Deep Thoughts

"The current positives for investors include moderate valuations, rising corporate earnings and the likelihood we’re already in a recovery. On the other hand, I continue to feel consumers are too traumatized to resume spending strongly, and I see unpleasant and rarely contemplated long-term possibilities including those discussed above. In particular, conservatism, austerity and increased savings are good for economic units individually but bad for a stagnant overall economy. Bottom line: anyone who invests today in a pro-risk fashion out of belief in the recovery must be confident he’ll be agile enough to take profits before the long-term realities set in." - Howard Marks, Oaktree

Dan Loeb is now fully out financials on regulatory, among other, concerns. Will John Paulson be the last man standing (and holding an ever-increasing bag), with the conviction that Obama won't end up destroying the US financial system? For a very strong counterargument that Obama will eventually destroy the very core of the US financial system, may we point you to this post, which describes why US pensioners have at most a few more years of hopes that their savings have not been totally wiped out. One of the biggest source of profit for Loeb in 2010? Long ABX 06-1, which he rode from 10.5 to 16.

Regular readers will know Zero Hedge's fascination with Hugh Hendry, who so far has been spot on in his predictions on this business cycle and bear market rally. Here is his most recent May 2010 letter, in which topics are critical as China and hyperinflation/deflation are deconstructed in a way that only the former Goldman/Odey partner can. Must read.

For about a year, I’ve been sharing my realization that there are two main risks in the investment world: the risk of losing money and the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can’t eliminate both. One of the prominent features of investor psychology is that few people are able to (a) always balance the two risks or (b) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one . . . and in so doing make the other the one deserving attention. During bull markets, when asset prices are elevated, there’s great risk of losing money. And in bear markets, when everything’s at rock bottom, the real risk consists of missing opportunity. Everyone knows these things. But bull markets develop for the simple reason that most people are buying – ignoring the risk of loss in order to keep from missing opportunity – just when elevated prices imply losses later. Likewise, markets reach their lows because most people are selling, trying to avoid further losses and ignoring the bargains that are everywhere. - Howard Marks

"Recently value has been more difficult to find, but not impossible. The run-up has left the S&P 500 with an expected return over the next 7-10 years in the 3-4% range. With that expectation, coupled with the issues discussed at the outset of this letter, we are being very discerning about when and how we add risk exposure."

From Leucadia's 2009 Letter: "Out of prudence we take a pessimistic view as to when this recession will end. To think
otherwise would be a gamble that we are unwilling to make."

"The feeling that the government will ride in on a white horse to rescue the world is widely held. The vast majority believe that the government can control the economy, and the reason that they are so vociferous – or should I say violent – is that they really believe that if their party or ‘concept’ were in total control then everything would be fixed up and we all would be paying our bills and living the good life... Everyone with any skill in the money management or the economic forecasting arena is aware of how little he or she knows. The random nature of the variables is important, but the psychologically hardwired misconceptions that the behavioral economists have recently pinpointed make the problem much worse. None of the “blue ribbon” economists ever forecast a recession, but they do occur. More importantly we all see order when there is none and we all believe that we know more than we do. This applies to Geithner, Sarkozy, Merkel, Gordon Brown, and even Paul Volcker, as well as to you and me." - John Taylor

This memo will be about one of the inarguably most depressing topics of our time: the seeming inability of governments and politicians to solve – or even tackle – the financial problems we face. - Howard Marks, Oaktree Capital

"In Friday’s Comments, we wrote that the napkins suggested support in the S&P was “way down around 1058/1063”. The sharp opening selloff took the S&P to an intra-day low of 1062.97 before they circled the wagons. For today, we’ll stick with the 1058/1063 support. Resistance looks like 1083/1088 and then 1093/1097. The dominance of the dollar was so evident that I was stunned from time to time to see brokers getting calls from trading desks inquiring “what turned the market?” Talk about not seeing the forest for the trees. The Dow closed two-thirds off the lows. That allowed the first up week in the last five. Not quite a resounding victory for the bulls, but a welcome respite at least." - Art Cashin

Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest. They may or may not think it important or that it caused this or that problem, but they know it’s a real conflict.  Congressmen, since when wasn’t conflict of interest and poor ethical standards reason enough to change the law? But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems (see last quarter’s Letter). Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk. This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profitable rival that resembled a hedge fund rather than an investment bank. Thus encouraged – or intimidated – some CEOs just kept on dancing right off the cliff. Let’s
learn from our near disaster. Viva Volcker!

"We're a big country, and we'd better pull for big business - not against it. We'd better remember that "what's good for business is good for America." If we don't, and if big business isn't allowed to thrive, wondering about the shape of the coming recovery or the outlook for security prices in 2010 will amount to nothing more than "rearranging the deck chairs on the Titanic." - Howard Marks, Oaktree, January 21

Bob Janjuah's latest in its full, unabridged and grammatically irreverent version. A must read for all non-conformists. A juicy morcel:
"The budget should be balanced, the Treasury should be filled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome be bankrupt. People must again learn to work, instead of living on public assistance. - Cicero, 55 BC... Brilliant....and u know how Rome got away with it for so long - they secretly reduced the silver content in the coins (aka DEBASED) more and more - until they were worthless....and then the Empire imploded, ushering in the Dark ages..."

"We are no longer in a golden age. We are in trouble. The correction of economic and social
distortions that have built up over the past twenty years is underway. It is creating serious
ongoing economic and social problems, and despite the reassurances of central bankers and
investment pundits, there is no easy way to deal with it. The Fed’s standard remedy for treating
recessions by lowering interest rates and boosting liquidity has been seriously abused since
1982. The normal clearing function of recessions was aborted by an over-reactive monetary
intervention in every case, while fiscal irresponsibility at all levels of government mounted
unimpeded, and regulators were curtailed, reviled, or fired. These policies are not a template for
remediation. As we wrote in a recent Balestra Bulletin: for policymakers to expect the most
over-borrowed and over-spent consumers in the world to borrow and spend more in order to
carry us out of this recession is foolishness. So we suggest that the experts change their
playbook and look for guidance at the U.S. from the late 1920s through the 1930s, or more
recently, Japan’s ongoing tortuous financial struggle, which has its roots in the excesses of the
1980s." - Balestra Capital

"Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make
it difficult, including natural herd tendencies and the pain imposed by being out of step, since
momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s
essential to remember that “being too far ahead of your time is indistinguishable from being
wrong.”) Given the uncertain nature of the future, and thus the difficulty of being confident your
position is the right one – especially as price moves against you – it’s challenging to be a lonely
contrarian." Howard Marks, Oaktree

"This month I will attempt to answer the entrance examination for the Chinese civil service. That is to say, I will attempt to tell you everything that I know. In doing so, I will argue that this year's rally in inflationary assets, from emerging stock markets to industrial commodities to the fall in the US dollar, could be a FAKE. Let me explain why." - Hugh Hendry

Needless to say, a must read.