Meanwhile, at the Hall of Unintended Consequences…
by ilene - October 15th, 2010 1:18 am
Meanwhile, at the Hall of Unintended Consequences…
Courtesy of Joshua M Brown, The Reformed Broker
Can ultra-low rates combined with the hedge funds’ Need for Speed create a food price bubble?
Damn right they can and they probably will. They did it with commodities like wheat in early 2008 even as the consumption-to-stock ratio actually warranted a decrease in prices. This is now happening again as cotton hits a 15 year high, exploding corn prices drive the price of beef up to 25 year highs and the rest of the agricultural commodity complex takes off into the stratosphere.
When you link a financial derivatives market, which is technically infinite, to a market of actual hard goods (finite in supply), a price bubble becomes highly possible, even probable. When you drop rates to nothing, leave them there and then add the sex appeal of a long-term uptrend for global food consumption, you are tying a goat to a post in the T Rex cage, virtually beckoning the beast to come and gorge himself.
Marshall Auerback quotes an email exchange with commodities trader and portfolio manager Mike Masters over at Naked Capitalism:
Speculation in commodities can be exemplified from the following illustration. Money can be “created” by fiat. Because there is already much more capital available in the world than hard commodities, and also because money can effectively be created in a nearly infinite way; speculators, without limits, and with determination, can increase the price of consumable commodities, like food stuffs or energy, much higher than traditional consumers and producers (hedgers) can react. When derivative markets are linked to real commodity markets, this nearly unlimited capital from the financial sector can cause financially driven excessive price volatility. This is because in the derivative markets, a nearly infinite amount of new commodity derivative contracts can be created to satisfy the demand of financial sector speculators armed with fresh capital. However, because there is only a FINITE amount of bona fide actual hedgers (producers and consumers of the actual commodity), any speculative demand that exceeds the real amount of commodities that can be hedged at that time must be sourced from other speculators. However, these speculators will only supply new contracts via price- i.e. a new speculative demand that exceeds hedger supply must be sourced from new speculative supply at ever higher prices.
To sum up, we’re talking about an untethering…
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DiggHugh Hendry interview on the BBC
by ilene - September 24th, 2010 2:53 pm
Hugh Hendry interview on the BBC
Courtesy of Edward Harrison of Credit Writedowns
BBC HARDtalk interviewed hedge fund manager Hugh Hendry, CIO & CEO of Eclectica Asset Management, this past Tuesday night. The videos are below.
Related posts
- Hugh Hendry ‘I would recommend you panic’
- Hugh Hendry: Eclectica Fund Management Commentary, May 2010
- Hugh Hendry on Euro Outlook and George Soros
- Hugh Hendry talking Greek and euro banker bailout on CrossTalk
Hugh Hendry Admits: “I’m Losing Money This Month! It’s A Very Uncomfortable Process!”
by ilene - September 22nd, 2010 8:28 pm
Hugh Hendry Admits: "I’m Losing Money This Month! It’s A Very Uncomfortable Process!"
Courtesy of Courtney Comstock at The Business Insider
Hugh Hendry admitted he’s down this month while talking to BBC Hard Talk on Tuesday.
The often unhinged hedge fund manager was subdued until his interviewer began asking him about regulation and risk-taking in the hedge fund industry.
Then he got pretty riled up and spilled that he’s losing money this month, and how much it hurts.
It all started when the interviewer brought up financial regaultion.
"The financial industry is the most regulated sector in the economy," Hendry says.
Then the interviewer suggested that hedge funds, like Hendry’s are less regulated and therefore riskier than banks.
To which Hendry replied, "The most effective form of regulation is that if you mess up, you fail. And that’s the regulation that I’m subject to."
(Watch how the interview proceeds. Our summaries of the interviewer’s questions are in italics.)
Isn’t that very risky? asks the interviewer.
"I do not take extreme risk. Do you think for one moment [rich familes that have saved their money for generations] would give me their money to take extreme risks with it?" (circa 2:10)
Yes, I do think they would. I think that’s the premise that the entire hedge fund industry is based on.
"Extreme risk means that there is a very high probability of losing all of that capital."
Well, that’s what has happened to many hedge funds recently.
(This is when Hendry starts getting upset. The suggestion of his clients’ money being at risk in his hedge fund.)
"I spend half of my time allaying their fears – being transparent, addressing their issues - Where could I lose money? How much could I lose?" (circa 2:54)
(Then we find out why he’s really upset.)
"I’m losing money this month – it’s a very uncomfortable process! My phone never stops!" (circa 2:58)
Hendry quickly went from the best macro fund (up over 13% YTD as of August) to losing money.
Hedge Funds On The Defensive As Hugh Hendry Sees 80% Reduction In Size Of Industry
by ilene - September 21st, 2010 11:24 am
Hedge Funds On The Defensive As Hugh Hendry Sees 80% Reduction In Size Of Industry
Courtesy of Tyler Durden
It is no longer fun being a hedge fund manager – first, up until the recent POMO-based rally in stocks, HFs were down for the year, and what is far worse, they were underperforming the broader market – a death sentence for pretty much every hedge fund, as this is proof a fund can not extract alpha and thus has no reason to collect 2 and 20. While the recent ramp in the market is welcome by all bulls, the question remains just how leveraged into the latest beta rally hedge funds have been. If after the nearly 10% rise in the past 2 weeks any individual HFs are still underperforming the market, it is a near certain "lights out."
To everyone else: congratulations – you just bought yourself another three months of breathing room. Better hope the Fed makes good on its QE promises one day soon. In the meantime, Bloomberg Matthew Lynn and Ecclectica’s Hugh Hendry both confirm that in these days of instantaneous liquidity demands, and cheap strategy replicators in the form of ETFs which provide the same beta capture as hedge funds, at a fraction of the price, it is only going to get worse and worse for the once high flying community. In fact, Hugh Hendry goes as far as suggesting that 10 years from now 80% of all hedge funds will be gone. Our personal view is that the target will be reached in a far shorter time frame.
On one hand, Matthew Lynn shows the uphill climb that defenders of the hedge fund industry have to pass in recent days. "An industry that doesn’t know how to defend itself, and has forgotten how to justify its existence, is in crisis. Hedge funds are now in that position." Hilariously, Lynn shows that hedge funds uses that good old staple used by HFTs to defend their own piracy ways and means: providing liquidity.
On both sides of the Atlantic, hedge funds have been busy trying to hold their own against the tide of fresh regulations sweeping through capital markets.
The Washington-based Managed Funds Association, the U.S. hedge-fund industry’s biggest trade group, has been campaigning against proposed curbs on high-frequency trading. That would, it says, reduce liquidity
…
The Big Boys Discover Options
by ilene - September 5th, 2010 4:04 pm
The Big Boys Discover Options
Other institutions follow Pimco in using puts and calls to battle stock-market risk. Global volatility leads to less reliance on modern portfolio theory.
IN THE RAREFIED WORLD OF endowments, pension funds and major asset- management companies, worries about risk are often quashed by modern portfolio theory.
The Nobel Prize-winning concept essentially contends that asset diversification alone is enough to reduce risk. Options, though designed for that very purpose, are historically viewed as an inelegant solution.
But the old biases could be fading, according to a study released last week by the Options Industry Council, an educational marketing group primarily funded by the options exchanges.
THE GYRATIONS in the global financial market seem to have upturned longstanding ideas in the investment community, including those about owning a variety of stocks or bonds to reduce investment risk. Even now, correlation is damaging many portfolios as different assets, including some stocks and bonds, increasingly trade like each other.
The OIC study suggests that the financial crisis has made endowments, pension funds and major asset managers more open to using options to reduce portfolio risk. This is a significant development. The common experience for derivatives salesmen traveling to Boston and other bastions of the money-management industry, is to be viewed by portfolio managers as people with two heads and one eye, trying to peddle exotic financial detritus.
The Root of Economic Fragility and Political Anger
by ilene - July 18th, 2010 2:32 pm
The Root of Economic Fragility and Political Anger
Courtesy of Robert Reich
Missing from almost all discussion of America’s dizzying rate of unemployment is the brute fact that hourly wages of people with jobs have been dropping, adjusted for inflation. Average weekly earnings rose a bit this spring only because the typical worker put in more hours, but June’s decline in average hours pushed weekly paychecks down at an annualized rate of 4.5 percent.
In other words, Americans are keeping their jobs or finding new ones only by accepting lower wages.
Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks.
We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground.
And as long as this trend continues, we can’t get out of the shadow of the Great Recession. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing.
America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class could boost its purchasing power was to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.
Each of America’s two biggest economic downturns over the last century has followed the same pattern. Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the…
What Does The Financial Reform Bill Do Other Than Being Completely And Utterly Worthless?
by ilene - July 15th, 2010 6:44 pm
What Does The Financial Reform Bill Do Other Than Being Completely And Utterly Worthless?
Courtesy of Michael Synder at The Economic Collapse
Is it possible to write a 2,300 page piece of legislation that accomplishes next to nothing and is pretty much completely and utterly worthless? The answer is yes. Barack Obama has been trumpeting the Dodd-Frank financial reform bill as the "biggest rewrite of Wall Street rules since the Great Depression", but the truth is that after the Wall Street lobbyists got done carving it up, the bill that was left was so watered down and so toothless that it essentially accomplishes nothing except creating even more government bureaucracy and even more mind-numbing paperwork.
The bill is so riddled with loopholes for the big banks that it is basically the legislative equivalent of Swiss cheese. The Democrats in the Senate were ecstatic when they announced that they had secured the 60 votes needed to pass this legislation, but when they are asked about what the financial reform bill will do, most of them are left stammering for some kind of cohesive response. The sad truth is that most of them probably don’t understand the bill and none of them will probably ever read the entire thing.
So will the financial reform bill do any good at all?
Well, yes.
A very, very small amount.
Essentially, it is kind of like going over to the Pacific Ocean and scooping out a couple of cups of water.
That is about how much good this bill is going to do.
But U.S. Senate Majority Leader Harry Reid is making this sound like this is some kind of history-changing legislation….
"We’re cleaning up Wall Street."
Oh really?
Charles Geisst, professor of finance at Manhattan College recently had the following to say about this absolutely toothless bill….
Like health-care reform, this bill is being drawn up to grab headlines but its details betray it as nothing more than a slap on the wrist for Wall Street. It is true that Wall Street can commit grand theft and apparently get off with nothing more than community service.
The truth is that most of us never expected the U.S. government to truly take on Wall Street. The relationship between the two is just way too cozy for that to happen.
So does the financial reform bill actually accomplish anything?
Yes.
Let’s take a look…
Do Hedge Funds Trade On Insider Information?
by ilene - July 9th, 2010 2:47 pm
Do Hedge Funds Trade On Insider Information?
Courtesy of Tyler Durden
A very interesting research paper currently in publication by a team from York University headed by Nadia Massoud asks "Do Hedge Funds Trade on Private Information? Evidence from Syndicated Lending and Short-Selling" and analyzes whether or not hedge funds actively trade in the public securities of companies that had approached said hedge funds with private, capital structure specific (in this case loan syndication and amendment) information. The paper focuses on the period between 2005 and 2007, when the first wave of second- and third-lien debt that had been issued by crappy companies to hedge funds, was starting to become impaired and led to wave after wave of covenant and other bank loan amendments, designed to allow the borrower some breathing room.
Massoud also tracks whether or not in the days preceding the public announcement of a covenant amendment, traditionally seen as a sign of weakness by any borrower company, there was a spike in short-selling activity by hedge funds, courtesy of an interval between January 2nd 2005 to July 6th 2007, when RegSHO had made public extensive detail on equity short-selling data (why this is no longer the case one has to ask the corrupt SEC, but that is a question for after the next 10,000 point Dow flash crash when the SEC’s headquarters will finally be surrounded by rioting former investors who have had enough). The paper finds conclusive evidence that companies that come to lenders in hopes of amending syndicated credit facilities do indeed see aggressive shorting of their stock into the days preceding the formal announcement, implying that there is obviously material non-public information abuse and frontrunning. Here, the authors of the paper however, make a blatantly wrong assumption that this frontrunning originates almost exclusively from within the hedge funds that had been approached with the material non-public disclosure of weakness. We are happy to demonstrate that not only is that not necessarily the case, but to explain why certain sections of FT holding company Pearson can charge over $100,000 a year for premium subscription to their content by rich hedge fund subscribers, thereby once again creating a very tiered information market. We speak of course of Pearson niche media subsidiary www.debtwire.com
First, a brief observation of the York paper’s conclusions. As the charts below summarize, there is almost no doubt…
Victor Niederhoffer Thinks He Caused The Stock Market Crash Of 1997
by ilene - June 23rd, 2010 1:35 am
Victor Niederhoffer Thinks He Caused The Stock Market Crash Of 1997
Courtesy of Courtney Comstock at Clusterstock
Victor Niederhoffer thinks he caused the stock market crash of October 27, 1997, when the DOW dropped over 550 points.
In an interview with Slate Magazine, Nierhoffer explains his theory:
They all knew that if I was hurting in one market, I’d have to liquidate in the other markets.
Whenever someone’s in trouble, it circulates around Wall Street; you’d be amazed how just one small fish is enough to stop the wheels of commerce for long enough to relieve that person of his funds. And then the market goes back to doing exactly what it was going to do beforehand.
I still think that the crash of Oct. 27, 1997, was basically due to brokers running my position against me, knowing that I was on the ropes. The market had its greatest drop in the previous 10 years that day. And then the next day, once they were able to force me out, it went up more than it dropped.
Let’s compare his hypothesis with what some other financial experts think caused the crash.
Bernanke
Bernanke says that October is just a crazy month for the markets.
“Classically, October has always been the month for financial problems,” Mr. Bernanke told the WSJ in 2007.
Krugman
The Asian markets were overvalued and the bubble burst - (Urbi Garay’s paper on the crisis)
Malcolm Gladwell
He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell.
It was an unhedged bet, or what was called on Wall Street a "naked put," meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices.
He ran through a hundred and thirty million dollars — his cash reserves, his savings, his other stocks — and when his…
George Soros: Financial Crisis Has “Only Entered Act II”
by ilene - June 11th, 2010 11:48 am
George Soros: Financial Crisis Has "Only Entered Act II"
Courtesy of TraderMark
Love or hate his politics, there is no doubt George Soros is one of the brightest investment minds of the past few generations. Hence when you have Soros on one side saying we have only begun the 2nd stage of the financial crisis, and on the other hand you have "Unicorns and Butterflies" Bernanke telling us all is well (kumbaya!) [and coming off one of the worst economic forecasting records the past half decade you could put together], you can guess which side one might be better off listening to.
“The collapse of the financial system as we know it is real, and the crisis is far from over,” Mr. Soros said at a conference in Vienna. “Indeed, we have just entered Act II of the drama.”
NYTimes DealBook has a full transcript of the speech Soros gave at the Institute of International Finance in Vienna here. Remember, you can choose to accept the red pill or the blue pill; if you choose the blue pill Ben Bernanke has solved all your ills… if you choose the red, please read on for some excerpts.
- Soros, 79, said the current situation in the world economy is “eerily” reminiscent of the 1930s with governments under pressure to narrow their budget deficits at a time when the economic recovery is weak.
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