October 28, 2008
seven deadly sins
Finance & Economics, Financial Crisis, In Other Words
Filed by The Editor on October 28th, 2008
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October 21, 2008
how to close a hedge fund
Finance & Economics, Financial Crisis, In Other Words
(Few people will escape from this crisis with enough reputability to scream “I told you so” at the top of their lungs like hedge fund neophyte Andrew Lahde. In this epilogue to his one year experiment in asset management – during which time his fund returned 866% betting on the subprime collapse – he rails on the industry, its myopic leadership, the vice of greed, and even the virtues of a little green plant…)
Dear Investor:
Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
Filed by The Editor on October 21st, 2008
October 11, 2008
sanity check
Finance & Economics, Financial Crisis, In Other Words
(Words of cautious wisdom from the celebrated biographer of risk, back in November of 2007…)
Crazy Little Thing Called Risk
By PETER L. BERNSTEIN
BACK when I was managing other people’s money, I had a client, a doctor, who enjoyed giving away money to his daughters. He was lucky, because an extended bull market was under way with only minor interruptions. The more he gave away, the more the market replaced what he had parted with. As generosity appeared to be a cost-free form of recreation, he considered the whole thing a riskless enterprise.
Whenever I saw my client, he immediately thanked me for making him whole after his most recent spate of giving. I always had to remind him that his gratitude was misplaced. Don’t thank me, I warned him. Thank all those nice people who are willing to pay higher prices today for the stocks you bought earlier at lower prices.
This client, who assumed that the steady multiplication of his money would continue indefinitely, without risk, keeps popping up in my memory. Although this episode happened back in the 1950s, it contains a deep truth worth exploring now, because his experience gets to the roots of what investment risk is all about.
Filed by The Editor on October 11th, 2008
October 6, 2008
the view from 1929
Finance & Economics, Financial Crisis, History & Society, In Other Words
(”Spectacular episodes in financial history” come about more often than we might expect, and certainly more often than we remember. Harvard economist John Kenneth Galbraith wrote a brilliant primer on financial speculation in the early 1990s, suggesting that our memory for financial disaster was far more limited than our intelligence might otherwise suggest:
“Built into the speculative episode is the euphoria, the mass escape from reality, that excludes any serious contemplation of the true nature of what is taking place….Contributing to and supporting this euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten…”
While speculation was only the trigger in this broader financial collapse, perhaps the more important lesson will come from how we institutionalize the memory of this “mass escape from reality” and carry these lessons forward into a more stable global economy. Unfortunately, as this Economist article from 1929 points out, history is not on our side…)
Reactions of the Wall Street slump
Nov 23rd 1929 in The Economist
IT’S an ill wind that blows nobody any good. The fall of Bank rate on Thursday by another half per cent is an outward and visible sign that the dramatic and precipitous slump of the last three weeks in Wall Street has definitely relieved the pressure on the world’s money markets which the New York situation has been exerting so continuously for the last two years. Very few could have dared to hope, when Bank rate was raised to 6½ per cent on September 26th, that it would be back again at 5½ per cent in less than two months. That advance, indeed, was a by no means negligible factor in turning into the opposite direction the tide of funds which had been flowing so strongly towards New York, and in causing the edifice of American speculation to totter. But that it would collapse so completely was hardly to be expected.
The slump on the New York Stock Exchange, which has resulted in this great change in the monetary outlook, is one of the spectacular episodes of financial history. A prolonged upward movement, the extent of which is illustrated by some graphs which we print in a later column, has been built up over a series of years on the amazing and unexampled prosperity of America. But some two years ago the speculative movement seemed to lose all touch with reality; and in spite of occasionally vigorous but more often half-hearted, measures by the banking authorities of the United States, speculative fever spread throughout the nation and carried prices, mainly with the aid of borrowed money, to fantastic heights. Writing of the efforts made to check the movement, a high authority observes:
Filed by The Editor on October 6th, 2008
October 3, 2008
the great black north
Finance & Economics, In Other Words, Politics & World Affairs
(As Canadians flock to the polls later this month, quietly supplying 22 percent of America’s oil and 13 percent of its natural gas, its neighbours to the south have barely noticed. Cross-border oil flows are inevitable – given that America controls of a mere 2% of the world’s oil reserves and consumes almost 25 percent of supply – and securing its long-term petroleum assumes the full participation of Alberta’s carbon-rich tar sands and the off-shore bounty at Hibernia. Even Governor Palin’s Wildlife Reserve is virtually useless without passage by pipe across Canada’s Western provinces. Given the importance of “Securing America’s Energy Future” during a twin election year, it’s surprising that talk hasn’t returned to NAFTA, cleaner energy, or agricultural subsidies.
Then again, maybe it isn’t…)
Canada’s role missed in U.S. energy debate: Yergin
By Jeffrey Jones
BANFF, Alberta (Reuters) - The way Daniel Yergin sees it, the high-stakes debate over energy security in the U.S. presidential campaign has ignored one of the most critical parts of the United States’ oil supply equation: Canada.
The United States’ neighbor to the north has quietly become its largest foreign oil and gas supplier, and that has actually improved energy security in the United States, said Yergin, energy and geopolitical analyst, Pulitzer Prize-winning author and chairman of Cambridge Energy Research Associates.
Meanwhile, Canada’s oil industry is struggling at home to keep boosting production of the country’s vast oil sands while facing major new environmental and cost hurdles, Yergin said.
“People debate oil imports, but what they don’t know is 22 percent of oil imports come from Canada, that 13 percent of our natural gas comes from Canada. Imports of energy from Canada need to be seen in the larger context of the trade and investment network that ties the two countries together,” he said in an interview in the mountain resort of Banff, Alberta.
“This shows interdependence at work.”
Filed by The Editor on October 3rd, 2008
September 7, 2008
the elusive bottom
Finance & Economics, Financial Crisis, In Other Words
(Even market cheerleaders are struggling to find good news to rally around these days. With labor, capital, finance, real estate, and consumer markets all reeling from a half-decade of credit-fueled gluttony, and commodities markets cresting near all-time highs, it might seem a bit clichéd to highlight yet another bearish commentator — unless that bear is David Rosenberg, one of the few bulge-bracket economists to voice frequent and convincing skepticism about the “resilience” of modern capital markets and highlight the irrational optimism of the average investor. In his opinion, the markets have been in a secular downturn since the turn of the millenium, as the dot.com bubble morphed into the housing bubble, which evolved into the credit bubble, and which now seems destined to poison commodities prices, currency markets, trade flows, and even geopolitics through the end of the decade. Caveat investor…)
Conference Call Notes, 14 August 2008
David A. Rosenberg, Chief North American Economist, Merrill Lynch
My sense is that we probably aren’t even past the halfway point yet of this recession, the credit losses or the house price deflation. Looking at whether equities may have bottomed or not on an intermediate basis, maybe the recent action to the negative side was an important inflection. In terms of what I do, which is trying to tie the macro into the markets, I have a very tough time believing that we have reached anything close to a fundamental low, either in the S&P 500 or in the long-bond yield, for that matter.
300-point rallies in the Dow happen in bear markets
We’re in a very confusing atmosphere. People didn’t really know what to make of a 300-point rally in the Dow the other day, but my main message was that 300-point rallies from the Dow don’t happen in bull markets. In fact, they never happened in the bull market from October ‘02 to October ‘07, but it has happened 6 times in this bear market and happened 12 times in the last bear market. You don’t get moves like that in bull markets. As Rich Bernstein has said time and again, “This is the hallmark of a recession and a hallmark of a bear market.”
Filed by The Editor on September 7th, 2008