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David Einhorn Value Investing Congress Speech
- Ben Bernanke
- Bond
- British Pound
- Credit Rating Agencies
- David Einhorn
- default
- Goldman Sachs
- goldman sachs
- Great Depression
- Japan
- Lehman
- Merrill
- Merrill Lynch
- Middle East
- Morgan Stanley
- Paul Volcker
- Rating Agencies
- Sovereign Debt
- Sovereign Risk
- Sovereign Risk
- Structured Finance
- Treasury Department
- Value Investing
- Volatility
- Yen
David Einhorn provides some probing and uncensored thoughts at today's Value Investing Congress. Primary among them is the observation of congruity between the near-collapse of the bank business models and the comparable outcome that might occur if a currency (wink wink, dollar) ends up collapsing - an outcome the Fed Chairman desires more than anything:
The failure of Lehman meant that barring extraordinary measures, Merrill Lynch, Morgan Stanley and Goldman Sachs would have failed as the credit market realized that if the government were willing to permit failures, then the cost of financing such institutions needed to be re-priced so as to invalidate their business models.
I believe there is a real possibility that the collapse of any of the major currencies could have a similar domino effect on re-assessing the credit risk of the other fiat currencies run by countries with structural deficits and large, unfunded commitments to aging populations.
Also, never one to back off from a chance to attack his favorite pet topic, rating agencies, Einhorn does just that:
[S]tructural risks are exacerbated by the continued presence of credit rating agencies that inspire false confidence with potentially catastrophic results by over-rating the sovereign debt of the largest countries. There is no reason to believe that the rating agencies will do a better job on sovereign risk than they have done on corporate or structured finance risks.
My firm recently met with a Moody’s sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region. Moody’s does not have a long-term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth. They use a short-term outlook – only 12-18 months – to analyze data to assess countries’ abilities to finance themselves. Moody’s makes five-year medium-term qualitative assessments for each country, but does not appear to do any long-term quantitative or critical work.
Their main role, again, appears to be to tell everyone that things are fine, until a real crisis emerges at which point they will pile-on credit downgrades at the least opportune moment, making a difficult situation even more difficult for the authorities to manage.
Additionally, and relevantly to the ongoing debate over gold, David had this to say about the precious metal:
I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.
Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.
Lastly, Greenlight's outspoken leader does not cover his true feeling about the administration:
A few weeks ago, the Office of Inspector General called out the Treasury Department for misrepresenting the position of the banks last fall. The Treasury’s response was an unapologetic expression that amounted to saying that at that point “doing whatever it takes” meant pulling a Colonel Jessup: “YOU CAN’T HANDLE THE TRUTH!” At least we know what we are dealing with.
When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.
Along these same lines, we have bought long-dated options on much higher U.S. and Japanese interest rates. The options in Japan are particularly cheap because the historical volatility is so low. I prefer options to simply shorting government bonds, because there remains a possibility of a further government bond rally in response to the economy rolling over again. With options, I can clearly limit how much I am willing to lose, while creating a lot of leverage to a possible rate spiral.
Full speech below (attached):
Via Rolfe Winkler
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I recommend reading the entire speach. Well worth your time.
In fact, gold bottomed at $255 in 1999 after a 19 year
bear market while American GDP growth fell in real
terms from 8% in 1984 to -6% now.
There was a gold standard in 1933 when FDR broke the
Constitution. There is none now. There was also far
less debt usury crowding out the economy then. There
were far fewer people depending on government.
Gold, like all assets, goes down during deflations.
All assets correct the amount they are financed,
in the case of naked derivatives and DiTech loans,
up to 125%.
In other words, disappearing credit and financial black holes that only cash can negotiate.
The US Dollar and Dow deflated 84% relative to gold
since 2001 and 1999.
The Fed and Treasury may implode before they can take
them down to zero and tell US how good that is for the
economy, while bailing themselves out with our money.
In other words, safe cash may be king.
http://www.jubileeprosperity.com/
Speaking of gold and FDR, here's something interesting from Antal Fekete's latest article:
"Careful as though Roosevelt was to cover his trail in getting away with the loot, he has made one major blunder. He failed to make the looted gold fungible. The coins were not made of pure gold: they were an alloy 22 carat in fineness. The reason was to make them stand up to wear and tear better in circulation. All countries striking coins for general circulation employed an alloy. Roosevelt thought that he could save the cost of refining the melted gold to the international standard of 995 fine (24 carat) so the gold bars in Fort Knox are only 22 carat fine. In consequence these gold bars are not fungible. They are easily identifiable as contraband, the proceeds of the Great Gold Heist of 1933. The shear quantity of this looted gold makes it impossible to refine it at this late hour. The U.S. gold stinks, and will keep on stinking."
http://news.goldseek.com/GoldSeek/1255885200.php
Uhm, what about AUD or the Canadian dollar?
Commodities in general appear better over the longterm (IMO) and I have to agree with his opinion on gold.
I give it a 7/10 but if David would like to do an extra credit assignment on a topic of his choice we can always bump that grade up to maybe an 8/10.
The problem with the Canadian dollar is that they have their own mortgage crisis in the making with the CMHC. Additionally, the stronger the CAD gets, the more it hurts their economy. While their debt is not as awful as ours, they did do their own bailout a year ago for the big 5 nationally chartered banks. You could easily see the printing presses start to roll there with the CAD getting near par again. Unemployment is higher there than here, gas and food are much more expensive, and ultimately, that spells trouble.
I still think the Kroner or Gold are your safest havens long term. However, I do believe that the dollar will reverse soon for a least a short term reprieve--but on that note I am a broken record since late August. So whatever!
hope your little one is doing better Howard.
i remember those days.....got one that's an adult, one in college, one with 2 more yrs in high school. once he is out, i'm out of NY, hopefully to the caymans.
Thanks so much DH--she is out of the woods, finally. That swine is very scary. We did the hospital and then our doc said get her out of here after treatment--the #3 cause of death in the country is being in the hospital--so we sweated out the last 6 days. I'm happy to report there are no more delusional fevers and she is eating. Thanks again for caring.
glad to hear that! without question, nothing worse in life than having a loved child sick....I still constantly worry about mine, lol!
It's so hard when your child is near the abyss. My girl has had a very frail immune system since birth which made the fear so much larger. It brings you back to the reality of what really matters in life and makes all this money stuff silly. Because if I lost her, no amount of safety or wealth would heal me. I am so glad the anti-virals worked on her. She was hospitalized for 2 days. But I gotta tell you, we have been through serious illnesses with this gorgeous girl and she always seems to pull through although she is a frail munchkin. She's a survivor. Must be in the genes.
+100 and continued good luck and great health to her!
Howard - I live in Canada and do not understand the clips I have read on the CMHC being a bubble. The CMHC forces all mortgages (unless a 20% deposit is placed) to be insured. The premiums are paid throughout the amortization. It is very well funded because houses never lose 100%. Also in Canada there has never been Government support for housing in the form of tax deductions on interest payments (as in the US and UK). This means that property ownership is not advantaged in the tax system. This means that house prices in Canada have been restrained.
Canada has not bailed out the banks and we are not printing like mad either. Gas and food are more expensive - but then we do not have to pay for healthcare, at least individually. I am probably biased but I think Canada has behaved prudently - and that prudence is reflected in the value of the Canadian dollar.
Perhaps you need to read more of Leo's work. Additionally, Harper slid into the budget last October a $75 billion infusion into the banks. It was not an official bailout and didn't reach the press for months. The CMHC is backing mortgages with 3-5% down. That is a fact and the article was posted earlier today, although it has been going on for months and months. Trust me, I have lived in Canada the majority of the time for the last 3 years so I am not speaking uninformed. Do your homework and you will find what I am saying is not hearsay, rumor, or nonsense.
Here's the bank bailout link:
http://www.globalresearch.ca/index.php?context=va&aid=12007
CHMC link:
http://www.globeinvestor.com/servlet/story/GAM.20091017.RCMHC27ART1939/GIStory/
I believe the Canadian unemployment rate is lower than the US.
http://www.cbc.ca/canada/story/2009/10/09/unemployment-rate-jobless-stat...
I am with you. After March 18th, when I was looking at getting out of the USD, I moved money into CAD and AUD in the short term. I have since moved into gold, but they were a good trade for awhile. My rationale was that if we move back to a commodities-backed currency, Canada and Australia have lots of their own to back their currencies.
My reservation with Canada is the Bank Of Canada is run by an ex-Goldman guy, who will be under a lot of pressure to follow the global devaluation race by his cronies.
And you have to remember Harper is an idiot. The conservative party has been fighting to stay in power for almost a year. Last December, Parliament was suspended for 7 weeks when it looked like Harper was going to be ousted so the Queen's emissary (how fucked up is that) answered his prayers and allowed the suspention. By the end of it the other 3 parties were at odds and Harper bought more time. The Bank of Canada gets their cues from the U.S.--make no mistake--original thought is not happening in my future digs. U/E in Toronto is over 10% for the record. The rates you posted were as silly as our BLS garbage.
Hey Howard what's going on.
Most of my family is in Canada. I'm concerned more about their debt situation than even their unemployment (not sure that slaving for the banks is a much better future than bankruptcy...)
My self-employed sister last year was considering a mortgage of 'only' a quarter-million dollars - in Ottawa of all places. That hotbed of financial talent and booming entertainment.
When I nearly fainted (her income is quite modest, a solid 5-figure middle-of-the-road), she said she 'thought that was cheap'...it took quite a bit of numbers-crunching to talk her down from the ledge.
I think she finally saw the light when I explained that the key point here is not whether it was 'cheap', but whether she could actually afford it!
Most of my relatives are Boomers and own their real estate - thank God - but their Generation X offspring are patting each other on the back at how world-class their banks are by day, sweatin' buckets by night at how they'll pay the bills.
My down-to-earth, feet-on-the-ground mother lapses into nearly obscene poetry, so livid does she get at the idea of Harper clinging to the PM's chair until his fetid corpse is peeled out of it...
Ha ha....Ottowa, hotbed of entertainment. Glad you talked your sister down. Seems like Harper's time may be limited...question is, will the Liberal Party help in any way? Hard to imagine if the Looney is through the roof and the organic growth of the country continues to faulter. GM, basically gone. Got oil. yep. Water, yessir. Got taxes--oh yeah--gimme that 14% tax on everything in Ontario.
Canada is repearting our subprime crisis to prop up a housing market that didn't even need it. They were bubbly two years ago. Now the CMHC has gone insane to bolster something that wasn't a real problem and Harper is seen as a powerful master since they are riding out the storm--uh, except he is creating one that no one sees and the press (including the Star) rarely look at in depth. Toronto was going strong and had no reason to not expect a dip. The Kaghastan mob that financed the Bloor and Younge perfection in Condo living defaulted 4 months ago and last I checked they chopped off the top 20 floors. Wiped out a great corner of shopping and now it's a pit.
So Harper continues in the Bush framework and the sheep mentality of the Canuckies (my fiance calls them that) just keep letting it happen. Somehow, Harper thinks if the housing market is strong, then everything else is ok. That will be a sorry state when the CMHC shoots these POS's back to the banks with no equity. Because when you only have a 3-5% stake in the game, the keys get left on the counter. It will take nothing to put the big five in trouble...and the CMHC will be the next Freddie/Fannie in the Western world.
As far as being rated as the safest banks in the world, Leo said it best. They got lucky. Eric Sprott in Toronto has no faith in the big five--they are spread too far and wide and are all TBTF. That in and of itself is a concern. Their Tier One's aren't that much higher than ours, in fact--in 1928--US banks were required to hold 22%. Mostly today ours are 5-6%. Canada is 9%. To think oil and gold will save the economy there is a fallacious argument--because unless you live in Alberta where you get a piece of the pie--the rest of the 40 million population will suffer with a high CAD. So what might Harper do to stop the rise of the CAD--print, baby, print. It's just another fiatsco waiting to happen. and idea of Harper clinging to the PM's chair until his fetid corpse is peeled out of it...is your mother's word's of wisdom. She sounds like a treasure.
My mum is a treasure for sure! Not a lot of education, but makes up for it with some kinda 'mum' sense that runs in the elderly family women. :-)
I don't know much about Ignatieff but Canadians have a long proud history of split elections and minority turnout creating 'landslide' results. I miss the Rhinoceros Party. (Don't know if they were 'before your time' for following Canadian politics or not!)
I swear Aus and Canuckie (hahaha) pollies are separated at birth. 'Robust housing market' (transl. priced way too high for anyone except banks to afford) = 'strong economy'. What utter horse pucky.
I had to snicker reading what you said about the Bloor/Yonge fiasco. I remember hearing firsthand accounts from my Toronto sister about idiots camping out in lines to stick their heads in the noose...err, 'buy' bits of of that white elephant.
The Big Five are precisely equivalent to the Big Four here in Aus. Makes the hundreds of failing US banks look like a paradise of capitalism. The only realistic option to the Bloated Four here is a handful of credit unions. Our Big Four derivatives-market leverage exposure was on average about 110:1 mid-year, although I haven't checked the figures lately. (Note to self...) Our capital requirement was 8% last I checked.
Mining has been 'saving' the Aus economy for lo the past decade, and we are still the most indebted people on the planet. Our government is shifting the private debt into public debt through 'grant' incentives as fast as the bonds market will let it; I'm guessing the Candian government will be doing the same.
I don't think the 'print' option is really available to Aus or Canada; we are not the mega-markets that the US, UK, or Japan are. My guess is we will instead try to walk the tightrope between a growing public debt, incrementally rising or stagnant rates, and selling off resources as long as China is buying. If we try to print, I expect our bonds markets will plummet faster than Obama's approval ratings...but then, what do I know. I can't understand the rationale of government 'housing grants' and 'cash for clunkers' either. Hell, for all I know our governments will start bulldozing homes if they have to...
I guess we should both just sit back and enjoy the pink cloud of perceived safety of our 'rising' currencies, for as long as it lasts. (And never mention that to rise against a falling standard, our dollars need only to fall slower than it does...)
Canada is in the midst of its own collapsing housing bubble.
Average selling price in Canada is $291,788 (Sept. '08), down from $331,602 (Sept. '09)
(Canadian Real Estate Association figures)
http://www.crea.ca/public/news_stats/statistics.htm
According to the 2006 Census, average household income in Canada was $53,634 - unless the wage has risen sharply during the global financial collapse, the average Canadian still cannot afford to buy a house, despite a near 15% price drop.
http://www12.statcan.ca/english/census06/data/trends/table_2.cfm?T=PR&LINE_ID=408&TOPIC_ID=400
(Conventional lending standards would constrain the average mortgage to about $160,000 on a $53K income - at *most*. While I realise that medians and averages are general at best, they give a good 'bubble' indication. Unless the average Canadian down-payment is north of $130,000, there are either a few very wealthy people buying up a big share of real estate - or quite a few Canadians are in debt over their heads.)
Further, Canada's debt-to-income ratio like America's has grown in excess of 50% since the 1990s, and is currently at about 130%.
http://www.statcan.gc.ca/pub/13-010-x/2008004/article01-eng.htm
Canada is in much the same position of Australia, relying on a rich resources base to avoid the effects of over-indebtedness (although Aus private debt levels are much higher than Canada's).
However, I don't believe this view considers the effect of a collapsing global credit bubble, and a fall in demand from China and other eastern producers, who no longer have the export markets they did. Nor does it take into account unemployment.
http://www.statcan.gc.ca/subjects-sujets/labour-travail/lfs-epa/lfs-epa-eng.htm
Even if a roaring commodities market can be counted on (and that's a gamble), the fact remains that most Canadian citizens can barely service their levels of debt as it is. With unemployment still on the increase (8.4% according to 'official' figures), it is rather premature to judge that Canada has behaved 'prudently' in terms of irresponsible lending.
Oh, and "houses never lose 100%" is completely false. A house value can most certainly go to zero. Any supportable case to the contrary would be welcome news to Detroit.
PS: Nearly forgot. Check out the Canadian House Price Crash forum, for debunking the rosiness of the Canadian housing market:
http://forum.globalhousepricecrash.com/index.php?showforum=17
Forum defunct for about a year, but some good information on the 'fundamentals' and 2005-2008 growth of the Canadian bubble.
Canadian house prices have been restrained?
How about Vancouver?
My question here,is how come his fund was down 21% in 2008 when he was short lehman(which I asume brought him a windfall)?yeh o.k. He might have beaten the s&p at that,but shouldn't he have seen the writing on the wall is he was sure of Lehman failure?shouldn't he be at least long some puts on the market as N. Taleb was in the 87 crash?.
http://www.reuters.com/resources/r/?m=02&d=20091019&t=2&i=11999810&w=450...
American billionaire investor George Soros attends his appeal hearing against a French conviction for insider trading at Paris Court House, February 10, 2005. The Hungarian-born financier was fined 2.2 million euros ($2.8 million) in December 2002, matching the amount he was accused of having made from buying and selling shares of French bank Societe Generale with insider knowledge 1988.
Isn't Einhorn the guy who started shorting Lehman long before the streakers came to the party? I remember seeing him on CNBS and it seemed like he had been threatened with bodily harm by Big Dick himself.
Yes he was shorting LEH and everyone was laughing at him. A few months ago he said he was short MCO.
Boy wonder was short all of the financials to one extent or another.
all discussed in Lawrence G. McDonald's "A collossal failure of common sense" An outstanding narrative of the LEH implosion.
I can't say enough about this book in terms of being a fabulous insight not only to the LEH implosion and the greed and stupidity on the street, but an excellent insight into the details of the housing market and associated derivatives
It's going on my Kindle tonight--before I leave for Canada tomorrow where I cannot use the 3G. Sounds like a great read.
What the... That's it! Einhorn is Finkle! Finkle is Einhorn! Einhorn is a man!
Genius!!! Must read
How can retail investors buy long-dated options on much higher U.S. and Japanese interest rates?
Just buy bond futures options.
Thanks for this.
"Gold did very well during the Great Depression", provided you were able to hide it from the Federal Government in the US, and from the marching armies of the Axis in Continental Europe and Asia. Regarding its status of a "store of value" at that time, many unfortunate jews in Europe discovered that the price of their freedom, even expressed in gold, was too high for them.
In hindsight, Switzerland and UK were the best places to store gold, but that was not necessarily obvious back in the thirties, and one could argue that it was a close call, thanks to skilled RAF pilots.
If ever there is a ZH Hall Of Fame for articles, this should be a lock.
Doesn't hurt to see gold up ~$20 in the last 12 hours, either.
Gold's price these days reflects the falling USD more than a rise in gold itself.
Don't get me wrong, I am staying in gold until I see some sign of a stable, usable currency that works as a true 'medium of exchange' again. (And doesn't masquerade as a store of value in and of itself.)
However, always wise to have a bigger picture on gold than just from the USD perspective. Here is a price chart you may find informative:
http://www.kitco.com/kitco-gold-index.html
As you can see if you look at the one-year chart, in 'basket-of-currencies' adjusted terms, gold has not even quite achieved its February high yet...let alone still about half of what its 1980-ish inflation-adjusted 'high' would be.
Considering the currency pressure out there, this makes it a screaming buy to me. :-)
Very good point about gold not being anywhere near its all-time inflation adjusted high. I think it still has a long way to go on the upside because if the Fed were to withdraw its easy money policies the economy would suffer considerably. Plenty of people thought oil was done going up around $90. And then it reached a ridiculous level some 60% higher. And I recently read a very interesting article at http://www.goldalert.com/gold_news.php titled "Gold Up, Dollar Down - Does it Really Matter" on the left side of the page that does a good job explaining the relationship between the gold price and the dollar given the Fed's monetary policies, and the huge conflict of interests that Einhorn also discusses between politicians' motivations versus the long term health of our country.
Gilgamesh, I could not agree with you more. This should be mandatory reading for every investor AND politician connected to the U.S. It's a damn shame that the super-majority of BOTH groups will not heed the advice explained herein.
If we've learned one thing from history, it's that man is doomed to repeat it.
What makes you say wink wink dollar? I gathered he meant yen.
Read the last paragraph, putting his money where his mouth is he bought long dated options on rising interest rates in both the US and Japan - but it could have been wink wink Yen/Dollar.
“Events can move from the impossible to the inevitable without ever stopping at the probable”
~Alexis de Tocqueville
You gotta admire that man's style. I remember how he was treated on squawk box and other CNBC shows during the collapse and it was shameful. The humility of his honest and insightful presentation gave proper justice to the weight of the matter at hand. Worth the time to read.
I've enjoyed reading ZH and the comments and now comes the time to comment myself.
Slightly tangential to this thread, but as good a place as any to float the idea is that it is the FED / Treasury (through back channels) who have started buying Gold not just USD weakness or Chinese/Indian/Russian/Middle East buying that is propelling the price up.
What would make them buy Gold, well the possibility of an audit of the FED and of a new global currency. See they have a bit of time to clean things up before the audit finally gets the go and before a global currency progresses. If this is true (not just my speculation) and it becomes known then the sky is the limit for gold and it will be a gold rush of another kind.
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