if its a zero-sum game, there is no net gain systemically. It has a Randian free-to-pursue cleverness-rewarded element, but even here, the conentious-philosopheresse (with lower-case "p") might begrudgingly yield on logical grounds of harming the public interest.

Might the main exchange itself have something civically useful to say about this? Sadly, the civic incentives of the exchange were jettisoned long ago, and are now somewhat shortsightedly intent upon solely maximizing turnover and volume, on behalf of its shareholders rather than pandering to the interests of such pedestrian constituents as the listed companies and their investors - irrespective of their primacy to game itself. Sympathy for the buccaneers runs deep, however - perhaps by tradition for specialists were themselves monopolists who systematically abused privileged information -however inimical this was to the community at large.

In the realm of The Trade , it's hard enough for bona-fide buyers and sellers (with horizons of longer than intra-day) to locate each other and maximize achieved results, or minimize slippage, without service providers themselves and all the minions privileged to transaction information front-running (whether large or small) without a dedicated army of thieves kitted-out with the highest-tech gear, and the shortest and quickest lines to the exchange tripping you up, knee-capping you, picking your pockets, at any and every opportunity. In this sense, they are not merely annoying gnats to be waved aside, nor even pesky mosquitoes, but nasty flesh-tearing financial midges or black-flies inflicting real damage. "Ouuch....f*&k that hurt!!"

Which begs the question: in the absence of pecuniary restrictions (message fees, fees for cancels? Tobin taxes? etc) or other yet-to-be-conceived outright heavy-handed rule-making, how can normal participants fight back, and snooker them in return. Hidden cameras watch the croupiers and box-men, keeping them honest. Surveillance exists on the few remaining pits, ostensibly though ineffectually to try to catch the covert shin-kicks, ear-pulls and information abuse that was rife anywhere rules or privileged information could possibly be capitalized into a dollars. But employ a series of probing orders, or a cute predictive algorithm upon a numerical sequence that does nearly the same thing (albeit with an element of risk and uncertainty) with the same intention, and Presto! one is sanitized and legitimate and courted by the very exchange whose constituents one preys upon. Hmmmm. Something doesn't seem quite right. They serve no purpose, even if purposefulness is over-rated.

Still, the uproar outside rantings of ZeroHedge is decidedly muted. Exchanges make money. Brokers make money. Libertarians dislike any regulation or restriction. Perhaps regulation is simply not possible and pecuniary control is not desirable. But there remain weapons at the disposal of both perturbed traders, and the daring and the bold. Guerilla tactics. In simpler times, when Atari elicited a "wow" instead of a "huh?", this might have been achieved by leaving sizable but plausible limit, stop or MOC orders, then pulling them to see who and how much was leaning on them. Now more cunning is required. Torquemada-like fear and surprise. Spoof them back. Double-spoof. Triple spoof. In size. BOOOO!! Randomize. Maybe relax or eliminate all restrictions upon transaction etiquette, thereby allowing trade with oneself to paint the tape as required shake the parasites, perhaps leveling the playing field. Or merely to make it more like quick-sand. Declare all-out war so anything goes. Let - no, encourage the 'bots to fight and predate each other. "Greetings, Mr Anderson". Is this real or are we in the Matrix??! Hunt the hunter. "Kill the bear" as Anthony Hopkins rallied in The Edge. "What one man can do - another man can do!!" Heck, it's not about investing anymore (if ever it was) - its about winning the game, and as this time of The Quickening approaches, an algorithmic battle to the death, an epic battle cannot be far behind, leaving in its wake, RAIDs, bandwidth, over-educated Russians with no scrupples, recursive bloodshed and, then yes, SkyNet...

And all the while, the thoughtful genuine investors, will watch with morbid fascination while exiting such venues and making greater use of alternative auctions that somehow keep out the riff-raff, reveal less and more optimally perform the true role of the exchange - to raise capital for growing enterprises, to match true buyers and sellers in the secondary markets.

Farewell JWM

So farewell
then
(yet again)
John W. Meriwether.

Old saws
abound
to describe
your fickle luck
and less-than
illustrustriousness.

Such as
"Fortune favors
the bold"
errr not
always.

"Thrice lucky"
perhaps?,
ummm.
not quite.

"The cream
rises to
the top?".
Evidently
not.

"There's a
sucker born
every day...",
ah, yes, that
will be your
catchphrase.


(with usual apologies to EJ Thribb and PrivateEye)

Anything But A Financier

Attention all media personnel:

Please cease referring to Alan Stanford as "a Financier". If your prose is feeling naked and you are looking for an appropriate job description might I suggest "Ponzista", "Contrapreneur", "Confidence Man", "Trickster", "Financial Huckster" "Snake-Oil Salesman", or "Pathological Liar", Barricuda, Bilker, Bunco, Cheater, Clip Artist, Crook, Deceiver, Fleecer, Flimflammer, Fraudster, Hoser, Hustler, Mountebank, Scam Artist, Scammer, Shark, Sharpie, Smoothie, Swindler, or Antiguan Anti-Christ. Should you feel these tags a tad premature (editorially-speaking), do not hesitate to preface it with "alledged", or for those willing to go out (but not too for out) on a limb, "likely".

Thank you,

"Cassandra"

The Reith Lectures: 2009

BBC's Reith Lectures are always both thought-provoking and illuminating. This year Harvard's Michael Sandel examined morality in a variety of venues - first markets, then politics, and, the third coming up, in science with respect to genetics. The first two of Dr Sandel's talks are well worth one's attention, as I am certain the final two will as well.

Needless to say, I am a big fan of the both the format and purpose. They are, at once dense yet approachable - attributes that in an ever-increasing world of complexity is useful for non-specialists to fathom the nuances of the deliberated subject. The BBC describes their history and purpose as follows:

The Reith Lectures were inaugurated in 1948 by the BBC to mark the historic contribution made to public service broadcasting by Sir John (later Lord) Reith, the corporation's first director-general.

John Reith maintained that broadcasting should be a public service which enriches the intellectual and cultural life of the nation. It is in this spirit that the BBC each year invites a leading figure to deliver a series of lectures on radio. The aim is to advance public understanding and debate about significant issues of contemporary interest.

The very first Reith lecturer was the philosopher, Bertrand Russell who spoke on "Authority and the Individual". Among his successors were Arnold Toynbee (The World and the West, 1952), Robert Oppenheimer (Science and the Common Understanding, 1953) and J.K. Galbraith (The New Industrial State, 1966). More recently, the Reith lectures have been delivered by the Chief Rabbi, Dr Jonathan Sacks (The Persistence of Faith, 1990) and Dr Steve Jones (The Language of the Genes, 1991).

While some will argue that the internet and huge range of similar content now-available has made this redundant, but I'd argue that the exponential the Public Interest is still-served by the mediation and editorial policy of a trusted source. Yes one can still argue about who best serves this role, but I am pleased to benefit from the Beeb's filtering on our behalf. Hope you enjoy them...

Moving Blues

My family and I are moving. Across an ocean. Large upheavals for the entire lot of us. Leaving friends and an indolent but simply honest way of life will be challenging for children and parents alike. But this is no time for regret as the die has proverbially been cast. As a result, I've had little time to write - much to my chagrin - hence the spartan posting of late, as the practical details associated with sifting and sorting more than a decade-and-a-half of accumulated shite and entrenched life that seemingly must (and now as I edit this, has) found its way into boxes and crates before floating across the azure, and hopefully placid (lest the container slip off), sea.

Down-sizing is a time-consuming though cathartic exercise. One gets lost in the endless photos, letters to or from friends, loved-ones now passed and old flames, pondering the whereabouts of old acquaintances whose address on a scrap of paper or business card has been used as a bookmark in a half-finished novel, or in ruminations upon mementos such the unusual brass desk calendar (something like this) with a fine 70-year old patina that turns to flip the two-sided cards within in order to change the prevailing day, (twice at the end of the month if it's a short one) ... one of the few tangible relics I possess from my grandfather, that made the cut on all prior moves, and will, again, this time. As I packed, I wondered of the origins and stories of these oddities and curios - the seemingly endless accumulated junk like the pair of E&Y mini-binoculars handed out at some function or another, never used, having consumed resources, the energy of asian labour, shippers diesel, the forwarders trans-shipments, multiple deliveries and manifests that brought it hither only to land (with one of it's siblings, no less) in a drawer, still-protected by its hermetical seal. Multiplied by five people, and untold drawers and shelves, now binomially at the crossroads between the increasingly pregnant rubbish bag, and membership in the growing tower of #42, #52, and #62 cartons, the exercise is arduous. Will the stuffed animals ever be re-cuddled, the re-match of "Clue", ever re-played, or the old cards and letters ever be re-read?!? Yet a few days later, with the boxes gone, I cannot tell you what became of most of them, such was the frenzy and blizzard of the removal. Now, I am profoundly unsettled. Not because of the impending move, but because I am not proud of the hoard. In fact, just the opposite. I am at once shocked and horrified by the obscenity of clothes, linen, PVC, toys, games, DVDs, CDs stuffed animals and all type of shiny, glazed colourful bric-a-brac that we human magpies collect (or, at least my family unit has collected). And yet, prior to this, I thought (or romantically imagined) we were parsimonious - at least compared to our peers. "Quality, not quantity". "No No No, you CANNOT have that - it's a waste...". The unending pleas to grandparents NOT to buy more junk. "Need little, want less", the wise catchphrase, over at Jesse's Cafe I hold out as a core value to demonstrate good non-acquisitive non-materialistic values. And yet, before me are boxes with too-many-multiples and sets of errrr ummm well, nearly everything, evidence I've failed in my attempts. Despite continual shedding of excess to friends, acquaintances, and the needy, the substantial purge of what will shortly be incinerated, and the sale of all the pedestrian furniture, devices that will not operate on 220v, what remains seems inconceivably vast, I feel empty, and ill as a result. I wish for that feeling when I first discovered DT Suzuki, identified with anicca and annata, and swore a now-broken oath that I'd never find myself where I presently am.

Analysing how this happened without my noticing, I begin to suspect that there is something allegorical in my predicament, both with respect to The Credit Bubble in general, and the erosion of America's fiscal position, and household balance sheets in particular. For just as I never set out with a plan to mindlessly consume and acquire, so too did America not consciously embark upon a credit-induced death-wish, nor the State and Her households conspire to burden themselves with untenably servicable quantities of debt. Incrementalism was the path. Manana, manana, manana was the mantra of denial that insured the difficult choice, the painful option, the road less travelled, was rarely contemplated let alone set out upon. Just as one doesn't become hugely obese by the pull of a rip-cord, the extension and multiplication of credit is not instanteously conjured. It is a slow-motion result cumulating from innumerable small decisions, each not life-threatening and reversible in themselves, but when conjoined, and embedded in feedback-loops, result in veritable disaster, be it fiscally, in one's waistline, or, in the accumulation of stuff. One's child desire's a brightly coloured plastic widget-thinger. One is tired, so one relents, makes the bargain with the devil and buys it - a respite from incessant demands, a bribe to keep the polity content. But intuitively, from wisdom and experience one knows it will rarely be played with thereafter, as are the multitudes of birthday presents, holiday gifts from family close and far. One knows the moment of weakness, far from currying favor or satiating demand, will only amplify it. One knows intuitively it's wrong and wasteful. But few are strong enough. Few people in the heat of that decisive moment - be it a mindless "toy" or an omnibus appropriations bill take into account cost vs. benefit analyses or an assessment of negative externalities. A plant, a book, a poem, a perennial bulb, a sketch, a charitable donation, all devalued in favor of PVC plastic bakelite injection molded synthetic rayon nylon stuff with imagination engagement values measured in the minutes or hours, but environmental half-lives measured in the centuries. Or deficit-spent consumption at the expense of investment. It is the same. How did we get here? Haven't more people noticed?

Does this stuff have value to anyone else? Would it find a market in its hovel of origin, outside of the salvage value from the materials from which is was constructed? Were they thinking of the gullible buyers, as I wonder about who made it? Decorative votive holders? Harvest motif napkin rings? Endless junk and clutter, some once useful, others never approached any reasonable utility. There is no secondary market value for most of it. Even the local charity ceased to accept clothes excepting those of a suitable pedigree. Beggars, it would seem, can, and are, choosy.

Now, I have shed [much of] my excess, filled my boxes, and sent them on their way in the container. Now, I am living in a minimalist purgatory for a couple of months until my [remaining] belongings arrive at their destination. I miss none of it. I feel liberated. If the container fell off of the ship, was waylaid by Somali pirates, or jack-knifed on the A7 enroute to delivery, I would shed no tears. I have my family, my health, a piano, some books, a trusty bicycle (which I've yet to figure out how to bring to its new home), and my running shoes. But this is potentially where the allegory stops. The last twelve months of de-leveraging at first glance, appeared to provide some strong introspective incentives. The upper boundary of aggregate credit appeared to have been reached, and the consequence of the mass-realization of this fact, combined with the cascading impact upon asset prices of system-wide reactions was too much to countenance. While I've satirically and bitterly mocked how we got there, as we were getting there, I do believe in the predicament at the moment, that stabilization of the patient was necessary. Just seven months ago, we had innumerable 'Ghost of Xmas Past' moments. "Never again" , "How could we have been so foolish?" "XYZ is the new normal", etc. Now, with asset prices on the mend, and feedback loop, well, feeding back in the prevailing direction, there is the belief that the worst is passed. Recovery is purportedly here (at least if viewed through the eyes of risk premia). Jimmy Stewart is already forgotten, as are the sleepless nights of what systemic obliteration might have meant. The promises of change and pleas of obedience to the deity of choice have been transgressed. Or at least so say the price action of the commodity complex and diversified inflation hedges.

This may true. But the crucial question, put most simply is: Has the denoument of the crisis passed, or is this merely the eye of the storm?? I am but an economist with a very small "e", however, as I wrote in favored post "If You Can't Tell Who The Sucker Is...", the question of what is likely to appear to be normal in hindsight is not (if this is The Big One as I believe it is) what is popularly perceived. "Peak Credit" has come and gone, and with it, the Era of Stupid Loans passed - for this generation anyway. In hindsight, we will wonder NOT why credit was crunched, but how the hallucinogenic wheat fungus that caused those with capital to, along with pixie dust conjured from it, to give it away to anyone and everyone who wanted it with such reckless abandon. So IF the era of Stupid Loans is finished, there will be no recovery. There will be precious little inflation, and it is likely deflation will persist.

I want to be bullish. I want asset prices to already be south of some long-term equilibrium, and be ready to rise. It would be less painful for The People. But with employment shocks still to ripple through the chain of dependencies, household balance sheets compromised, continued real-estate indigestion, our position between a fiscal rock & a hard place, and continued financial sector deleveraging, we collectively are the place that I've just been. We collectively are just beginning to sift through our shit - mentally sizing up what's important, what to take and what to leave. We are just beginning to realize that tough choices lie ahead - in all facets of life. We are just beginning to understand that these choices do not include 5-litre Cadillacs, absurdly over-applianced kitchens, or $5 iced-frappucino lattes. But, on the bight side - you won't miss most of it as much as you ex-ante believe you might...

Don't Break the Law When You're Breaking The Law

When I was in Aspen in April, Patrolman Joe sirened me to a stop as I came over the Bridge into town. "What's the rush Sir? - Is someone ill??" "Do you realize you were doing 37 in a 25 zone?" "Ummm ummm no sir, I KNOW it's a 25 in town and I crawl safely like everyone else there. I thought I'd slowed down. I didn't realize the zone began at the bridge... I have no excuse, as I was clearly guilty".

"License and registration Sir..." he demanded politely. "Are you going to be arrested?!? my son called from the back seat. My daughter had her head in her hands embarrassed by her groveling parent. My spouse gloating with "I told you so looks and tongue clicks". He ran my license. Didn't catch my outstanding offense from 1987 for non-payment of a non-applicable fine that I'd neglected to clean up. Back he came. "Now, IF I were going to give you a ticket it would be $140 and three points. Of course, you're not from here so I am sure you don't care about the points. All the same, it would be expensive. But, I can see you're well-intentioned, so I'm just going to give you a warning...Please drive safely in our town!

Two months later, they pulled over another hedgie (report here). Perhaps the arresting Officer was invested in the driver's Fund since since the offending Driver of the Green Land Rover was clearly not as lucky as your's truly. I still remember the sagely advice of a local villain where I grew up (obviously unheeded by the driver below): "Don't Break the Law When You're Breaking The Law..."

(hat-tip CB!!)

So Farewell Then...

So farewell
then
Pequot Capital
Management
Hedge
Fund.

You told
investors
you
channel-checked
more accurately
than
anyone...

...counted cars
in a
fab's lot
at 9pm
to stay ahead
of the
herd.

And you didn't
dispel flattering
rumours
your Wharton interns
were dumpster-diving.
on your
behalf.

But it seems
your research
edge was
less-than
salubriously
on the edge.

Quite aptly,
'Pequot'
translates as:
"Men of
the Swamp"

Perhaps there
is more
justice in
the second liquidation
of the Pequot
than in
the first.

(With apologies to PrivateEye and EJ Thribb and posthumous ackowledgement to Greg Newton)

Trojan Horse Becomes Trojan Rabbit

Porsche's perfect Trojan Horse corner and attempted takeover of VW is, according to Bloomberg (and others), rapidly in danger of becoming a less-perfectly concocted "Trojan Rabbit". Had Mr Wedeking perhaps spoken with the Hunt Brothers, they would have learned that getting the price up is only half of it (and the easy half). Cashing out in full, and banking the plunder, as the Hunt's would have told them, is a bit more tricky.

I must admit that I am actually a bit sad to see it come unravelled (not having had a short in VW) since there was brilliance in shafting may of the self-professed smartest guys in the world (?!?!?) by suckering them in with a trail of seemingly free bank notes, before giving them the P&L wedgie of their lives and hanging them-up in public view by their short and curlies. But it appears that The Street may have the last laugh.

Caned!

This would be funny if it weren't so sad...

Perfect Revelation

In my post, The Perfection of Quantitative Easing, I ruminated upon the linguistic perfection of the phrase, wondering aloud who might have conjured such a wonder. The answer has revealed itself in this kind note below that was too illuminating to leave buried in the comments section of the post...

Richard Werner said...
I believe I am the originator of the phrase 'Quantitative easing'. The original Japanese expression is 'ryoteki kinyu kanwa' or 'ryoteki kanwa' for short. Both are, literally translated, 'quantitative easing'. Thank you Cassandra for your most wonderful description of the English translation.

I used the expression prominently in my articles in the Japanese press in 1995, 1996, 1997, 1998 (Nikkei, Japanese Economist, Toyo Keizai, Japanese Newsweek, etc.) to suggest the necessary and sufficient policy response to end the recession (I had predicted the Japanese banking collapse in 1991; in print see Discussion Paper 129, Oxford Institute of Economics and Statistics). I had already argued then that interest rate reductions, even to zero, won't help. What was needed was to stimulate the economy through the quantity, not the price of money - correctly done. I wanted to avoid expressions such as the figurative 'printing money' and the common 'expanding the money supply', not only because they would unnecessarily alarm Japanese lay readers, but also because these are traditional monetarist prescriptions, which I argued would not work (as the monetarists argued for an expansion of bank reserves). At the time I was chief economist at Jardine Fleming Securities (Asia) Ltd. and Assistant Professor at Tokyo's Sophia University and known as the BoJ's fiercest critic. The Bank of Japan adopted my expression in 2001 as its official policy. The BoJ used exactly my Japanese phrase, and in its English-language press statement literally translated it.

However, and this is a predictable irony of central bank behaviour, they used it is a cover, because they did not adopt true quantitative easing, and instead implemented simple monetarist expansion of bank reserves. As I had predicted, this could not work. Next year Japan will basically be in its 20th year of recession. One further comment: In my English-language articles and interviews that I gave I used the expressions 'credit expansion', 'liquidity expansion' or 'credit creation' (the latter being the most accurate description) instead of 'ryoteki kanwa', as the audience in the financial markets would then understand me more or less correctly. Anyway, shame I'm not getting license fees each time a central bank talks about 'QE'.
Professor Richard A. Werner, D.Phil. (Oxon), Chair in International Banking, Director of the Center for Banking, Finance and Sustainable Development, School of Management, University of Southampton. werner@soton.ac.uk
9:00 AM, May 14, 2009

Time of Your Life

It's a contemplative self-proclaimed "No-Finance Monday". As such, I will encourage you to enjoy one of my fav's with me. It's quite an archetypical theme, so I would be surprised if it doesn't touch most people, at even just a little.

Financial Psalm 16

Financial Psalm 16

16:1 Preserve me, Gold, for in you do I take refuge.

16:2 My portfolio, you have saveth, and it sayeth: “You are my Saviour.

Apart from you, I have no good thing.”

16:3 As for the silver and oil which is in the earth,

they are also excellent ones in whom is my delight.

16:4 Their sorrows shall be multiplied who diversifyeth into other assets.

Their offerings of bonds I will not accept,

nor hold such paper on my lists.

16:5 Gold well-assayed is my preference and made-eth my cup. 

You made my lot secure.

16:6 Your prices have risen making pleasant our faces.

Yes, our offspring will have a good inheritance.

16:6.1 Beware the false prophet, paper gold, promising false profits.

16:7 Blessed be Chris Wood, who resembleth Jesus, and has given me wise counsel.

My heart instructs me to stay long during the right seasons.

16:8 I have set Gold always before other assets. Because It is is heavy in my right hand, and shall not be moved from its Swiss vault without  countersigned instructions.

16:9 Therefore my heart is glad, and my relative purchasing power rejoices.

My portfolio shall also dwelleth in safety so long as Bernanke ruleth.

16:10 For you, Gold will not leaveth my portfolio in Zimbabwe, or Weimar

neither will you allow my portfolio to become holey due to political corruption, or crony capitalism.

16:11 You, Gold, will show me the path of wealth preservation during times of inflationary woe and political uncertainty.

In your presence, I feel the joy of your security.

So that my hand can exchangeth you for pleasures forevermore.

(with apologies to Private Eye)

Reg FD: I am not a goldbug and still believe it has one more big puke before the rocket-ride (not the "gee, I printed a price and stayed there for 5 mins puke)

The People of Great Britain are Better Off Today...

The People (and Government) of Great Britain have, for the last century-and-a-half been notoriously tolerant. From Karl Marx to the Mad North London Mullah with a prosthetic hook, Abu Hamza, from Glenn Hoddle to Simon Cowell, they let a whole lot pass upon their shores that other people simply wouldn't countenance, (and if they did, certainly would not do so for as long). And true to my political orientation, I think Britain, and the British people are not the worse-off for their open-mindedness and forbearance. So I am reasonably certain that, if I were consistent, I rightly should feel Britain has suffered some meaningful loss over Home Secretary Smith's slapping an entry ban on Michael Wiener, a.k.a. Michael Savage.



Yet, I don't. Paradoxically, despite my predisposition towards free speech, and general tolerance of most weird, eccentric, iconoclastic, ludicrous, subversive, even lunatic ideas, I am quite confident that Britain is better without the inciting bigotry and facist, racist, homophobic, hyperbolic rantings of Mr Savage-Wiener. Mrs.Smith's solution was simple and clinical. Probably not optimal, but effective. And so in one small way, (FTSE short-squeeze andincreasing risk appetites asides) the people of Great Britain are better off today than they were but a few days ago, save the elimination of Mr Savage-Wiener 's entertainment-value of which they will now be deprived.

Financial Gitmo

I am a survivor of the Japanese bear market. Twelve (or twenty - depending on your school of thought) long years of it. Call it "Financial Gitmo". The lessons of this incarceration were varied, and the experience invaluable - indelibly etched upon my brain for ease of retrieval when required in the future. Like now. One such lesson was that once the initial violent trauma of the market waterboarding dissipated, the mind-fucking treachery and psychologically-painful water-torture begins. Not unliike being forced to watch the same lame episode of "Kudlow & Cramer" or being subjected to a Mossad interrogation (at least according to recountings of the tens of thousands of Palestinians so graphically subjected).

Deeply oversold markets can rally for all manner of reasons: simple sellers' fatigue; government intervention, whether directly in markets (PKO anyone?) or indirectly through moral suasion, jawboning, or policy response, inciting the feedback loop to short-covering, which, causing higher prices fuels positive momentum and the optimism that the worst is maybe, possibly, hopefully over. The Strategist weatherwanes (like Abbey Cohen or Alex Kimmont) chortle which way the wind is blowing rather than where it will blow tomorrow. Professionals get squeezed-in to further penalize their (and their customer's) less than prescient capitulation at or near the prior lows. These episodes typically last longer than most bears can tolerate, both in time, though more acutely in P&L. They decry the move and point to fundamentals (and they are of course right, though it matters not). They conjure conspiracy and highlight manipulation (and may be right) but it gets no traction for the bullish side has more constituents than the bears. Their confidence wanes with their P&L, each higher intermediate-term low pushing them one step to closer to covering. The trend-followers have long-since bailed - even the longer-term programmes are turning bullish. Markets do, after-all, lead, don't they? Finally, like the interrogated, the short is broken and confession to anything and everything is achieved. And like a false confession, this capitulation is a hollow victory for the bulls and the market, since it is likely to be an intermediate-term top - NOT an early whistle-stop along the New Prosperity Line, particularly where The De-leveraging is The Big One.

So hearing Mobius, Cohen, and other pundits speak of bull-markets and greenshoots is predictable. But I reckon that Mssrs Schilling,and Roubini, will in time - once again - more likely be correct insofar as I believe continued recession and mild deflation will predominate longer than optimists (and inflationists)- and in particularly longs, can bear once the shorts have sufficiently covered and the intermediate term optimism rolls over with the continued bleak news flow. Then, the trend-followers will mechanically bail, and reverse positions, prescient programmes and specs, too, will re-establish their shorts, until finally the squeezed-in will, once again get squeezed-out, and those amongst us with weak constitutions will be forced to hide the pills and sharp objects to avoid .... tragedy.

The Interview (With Thaler)

BBC's Lyse Doucette does just an OK job grilling Dr Richard Thaler on this week's The Interview . She's admittedly a bit out of her depth (Tom Keene would have been more provocative and teased more out of him). Despite this, it is worth a listen regardless of his plugs for his book, and apparent soreness for being under-recognized in Kahnemann's & Tversky's Novel award.

Tempting Offer?!?

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

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

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

Farewell Greg Newton

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

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

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

Death Nell

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

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

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

Pause for Thought

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

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

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

Umm al-Fahm

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

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

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

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

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

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

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

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

Cheney: "Rush is a good guy"

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

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

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

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

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

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

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

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

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

The Perfection (of sorts) of Quantitative Easing

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

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

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

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

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

What is Your Real Name?

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

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

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


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

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

It's Official: Mrs Madoff is Delusional

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

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

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

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

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

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

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

What Price For Market Liquidity?!?!?

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

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

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

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

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

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

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

Frankly Mr Shankly...

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

An Excellent Read...

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

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

Pundit Rage

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

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

"Camille's Reclining" Declining

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

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

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

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

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

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

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

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

Simon Cowell is a D*ck

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

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

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

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

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

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