Bloomberg Quote of the Day: “Many people would sooner die than think; in fact, they do so.” – Bertrand Russell. Do you think he was talking about Wall Streeters? TB
…two of the best and brightest, NYU professor Nouriel Roubini and Nobel Laureates Joseph Stieglitz, and Robert Engle were on CNBC and both pulled no punches as to the severity of the credit crisis…liquidity crisis…as being the most severe since the Great Depression…TB concurs. Steiglitz, who recently stated that the cost of the Iraq war is over $2 trillion and will be $3 trillion before it is all over, (and we thought the Louisiana Purchase was Jefferson’s folly), feels it will be much deeper and longer than most expect but is slightly less bearish than Roubini, blames it on a group of Wall Street quants who took just enough statistics to be dangerous. He points to their reliance on historical data, and backtesting to create models that had no relevance to the current conditions. This is much the same as Nobel Laureate Myron Scholes (Black-Scholes options model), who tried to convert theory to practice forgetting that the assumptions, as with Modern Portfolio Theory, are flawed as they do not take into account size of positions, trading costs, etc. Furthermore, what works for one or two people certainly fails when everyone is using the same risk-based models. Hence, the current whining about marking to market from a group who had no qualms about marking to model.
TB recalls the 1987 stock market crash…at that time a colleague said to TB: “we need to get a quant to do all the research…we are getting too old for this.” TB thinks this is precisely the problem. With most brokerages having converted to partnerships where it was best to know what was going on in the firm (Drexel excepted), we have corporate officers who care spit for what happens five years down the road. They want…and in fact need…immediate gratification…bonuses paid on one good year that is followed by years of failure…and this extends well beyond Wall Street…isn’t Other Peoples Money (OPM) great?
This is the basic quandary in investing…how does one value an asset? As TB has stated repeatedly, prices at monthend, quarterend, or yearend are merely a snapshot based on the value of the last trade. Then, all assets in the class are priced at the margin whether that last trade was for $100,000 or $10 million. This can make a huge difference in valuing a portfolio and while it is tough for Wall Street, think how it is for a mutual fund manager when you have a portfolio of thinly traded securities. When you get a bear market as we have recently seen following a prolonged bull market, investors took out money at the top at inflated valuations and if you try to give any advantage to the lack of liquidity in the current environment, scared investors may withdraw funds at a severe disadvantage to investors who do not sell. This opens the door for lawsuits and recriminations.
Thus TB has little confidence in this rally…or that the recession will be short and shallow, but continues to believe it will be worse and longer than those with a vested interest in strong equity markets suggest.
How one can believe that we can overcome 25 years of excess in about six months is inconceivable, especially when incomes, savings, debt levels, all based on the mean, not the median, are skewed by highly paid CEO’s, and hedge fund managers (taxed at 15% by the way), as exemplified by Paulson & Company CEO John Paulson who took in $3.7 billion last year…paying just 15% tax…don’t expect that to change as the GOP does not want to do anything to taxes, the Dems believe that $103,000, the level of the top 10% of taxpayers, is significant…and it is hedge funds that support Hillary, and perhaps Obama so if you believe change is in the wind by either party you are sadly mistaken. Neither party has a clue what they are doing…or chooses to ignore facts…and that is creating major unrest…a bad thing.
Consider the annual meetings of Citigroup and Wachovia held the same day. It was a near riot as investors wanted blood: the entire board should resign…and in Wachovia’s case the CEO…and also at Wachovia, the board should take a cut in pay equal to the losses shareholders have sustained…until they can turn things around. That two banks should have annual meetings with this much angst is amazing.
Now consider the masses who are not earning more money and are doled out a pittance from the US government to placate their anger…that too is not working. We need a fix…but how? TB has no clue how to get that job done.
Hope you all have a nice relaxing weekend and more importantly that we can find someone to do something to save this great country of ours which is being destroyed by greed.TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 25, 2008
