Cliff Asness

The only way to finance a big European-style state is to have it paid for by massive taxation of everyone, mostly the middle class. Right now, we are avoiding honest debate on this fact. The central issue of our time is the debate over the size and scope of government. Two unpleasant but undeniable mathematical truths limit the feasible policy choices. The first truth is that the current tax rates cannot support the promises made to middle-class Americans. The second truth is that you cannot pay for the Life of Julia, or any vision of a cradle-to-grave welfare state, without massive and increasingly regressive middle-class taxes. Not only that, it's easy to tax middle-class assets and transactions but soaking the rich means taxing investments, and problematically, investments are the lifeblood of economic growth. The choice the country faces is simple. What we cannot have is the Life of Julia at no additional burden to 99 out of 100 of us. The way to boil the frog of freedom is slowly.

Cliff Asness, head of the quant hedge fund AQR, has been known to be a vocal opponent of various failed governmental policies in the past few years. Today, he has shared his "dictionary" (of "humorous" persuasion as he himself notes, with definitions "written sarcastically as a faux left-winger, some just conservative/libertarian interpretations of what the left really means.") of the key terms dominant in Progressive America right now. In a world in which other people's money has pretty much run out, and ahead of a rather historic Supreme Court ruling tomorrow, we believe some of these are quite relevant.

AQR's head quant Cliff Asness, who as usual enjoys taking on what he believes is flawed conventional wisdom, takes on the topic of the Bush tax cut extension, and in typical fashion, presentd the upper class' view on things. What results is a piece that will likely not do much to bring the increasingly more polarized social and class extremes of America closer by even one bit.

• Kyrgyz crisis tops Russian headlines for four days, rest of world couldn't care less (Russian Scoop)
• America's municipal debt racket (WSJ) - Notable as the household sector's holdings in munis surpass $1 trillion for first time ever (Z1, p.64)
• Fed to conduct first test auction of bank CDs (WaPo)
• Carry-on charging Spirit Airlines grounds all flights through June 15 as pilots go on strike(Bloomberg)
• BP stock lower as the firm faces containment deadline as Obama seeks escrow (Bloomberg)
• Cost of fixing Fannie, Freddie at $140 billion, $1 trillion worst case (Bloomberg)
• Morgan Stanley: Just say no to double dip (Morgan Stanley)
• John Paulson takes ex-SEC bigs on board (Post)
• Liquid assets: Bordeaux 2009 futures sell 700 cases and hour, freeze computer (Bloomberg)

We have long claimed that any financial reform, determined by the Senator from Countrywide and the Rep from Fannie (thank you Cliff Asness), is worthless, and any debate over it is completely useless as it will achieve absolutely nothing. Sure, it fills blog pages and editorials but at the end of the day, the only thing that can save the financial system is, paradoxically, its destruction. There are just too many vested interests in the status quo, that absent a full blown implosion and subsequent reset of the system, it is all just smoke and mirrors. Luckily D-Day is approaching. We present an opinion by Robert Reich which validates our view that FinReg, and any debate thereof, is a joke.

"The Dodd bill is perfectly designed to create the largest and most powerful crony system in history." Cliff Asness is back to his usual irreverent tactics. Yet we have wonder just how his AQR quant fund did last Thursday...

The latest very much provocative letter from former Goldmanite and current AQRite, Cliff Asness. "All derivative contracts are side bets. They serve a useful economic purpose and our base case should be to let free people who want to make contracts with each other do so. The reviled Goldman transactions did not cause, or even inflate, the real estate bubble, it just made one financial institutional (Paulson) a bigger winner, and another a bigger loser. It was a bet each wanted to make, and was by definition considered a fair one by each party at the time. How do we know this? Easy, it was voluntary. Now government wants to rewrite history and say that this type of fair bet caused all our problems, and they’ll never bother us again if we just give them much more power, again. Do you believe them?"

Well, we certainly lost a big one. Despite hopes I share that this November’s polls will help mitigate the damage, this giant leap towards socialized medicine is a big loss for the Republican Party, and for the American people. And I say “leap towards” socialized medicine as this bill is not nearly the Left’s end game. It’s not meant to work, it’s meant to destroy the private health insurance industry, an industry that realized this only too late.1 It’s meant to help bring on, through socialized medicine, further breaking of the budget, and further conditioning of the American people to dependency and an expectation that government will provide for all their needs, the full European style welfare state. While it is obvious we must fight this, it’s not as obvious how. This note offers a few thoughts on the matter. - former Goldmnaite Cliff Asness of AQR (Quant Hedge Fund)

"The President, in these last few days following the second revolution against big government started in Massachusetts, has come out swinging savagely against “banks” in numerous ways in numerous speeches. Let’s be clear. There are legitimate issues and reforms to be discussed. But my first question is why this exact moment? The answer is simple. When a failing government with totalitarian impulses needs help, it’s pretty standard strategy to call down a pogrom against an unpopular class of citizens. The bankers are nothing if not unpopular. Unfortunately for this President, he will, I hope, find the financial community not cowering from his Cossacks on a shtetl in the Pale of Settlement (Greenwich, CT), but meeting his accusations with logic and patriotism." - Cliff Asness

Nearly a year ago, Zero Hedge first brought broad public attention to the nebulous aspects of the dark and dirty underworld of the market, exposing the "second-tier" of privileged market participants, consisting of quant traders, high frequency trading, flash trading, sponsored access, co-location, latency arbitrage, Morgan Stanley's discussed-below PDT operation, and many other topics (check our Glossary for much more). In April, Zero Hedge wrote an open letter to the quant community, pleading for more transparency absent which the eventual result would be "larger, systematic problems at the largest, most sophisticated quant managers." Since April, the impact of market neutral quants has progressively declined, as factors, one after another, have failed, and market neutral indexes are probing multiyear lows (HSKAX). The question of who has stepped in to replace the whales' liquidity provisioning is still unanswered, although the explosion of small, inexperienced 3 man quant shops consisting of a math Ph.D. and two programmers, may be part of the answer. The integration of Goldman within the structure of the NYSE and other exchanges, may be another: at last check, Goldman is still a key component of the NYSE's SLP program, regarding which there is still barely any information, despite promises by NYSE representatives to the contrary (and with Goldman's prop operation potentially terminally crippled, the question of how extensively intertwined prop trading is with liquidity provisioning, will be a major topic going forward). Today, the WSJ's Scott Patterson takes advantage of the recent furor over quants and in extensive article promotes his new book "The Quants" in which "he suggests how this new breed of mathematicians and computer scientists took over much of the financial system—and the damage they inflicted in the 2007 meltdown." We are glad that, after nearly a year of writing about it, the topic of the market systemic threat presented by a small subcommunity of quantitative traders is finally emerging on the mainstream scene.

A quant fund voicing against the proposed transaction tax is hardly surprising. We expect many more letters from Asness' colleagues at GETCO, RenTec and all other HFT venues whose livelihood depends on strictly continuing the status quo. We eagerly expect a follow on essay in which Mr. Asness discusses the pro and cons of High Frequency Trading.

Should Congress and the President find enough appeal in HR 4191 to enact it, there are
three possible outcomes. The first is that there are enough loopholes that the tax raises
little money but has unfortunate side effects like driving jobs and tax revenues overseas
or inflating the balance sheets of banks. The second is that there are no meaningful
loopholes but, surprisingly, people still trade a lot and enormous taxes are paid, in which
case we expect stock prices to fall dramatically. The third, and most likely, is that there
aren’t enough exemptions and investors react by sharply reducing trading activity, so
there is little revenue but great harm to the market and the economy. Whichever of these
occurs, the sponsors of the Bill will face a hard time explaining how, when aiming to
shoot the banks, they shot their constituents who will then pay for the next Wall Street
bailout. - Cliff Asness

Dear Leader and Minions,

The only thing more un-American, anti-freedom, and hypocritical from this administration, that dared to campaign on the prior administration's respect of the constitution, than your attempt to socialize vast swaths of the American economy, is your new attempt to silence your legitimate critics. You have (collectively with your party) called them Nazis, you have lied about their generally peaceful demonstrations while ignoring the incredible hypocrisy of your own brown-shirt like efforts (New Black panther thugs let off the hook by Holder, Code Pink, SEIU and ACORN vigorously disrupting free speech; and just try to give a speech offending the Left on our academically "free" campuses?). Now this explicit effort to have Americans, who happen to disagree with the current people in charge, inform on other Americans to this email address. You all have no shame.

Cliff Asness V2

AQR's Cliff Asness, a hedge fund manager (and ex-Goldmanite) who recently achieved public acclaim by lashing out quite vocally against some of the administration's tyrannical practices, yet stands to lose some of that new found populist credibility by being one of the first "scholars" supporting the petition to limit oversight and visibility of the "independent" Goldman-enhanced Federal Reserve, has just hit the road with another piece of a Hunter S. Thompson-esque Op-Ed.

The following individuals whose primary goal in life is getting tenure and publishing a textbook, yet believe they have a voice in deciding whether over 300 million American people should know just whose interests the Fed so staunchly protects, have issued an open letter to Congress and The Executive Branch, demanding that no one ever dare tinker or have audit powers over the private institution that is the Federal Reserve. Those who run hedge funds, operate semi-failed companies, work for an Investment Bank, especially taxpayer bailed out ones, or are otherwise conflicted, are highlighted in bold.