Managing Money

Capitalism may have bested communism a few decades ago, but exactly how our economic system allocates society’s scarce resources is now undergoing its first serious transformation since the NYSE’s founding fathers met under the buttonwood tree in 1792.  Technology, complexity and speed have already transformed how stocks trade; but As ConvergEx's Nick Colas notes, the real question now is what role these forces will play in long-term capital formation and allocation.  Rookie mistakes like the Twitter hack flash crash might be easy to deride, but make no mistake, Colas reminds us: the changes that started with high frequency and algorithmic trading are just the first step to an entirely different process of determining stock prices.  The only serious challenge this metamorphosis will likely face is a notable crash of the still-developing system and resultant regulation back to more strictly human-based processes.

Turning your growth trade into a value trade is the quintessential sign of a losing trader on Wall Street. 

From Whitney Tilson: "After a strong 12-year run, 2011 and 2012 were lost years. I feel very badly about this and apologize to you. But I know you don’t want an apology – you want performance! To that end, I’ve reflected on the mistakes I’ve made, learned from them, and taken significant steps to maximize our chances of success going forward: I’m now the sole portfolio manager and have dramatically simplified, focused, and de-risked the fund. I’m confident that my strategy is sound, I will execute it well going forward, and we will all profit."

"what you realize is that the lessons of ’08 will actually result in a much quicker process, a process that I would describe as a “black hole” if and when there is the next financial crisis.... Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. What I’m trying to struggle with as a money manager, who really seriously doesn’t like to lose money, is how to protect our capital and how to think about the next crisis."

For some time now we have been warning about the danger to portfolios given the deteriorating fundamental, economic and technical backdrop in the markets.  Our warnings, for the most part, have been ignored as individuals continue to chase stocks in hopes that "this time will be different", and somehow, stocks will continue to ramp higher even though all three support legs are weakening.  Currently, it is the imminent arrival of the next round of Quantitative Easing (QE) that keeps "hope" elevated but further Central Bank intervention is unlikely in the near term leaving the markets at risk of a further correction. The technical and fundamental setup is currently a negatively trending market.  It is very likely that, in the current environment, we will retest the May lows, if not ultimately set new lows, in August.  Those lows will likely coincide with further weakness in the economy which should be the perfect setup for the Fed to launch a third round of Quantitative Easing.

Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility, instantaneous liquidity, and redeemability) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?

In 26 years on Wall Street, Nic Colas of ConvergEx, has worked for seven firms and reported to nine different people.  His insights make up a highlight reel of things those people have told him which have stuck in his memory over the years (for better or worse) and seemed worth sharing with a broader audience.  The most insightful: “Don’t make this game harder than it has to be.”  From the same boss, the most motivating: “Someone is getting the information before you.  Why don’t I fire you and hire them?”  On customer service: “What am I? A pimp?  Get me a black car.”  And possibly the most important for someone who makes their living serving the investment community on the sell-side: “Do you know what it means when a dog shows well?”

Paul Mylchreest, author of the Thunder Road, releases his much anticipated latest report, and it's a doozy: "2012: Dear Portfolio Manager, you are leaving the capitalist sector and heading into a full-spectrum crisis." He continues: "You were to hear a report on the world crisis. That is what you are going to hear. For twelve years you have been asking: Who is John Galt? This is John Galt speaking….Now it’s  getting serious. 2012 will be a year to remember as the globalist agenda comes into focus amidst economic and geo-political crises: The titles of the last two Thunder Road Reports were prefaced with “Helter Skelter” - “The Illusion of Market Stability” followed by “Gentlemen Start Your Engines”. Sadly, the Helter Skelter I was writing about – the second part of the Great Financial Crisis is in progress and I’m expecting it to come to a head next year (2013 if we’re very lucky). The only question is WHAT brings it to a head? We’re not short of possible causes – a bank failure, sovereign default, Eurozone tipping into recession or the Middle East. Despite all the evidence to the contrary, like overwhelming debt levels and insolvent banks/sovereigns, the consensus seems convinced that we can “muddle through”. Dow Theory veteran, Richard Russell, explained it best: “In the coming two or three years we will be going through unprecedented situations beyond the understanding of most analysts.”"

The market rallied this past week, albeit in a very volatile manner, to end the week on a positive note as the hopes of a final resolution to the Euro crisis has been reached.   In reality, today's announcement of the EU treaty is only the first step and there are many legal challenges that will still have to be resolved.  While the reality is that there is still a very long road ahead before anything will actually be accomplished the implication that the with the ECB willing to buy bonds, at least for the moment, and the coordination of two bailout funds the Eurozone can play "kick the can" for a while longer.  Those headlines, even without much substance were enough to drive return starved managers into the market for the year end rush.

When it comes to reading the world's "tea leaves", few are as capable as Ray Dalio, head of the world's biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS' Charlie Rose that "there are no more tools in the tool kit" of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. Or not... and just to buy S&P futures in hopes that record career risk is big enough to force every other asset manager in the market to do the dumb thing and follow the crowd of lemmings right over the edge. Luckily, there are those who have the luxury of having both the capital and the time to not be drawn into the latest sucker's rally. More importantly, Dalio shares some truly unique perspectives on what it means to run the world's largest hedge fund, his perspective on Occupy Wall Street and demonizing wealth and success (in a way that does not imply crony capitalism unlike some others out of Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio's conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is "concerned." And that's why, unlike the recently unemployed David Biancos of the world, who never exhibit an ounce of skepticism, Dalio is among the wealthiest men in the world (and hence a prime target of the #OWS movement).

There is one hedge fund manager who I'll never forget, Ray Dalio of Bridgewater...

Will phosphate be bigger than Potash? These Montreal hedge fund managers think so and they're betting big on some small Quebec mining companies...

Here is the ugly truth on health, finance, organizations, weasels, Quebec's absolute return funds, the state of the Greek, US and Canadian economy, the 'solarcoaster', insanity and unrequited love! Enjoy!

A fascinating look at how US public pensions are betting their future on hedge funds...

Some thoughts on pensions seeding funds after my day trip to Toronto...