Archive - 2013

While 88% of hedge funds underperformed in 2012, no doubt relying on tried and true analysis of fundamental valuation, macro-economic trends, and flows (as opposed to a 12-inch ruler), it would appear one young chap by the name of Ken Griffin is doing rather well. As Bloomberg reports, the Citadel LLC fund founder (now gated since 2009) just purchased his second luxury oceanfront property in Palm Beach Florida in less than two months. In fact, Griffin bought the two lots for a total of $79.6mm. The compact-and-bijou house of a mere 6,055 square feet was built in 1988 and previously sold for $29mm in May 2011, was Zestimated at $33.75mm (by Zillow), meaning Mr. Griffin only 'overpaid' by a mere $8mm as he snipped it up a smidge under $42mm. The grander house, of a perfectly reasonable 9,111 square feet previously sold for $20mm in May 2000, was Zestimated at $21mm, and was bid at $38mm by the deal-making Citadel founder. It seems, given Citadel's 21% return through November, that being the Fed's alleged willing HFT-router-of-last-resort in times of 'market' need, has its handsome rewards - though all that sand would just get annoying.

With gold prices dropping (notably divergent from the ever expanding global central bank balance sheets) but record-breaking levels of physical gold being purchased, we continue to reflect on the other 'Great Rotation' that we suspect is occurring as the New Year begins - that from paper gold to physical gold. Who better to discuss the nuances of this dilemma than Eric Sprott as he outlines to TrimTabs' Charles Biderman the relative strengths and weaknesses of ETFs like GLD and SLV, physical-based ETFs such as PHYS and PSLV, and physical holdings themselves. While the new meme is that the Fed may be considering pulling back (on its 'flow') sooner than expected, reality is far different (as Bill Gross recently agreed with us) and that fact makes the following brief clip even more compelling.

2012 is the year the student loan bubble finally popped. While on one hand the relentlessly rising total Federal student debt crossed $956 billion as of September 30, and was growing at a pace that will have put it over $1 trillion by the end of 2012, the one data point confirming the size, severity and ultimately bursting of this latest debt bubble was the disclosure in late November by the Fed that the percentage of 90+ day delinquent loans soared from under 9% to 11% in one quarter. Which is why we were not surprised to learn that the Federal government has now delivered yet another bailout program: this time focusing not on banks, or homeowners who bought McMansions and decided to not pay their mortgage, but on those millions of Americans, aged 18 to 80, that are drowning in student debt - debt, incidentally, which has been used to pay for drugs, motorcycles, games, tattoos, not to mention countless iProducts. Which also means that since there is no free lunch, all that will happen is that even more Federal Debt will be tacked on to replace discharged student debt loans, up to the total $1 trillion which will promptly soar far higher as more Americans take advantage of this latest government handout. But when the US will already have $22 trillion in debt this time in four years, who really is counting? After all, "it is only fair" that the taxpayer funded "free for all" bonanza must go on.

Back on December 23, we presented one of the past year's most disturbing reports, the BCG's "Ending the Era of Ponzi Finance" which explained, quite succinctly, why the economy of the developed world, which is nothing but one big ponzi scheme, is approaching its inevitable end, in which existing principles will no longer be applicable nor available to kick the can down the road. The drivers for this are numerous (and all listed in the report), with soaring public and private debt only one of the main forces behind the coming collapse into a Keynesian singularity. Yet perhaps the biggest threat of all has nothing to do with the world's balance sheet, but its income statement, and specifically the category for Research and Development, or, as it is better known in refined economic circles, "productivity" - it is here that things are rapidly turning from bad to worse, and why the chart below (which we felt a need to emphasize, hence the repost) is probably the best summation of what the world has to look forward to, or, as the case may be, not.

First it was a German, then an Italian, and now, two months, later, the European self-immolation wave has spread to the country that many expect will be the next one to follow Greece into effective debt default. El Pais reports that an impoverished 57-year-old man who set himself on fire in Málaga Thursday, and subsequently died of his injuries at Carlos Haya hospital. He had third-degree burns on 80 percent of his body and suffered a multi-organ failure. The victim, thought to be of Moroccan origin, had worked in construction for years but was out of a job now, said people who knew him. In the last few months he had been scraping a living with the small change he made guiding cars into parking spaces near the hospital, an illegal practice that is usually overlooked by authorities. The police, who have not yet located his relatives, are not ruling out the possibility of an accident just as the man was lighting up a cigarette. Just two minutes before the event, he bought a pack of cigarettes from a local newsstand whose owner asked him how he was doing.

Bernanke: Drop it Janet. My mind is made up. Meeting over.

2012 is a year most asset managers would like to forget. With the S&P returning 16% and Russell 2000 up 16.3%, on nothing but multiple expansion in a world where risk has been eliminated despite persistently declining revenues and cash flows, a whopping 88% of hedge funds, as well as some 65% of large-cap core, 80% of large cap value, and 67% of small-cap mutual funds underperformed the market, according to Goldman's David Kostin. The ongoing absolute outperformance of mutual funds over their 2 and 20 fee sucking hedge fund peers is notable, as this is the second or perhaps even third year in a row it has happened. And while the usual excuse that hedge funds are not supposed to beat the market but a benchmark, and generally protect capital from downside risk is valid, it is irrelevant if any downside risk (see ongoing rout in VIX and net position in the VIX futures COT update) is now actively managed by central banks both directly and indirectly, their HF LPs no longer see the world in that way. In fact as Bloomberg Market's February issue summarizes, some 635 hedge funds closed in 2012, 8.5% than a year earlier, despite a far stronger year for the general indices. The reason: LPs and MPs have simply had enough of holding on to underperformers and get swept up in the momentum of performance chasing, and the result is redemption requests into funds who may have had a positive benchmark year, but underperform relative to the S&P for two or more years, which nowadays is the vast majority of funds.

One of the most important decisions participants in the foreign exchange must make is whether to view the dramatic pullback in most of the major foreign currencies seen in the early days of the new year as a reversal of the trend or as simply an overdue correction.   Our technical analysis sides with the latter and we anticipate renewed dollar weakness in the period ahead. 

We would be forced to reconsider if the euro fell through the $1.2980 area or if sterling fell below $1.60.  Although the dollar's sharp gains against the yen have left it over-extended, we see no compelling technical sign that a reversal is at hand.  Just like ECB's Draghi wielding Outright Market Transaction scheme drove down Spanish and Italian yields, Japan's Abe's rhetoric has been sufficient to drive the yen down without lifting a finger or spending cent.

Why We Are In a Perpetual Series of Wars ...

If anybody should be labeled a lunatic, it should be the Democrats and those that are encouraging these unsound financial spending policies.

Central Planners are trying with all their might to force people into behaviors and financial assets that are in direct contrast to their logic as well as long term financial well being.  This is the height of immorality, not to mention hubris.

“In general [traders/economists] are trained to analyze the economic data, balance sheets and so on. They’re not trained to predict political decisions. These factors have ruled the lives of fund managers in a more significant manner than what used to be over the past 20 or 30 years.”

The paragraph above pretty much sums it up.  There are no markets, there are manipulations.

Something is going on that reeks of the dreaded phrase, “this time, it’s different”: secret discussions in Germany.

While the cost of living has become a problem for some in the US (courtesy of the Fed’s inflationary policies) it’s become a real nightmare for many in the emerging markets where as much as 50% of income is spent by consumers on food.

Ex-Barclays chief 'Austrian' economist Thorsten Polleit provides a few clarifying thoughts on the hyperinflatory endgame (and democracy-crushing impact) of the fiat currency environment. Critically, Polleit notes that fiat currency tends to result in "collective corruption" in societies, and how this then leads to hyperinflation, despite the dangers to society that hyperinflation always brings. Ring some bells? This brief interview (with more detailed article below) stretches from the development of the global fiat currency regimes over the last 40 years to the increasing levels of debt that may (just as Kyle Bass and others have noted) mark the terminal decline of the fiat regime and the self-serving majority electing themselves into a vicious circle. Mises noted:

"The masses... do not conceive any ideas, sound or unsound. They only choose between the ideologies developed by the intellectual leaders of mankind. But their choice is final and determines the course of events. If they prefer bad doctrines, nothing can prevent disaster." If these "uncommon men" become "court intellectuals," the door will be opened for effectively spreading of false theories, supporting government-friendly ideas."

Must watch.

Most people are missing the boat regarding the Netflix/SEC tangle as the more relevant issue is the seemingly “selective disclosure” on Facebook by the Netflix CEO.