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Hugh Hendry: "We Hedge Fund Managers Are On Your Side"
Originally authored by Hugh Hendry and appearing in the Daily Telegraph
You don't know me; we've never met. But I fear you are being
encouraged to dislike me. Let me explain: I'm a speculator. I manage a
hedge fund. Apparently I profit from your misery. Accordingly, our
political leaders are keen to see the back of me.
Only yesterday,
Germany and France were calling for the "fastest possible" adoption of
new rules to put an end to financial speculation. But before you write
me off I ask that you listen to my side of the story.
First, and much like the bogeyman of folklore, the size and
significance of the hedge-fund industry is vastly over-stated. The best
estimate is that people like me control just 2.5 per cent of total
global financial assets under management. The ability to move prices
and markets resides more with the managers of pension funds, unit
trusts and our banking contemporaries; fortunately, for them, they are
on much better terms with our political masters.
Second, and much
to my regret, I have to correct another misconception. I am not
guaranteed success; far from it. I have no certainty or monopoly on
making money; that's the nature of risk taking, there is no free lunch.
And believe me, I am subject to the harshest possible critic: the
market.
Unlike my political adversaries I can't spin this out. If
I am wrong in my deliberations, I have to record a loss immediately. So
it should come as no surprise that I give great consideration to what I
do.
But what about this short-selling business and the allegation
that hedge funds seek to profit from the misery of others; are we
simply a scourge on society?
I believe not. Let me explain. In
short selling, investors borrow shares and sell them, hoping that the
price will fall and they can buy the shares later at a lower price,
replace them and thereby turn a profit.
Hedge funds are not
seeking to dictate economic affairs. Rather we are preoccupied by
price. A market-based economy like ours requires a pricing mechanism to
allocate resources and ensure that we all prosper. Get it wrong and we
endure the calamity of the technology bubble and the sleazy debacle of
the American mortgage crisis.
It's not that hedge fund managers
are bitter and seek to wreak havoc. It's just that we believe that
recurring and periodic recessions reveal the economy's winners and
losers. And through our endeavours, hedge funds attempt to discover the
identity and inadequacies of the poor businesses. During hard times,
such businesses typically go bust, allowing us to make an investment
profit by betting on that eventuality, and ensuring that successful and
prudently managed businesses prosper.
Or rather that was how it
was supposed to work. But our political leaders have gone to
considerable cost to avert this normal business cycle.
Fearing
that the huge scale of reckless bets within the banking system
threatened another depression, our politicians have used public funds
to bail out the economy's losers. And in doing so they run the danger
of creating a plutocracy: a society ruled by the wealthy. Consider that
fact that in Latvia school teachers have had to take a 35 per cent pay
cut so that the Swedish banks who funded the real-estate bubble are
repaid their imprudent mortgages.
We need to stop this
socialisation of risk taking: heads I win, tails you lose. Consider the
American government's enormous bail out of the failed insurer, AIG.
According to the world's largest bond fund manager, Bill Gross, it is
perfectly acceptable for the taxpayer to subsidise his returns. As he
explained it to the investment magazine Barons: "All I'm saying
is the government would lose almost $50 billion if it decides AIG no
longer is worth supporting. It is a game of chicken. You either call
the government's bluff or you don't."
I would recommend a
different course of action. It is the same one recommended in 1930 by
then US Treasury Secretary Andrew Mellon. I would call the bankers'
bluff and seek to purge the rottenness out of the system. All of us
will work harder, prices will adjust, and enterprising people will
flourish. Of course, this is a minority view. Instead, those in power
would rather use the subterfuge of inflation to hide the enormous
public subsidy.
The politicians' problem is that free and
independent capital markets tend to be anti-inflationary. As we have
seen, attempts at quantitative easing immediately depress the value of
existing government bonds in addition to the value of sterling. And
then you have the problem presented by my little industry. But we are
intelligent, well-funded and willing to vociferously challenge public
decisions. Most importantly, we are on your side.
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Blessed are the soap renderers. Without them, our village would be filled with diseased and stinking carcasses.
As Larry the cable guy might say, "I don't care who you are, that's funny".
Yes and that is exactly what is needed... get rid of the rotten so they don't infect the rest... but this is what is happening now. The rot is spreading and it won't stop until everything is bad.
Moral hazard creates a very poor society. Those who were prudent and had a bit of savings see their wealth destroyed because they can't get any interest on it, they have to eat into their hard earned capital to survive. They see those who borrowed and overstretched themselves living in rent and mortgage free houses because they just stopped paying.
They see banksters who made stupid mistakes get huge bonuses and keep their jobs.
Why should they bother to save or look to the future? They must behave recklessly and not think about their old age, after all the government will want part of it if they do, so why not spend it all now and get them to pay for you like they do with all the others.
But that won't create a proper society will it?
Hedge funds flip bits on the interweb. Praise their productivty!
Political theater: making hedge funds more transparent, banning bank prop trading (the regulators will know it when they see it, right?), etc. Seems like there are simpler ways to strengthen the financial system and bolster the nexus:
1) stop demonizing swaps and derivatives and instead view them as traps for the unwary, responding therefore with appropriate non-paternalistic policies that nonetheless protect the system from massive (and massively unwise) positions;
2) let it be understood throughout the system that borrowing short-term and lending long-term is a game that only the commercial banks can play with impunity and that, even so, only FDIC-insured accounts shall be fully protected from the risks of funding mismatch.
Hugh was long the dollar/20yr+ USG Bonds since beginning of 2009 (well before the recent USD rally). I also understand he is waiting for Gold to get under $600/oz to buy back in.
What a gentleman though, a true officer of the investment community. Although, I sometimes detect the foul smell of fresh bull$it. After all, if he was really that rich and successful, why parade around? Rich people are very private.
Yeh! "Rich people are private" - Take for example - Donald Trump.
Or George Soros, Warren Buffet, etc...
Give me a break. Hendry is right, speculators keep the game somewhat honest. Now if GATA could just wipe the mud off the window to the gold market.
Why heed HH's wise words when it's so easy to blame HF's? Never mind "they're" the brightest folks in the lot. Never mind "they" work 24/7/365 for theirs. Pensions n pubs for plebes.
This is the efficient allocation of capital argument again - notice his fixation on price above all else .
Our policies and goals have become geared towards the allocation of resources towards the most price sensitive of vehicles . - The smartest and the most talented no longer build capital but allocate the remaining capital built up over generations to vehicles that have a built in false efficiency whereby they run down real capital and express this as profit.
A good example of this fools game is the airline industry
As the price of oil has risen the most ruthless and "efficient" airlines have increased market share and profitability at the expense of airlines who for example pay a decent wage and increase a airplane manufacturers profits.
What would have been the outcome if these airlines were allowed to compete against each other on a fixed wage / percentage outlay etc.
As the oil price would rise there would have been a recognition that the airline industry is unsustainable in its present form and would need technological change.
But you need capital to do research and the present airplane industry no longer has the resources to do the necessary research to counter the rising oil price.Think back to the Glory days of the aerospace industry in the 50s and 60s where engineers ran these companies and not accountants - they transformed our lifes.
Also different transport options would also become competitive such as high speed rail for routes that previously were serviced by short haul flights.
Now the airline industry model is everywhere and soon the most cutthroat airlines will be a victim of its own success as everyone will no longer have the money to travel and its manufacturers will no longer have the ability to innovate.
And yet we continue to give control of the remaining capital of this world to these Hedge fund managers who have never built a single thing in their life.
Entirely incorrect.
Price dictates opportunity, which dictates capital flows, which generates additional capital if the investment decision was correct. Capital is created from having previous capital allocated in various profitable areas of the economy.
Who fixes the wages of the airlines? Money, wealth, is the fairest measure of value that civilization has ever known. Once 'merit' is entirely determined by a central figure across society, the tools of civilization become whips and chains, not wealth.
The plight of the airlines has nothing to do with "not having resources". Do you expect the airline industry to invent nuclear fusion or plasma drives? Are you insane? Industries adapt, markets force them to. Maybe the industry is simply not economic. So be it. Maybe flights end up costing thousands for local flights. If the market determines that is the case, it is the best outcome.
Nothing 'needs' technological change. Such change is determined by a web of billions of relationships among those who have capital, those who deploy capital, those who demand a product, and those who are employed by the capital to affect the development of the technology. "Need" is nonsense.
Hedge fund managers have built America and the world along with other investors. Warren Buffett and Soros and even 1800s era speculators buying railway bonds and allowing the first expansion of American corporate credit to occur - this is building America. Only a small minded pissant like yourself does not understand this.
I am afraid you have missed my point Anonymous - the symbolic representation of true capital (Gold) has been missing from the equation since at least 1971.
Money is a symbolic representation of energy yet to be used but it no longer has a relatively fixed value therefore it is unable to quantify capital built up over time.
The Buffets and Soros of this world have little in common with the 19th century industrialists since once they reach a critical mass of power they no longer have to risk their own capital since they can extract a tax indirectly from the populace using the fiat money system and I can assure you that it is a small web of relationships.
This of course has consequences since money is now divorced from true capital there is no longer a incentive to create more capital - in fact there is a unstoppable drive to destroy capital and turn it into profit as under the fiat money system both are equal.This speculative mania has reached its apex today as they have turbocharged consumption at the expense of investment and they can no longer bring future wealth back to the present since it is no longer there.
As for the airline industry - it is a service industry , the aerospace industry is a manufacturing business and I believe they created technologies in the first two thirds of the last century unheard of in the history of mankind.
Airbus industries would not have been created without the joint anglo / french project Concorde - it required huge amounts of capital. The French state effectively drove that policey because they were instinctively aware of the destructive monetarist policies that were becoming vogue in the US and indeed in Britain at the time.
Your points are incohesive.
Anchoring capital as gold is nonsensical. So you are saying that if governments reduced taxes to zero on gold producers, that the mining industry would somehow magically create more capital than any other industry. As a result of these returns, more capital would be attracted to gold production, and sooner or later half of the labour force would be employed in mining as the 'capital base' - gold bars, in your opinion, keeps growing. Ah, but you have forgotten that gold is simply another asset. So is the value of 'true capital' based on ounces of gold or the price of gold or a function of both?
What you have confused yourself about is the inflationary capabilities of central governments versus hard assets (such as gold). While gold may be an inflation hedge, over the long term it is no better a hedge than hard assets. Define capital how you want, your point is moot.
First off, Berkshire, for all intents and purposes, is Buffetts capital (he is the largest shareholder). Secondly, and more importantly, what does it matter whose capital it is? If an executive does not create shareholder value his stock is punished, career threatened, etc. What is this tax that Buffett effects? So Buffett, personally, creates inflationary policies - that is what you are saying? Does he sit in on Federal Reserve meetings?
I won;t even address the majority of your sentences as they make absolutely no sense. Capital cannot be destroyed by 'making profits'. I suggest you read a few books before posting again. Try Wealth of Nations and Atlas Shrugged. Your grasp of economics is embarrassing.
EADS was not created due to 'inflationary Western policies'!! Give me a break and learn your facts.
Again you misunderstand what I am saying - both paper money ,gold or any other monetary substance is but a symbol. It is not a asset in a conventional sense until it is accepted as a representing more then just its own intrinsic worth.
Gold has been accepted as a core form of money because its worth cannot be distorted by money printing , it is durable Blah Blah Blah - everyone on this site is familiar with golds properties and its use as a monetary symbol.
Now how do I define capital ?
OK lets think of the structure of a economy. Utilities are the bedrock of a working economy as other business would be unable to operate within a vacuum of services.
Two classic examples of a utility are both banks and Power companies.
What is the capital of banks ? - it is the money base typically government debt backed by government gold which is considered its core capital which is loaned to productive enterprises to make a profit. (fractional reserve system)
Now with the fiat money system this example is obsolete as money in the new system is created every time there is a loan and it therefore is no longer a classic fractional reserve system as described above but I am sure you get the drift.
What is the capital base of a power company ? - its infrastructure such as its power stations and transformers etc. that produce power and is sold to customers at a profit.
Remember how I stated that gold is a perfect symbolic symbol of core capital because of the above advantages - well that was taken out of the equation entirely in 1971 and these utilities were enfranchised to begin burning their remaining capital to produce a temporary profit.
How was this done - well banks as we know had now the ability to produce infinite amounts of paper because their accounting really did not need to recognize a true capital base.
Also power companies no longer had to put large amounts of money into developing their infrastructure as this would reduce their profits or surplus so they decided to cease construction of capital intensive projects such as coal and nuclear power and concentrate on building gas powered plants with a low capital cost.
This new structure dramatically benefited the profitability of these utilities as they could now externalise the cost and risk at the expense of consumers or taxpayers.
For example a power company who had a low capital cost would benefit from a higher gas price as the shareholders did not pay for the cost of gas - they could merely state to their customers that the price is rising because of rising gas prices - which would be inevitable given the fact that other power companies have the same policies and therefore drive up demand for gas.
Similarly in banks the debt ratio in banks would increase to infinity as they have the ability to create debt without a capital base.
The one reason why this system does not increase to infinity is that customers cannot pay for infinite debt or infinite electricity prices because their wealth is not infinite it is ultimately based on the shared capital of all of these institutions and people.
As for Warren Buffet I believe he has a very close relationship with Goldman Sachs which has direct access to the money printing machine and so therefore he has no incentive to increase his capital base - he merely has to squeeze the tit of the fiat money machine and magically create profits.
Entirely incorrect.
Price dictates opportunity, which dictates capital flows, which generates additional capital if the investment decision was correct. Capital is created from having previous capital allocated in various profitable areas of the economy.
Who fixes the wages of the airlines? Money, wealth, is the fairest measure of value that civilization has ever known. Once 'merit' is entirely determined by a central figure across society, the tools of civilization become whips and chains, not wealth.
The plight of the airlines has nothing to do with "not having resources". Do you expect the airline industry to invent nuclear fusion or plasma drives? Are you insane? Industries adapt, markets force them to. Maybe the industry is simply not economic. So be it. Maybe flights end up costing thousands for local flights. If the market determines that is the case, it is the best outcome.
Nothing 'needs' technological change. Such change is determined by a web of billions of relationships among those who have capital, those who deploy capital, those who demand a product, and those who are employed by the capital to affect the development of the technology. "Need" is nonsense.
Hedge fund managers have built America and the world along with other investors. Warren Buffett and Soros and even 1800s era speculators buying railway bonds and allowing the first expansion of American corporate credit to occur - this is building America. Only a small minded pissant like yourself does not understand this.
Entirely incorrect.
Price dictates opportunity, which dictates capital flows, which generates additional capital if the investment decision was correct. Capital is created from having previous capital allocated in various profitable areas of the economy.
Who fixes the wages of the airlines? Money, wealth, is the fairest measure of value that civilization has ever known. Once 'merit' is entirely determined by a central figure across society, the tools of civilization become whips and chains, not wealth.
The plight of the airlines has nothing to do with "not having resources". Do you expect the airline industry to invent nuclear fusion or plasma drives? Are you insane? Industries adapt, markets force them to. Maybe the industry is simply not economic. So be it. Maybe flights end up costing thousands for local flights. If the market determines that is the case, it is the best outcome.
Nothing 'needs' technological change. Such change is determined by a web of billions of relationships among those who have capital, those who deploy capital, those who demand a product, and those who are employed by the capital to affect the development of the technology. "Need" is nonsense.
Hedge fund managers have built America and the world along with other investors. Warren Buffett and Soros and even 1800s era speculators buying railway bonds and allowing the first expansion of American corporate credit to occur - this is building America. Only a small minded pissant like yourself does not understand this.
I'm surprised that we haven't seen a blizzard of protesters warbling on about Mellon, Hoover, laissez faire and the supposed link to the ensuing depression.
Lest we forget that Hoover ignored Mellon's advice, and proceeded to become the first president to attempt to actively intervene to save the the US.
That ended nicely... NOT!
Love this guy, but he must control his "character". Politicians seem to win when one offers them a fight.
Yes. I agree with every point he makes but he comes off as an arrogant ass, particularly in public. You can't win a fight with a politician that way.
Price Mechanism provides pain, it causes us to do things that we would not do with out the pain. Imagine a world with out pain. Most of us would have lost our hands to hot stoves back when we were 5 years old.
Love me some Hugh Hendry.
"We're not bad people, we're only drawn that way."
He thinks and writes well. He has admitted to an arrogance problem. However his most "tragic flaw" is that he does not belong to the banking aristocracy making the easy money from a steep yield curve beginning at zero. He would be among the gray technocrats and be welcomed back into that nihilistic community .
Those who make money for free courtesy the tax payer and, who lobbies the government to continue to arrange financial affairs in their mutual favour are apparently the good guys. Hedgfund managers cannot be team players if they truly seek alpha.
Where is Nietzsche when we need him?
HF managers can also make enormous money from steep yield curve.
Just make the right bets, which Hendry does not.
-BBH
HH speaks and writes very clearly; but he keeps forgetting that his reason for speaking out is to mostly inform those outside the market, as well as warn the insiders that he is up for the fight.
In the above article, he fails to explain why he is right to 'borrow the shares' and why the massive, cautious funds are ordinarily quite happy to sit on their shares for the long view, thus distorting the market (by ignoring events, investment snsibilities, and management performance).
If he could get his act together a bt more for the mainstream media, we might make some progress in bringing this massive Ponzi to heel.
Why noy end the prosecution immunity of elected officials? Chris Dood should be going to jail instead of retirement.
So you do what you're supposed to do, that's enough for me as long as you play by the rules.
hendry's talkin his book and is NOT on your side either.
but the shorts and hedges are the oil in the honesty machine. they make up for compromised financial journalism.
We really only need the market to perform price discovery on one commodity - the price of money.
Allow that to happen and everything else falls into place.
Uh, doesnt he say that QE weakens currency?
Does he look at markets?
-BBH
Hedge funds borrow from the banks who were bailed out by the governments. Its all the same tit that they suck on.
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