As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
A couple of alleged Tweets, a few rumored phone calls, and what have we got? $2 trillion in new global stock market capitalization in hours. That was the bottom line after the purported communication between the staffs of Germany?s Angela Merkel, France?s Jean Francois Hollande, and ECB president Mario Draghi. But is the creation of this immense new wealth, which would alone rank as 10th in terms of GDP after France, justified?
If the intention was to punish hedge funds, the goal was certainly accomplished. The plaintive bleatings in email and text messages I received from hedge fund friends back home has been overwhelming. It was clear from the price action, straight line moves with no pullbacks, that the pain trade was definitely on. Pre-Thursday, the consensus wisdom was that market would crash into the August doldrums in the face of global economic data that was deteriorating by the day. Such is the price of betting against central banks that I highlighted in my recent trope ?Why Ben Bernanke Hates Me? (click here at http://madhedgefundradio.com).
Leading research houses seemed to be in an arms race with government institutions to see who could cut growth forecasts the fastest. They were all egged on by US Q2 corporate earnings reports, that were highly fudged and indifferent at best, with the most honest wisdom provided by the shocker from Apple (AAPL).
However, in the financial markets that are more often driven by emotion than information, politics trump fundamentals every day. With the street heavily positioned on the short side, the conditions for a snap back rally were ripe. This is why I had no positions at all for 10 days, and no equity holdings for over a month. Rather than chase the market on the downside, I waited for it to come to me, which is usually the best thing to do.
I have always believed that Europe has the ability and the resources to solve its problems at any time. To read my advice to the German government in detail, please refer to my report from Frankfurt, which I will write in the next couple of days, when I get some time.
All that is required is for Europe to make some unpleasant admissions of truths, and adopt some policies and institutions that have already been proven to work in the US. These are hard things to do politically, but that can be done. Make the politicians earn their pay for a change, I say. This is what makes the short game in Europe so risky, and why I have recently been so wimpy on my short Euro (FXE), (EUO) recommendations (in the reports, but without trade alerts).
Words are cheap, and their true value will become apparent when it comes time for Mario Draghi to deliver. If he does so quickly, we could see a ?RISK ON?, rally that could last until the end of the year and possibly take the S&P 500 up to 1,500. If he doesn?t, the August crash scenario down to 1,200 is back on the table, but no more. That table loses another leg if Ben Bernanke fails to deliver QE3 on Wednesday.
If all of this leaves you confused and befuddled, then welcome to the club. There are times when markets are just not forecastable, when the number of large variables and unknowns are too great to even make an intelligent guess at outcomes, and this is one of them. That?s why I am still 70% in cash, limiting my ?RISK ON? exposure to small, profitable positions in short Treasury and short yen call spreads. That?s down from 100% I had just last Wednesday.
I think I?ll go climb that Alp over there.
The Pain Trade is on for Hedge Funds
When I backpacked around Europe in 1968, I relied heavily on Arthur Frommer?s paperback guide, Europe on $5 a Day, which then boasted a cult like following among impoverished, but adventurous Americans. Over the following years he directed me down cobblestoned alleyways, dubious neighborhoods, and sometimes converted WWII air raid shelters, to find those incredible deals. When he passed through town some 44 years later, I jumped at the chance to chat with the legendary travel guru.
Frommer believes there are three sea change trends going on in the travel industry today. Business is moving away from the big three travel websites, Travelocity, Orbitz, and Priceline, who have more preferential side deals with airlines than can be counted, towards pure aggregator sites that almost always offer cheaper fares, like Kayak.com, Sidestep.com, and Fairchase.com.
There is a move away from traditional 48 person escorted bus tours towards small group adventures, like those offered by Gap Adventures, Intrepid Tours, and Adventure Center, that take parties of 12 or less on culturally eye opening public transportation.
There has also been a huge surge in programs offered by universities that turn travelers into students for a week to study the liberal arts at Oxford, Cambridge, and UC Berkeley. His favorite was the Great Books programs offered by St. Johns University in Santa Fe, New Mexico.
Frommer says that the Internet has given a huge boost to international travel, but warns against user generated content, 70% of which is bogus, posted by the hotels and restaurants touting themselves.
The 81-year-old Frommer turned an army posting in Berlin in 1952 into a travel empire that publishes 340 books a year, or one out of every four travel books on the market. I met him on a swing through the San Francisco Bay Area (his ticket from New York was only $150), and he graciously signed my tattered, dog-eared original copy of his opus, which I still have.
Which country has changed the most in his 60 years of travel writing? France, where the citizenry have become noticeably more civil since losing WWII. Bali is the only place where you can still travel for $5/day, although you can see Honduras for $10/day. Always looking for a deal, Arthur?s next trip is to Chile, the only country in the world he has never visited.
Arthur?s Next Big Play is Bali
?We didn?t get here by accident. America is the product of the greatest public/private partnership in the history of the world,? said Tom Friedman, international affairs columnist at the New York Times.
It was an unexpected call. A close friend who ran one of the world?s largest hedge funds said he had two tickets to the London Olympics opening ceremony on Friday night. Would I like to have them? I said he must be kidding.
I knew from my own research that these tickets were the most sought after in the world and were going for $20,000 each on the black market. Forgeries abounded. Besides, I was high in the Swiss Alps at Zermatt, and every flight going into London for weeks was booked. How was I supposed to get there?
No problem, he said. He would send his private Gulfstream G5 to pick me up. I answered that I was planning an assault on the Breithorn on Sunday, and that the guides had already been booked and the equipment rented. No worry, he would have the jet on standby in London until I was ready to return.
I said he was out of his mind. The day he was proposing would cost at least $100,000. He replied that he made over a billion dollars on my Swiss franc trade last year and it was the least he could do to say thanks. I said OK, but only if I could fly in the right hand copilot?s seat. ?Done,? he shot back.
I set to work immediately obtaining the necessary flight clearances. The nearby Swiss Air Force base at Sion was easy. But getting permission to land at Luton, just 45 minutes from the Olympics east London venue, was a little trickier. The British were unusually touchy about allowing private aircraft near the games, and my civilian inquiries hit a dead end.
Sion Airport
But after a few well-placed calls to the Pentagon it was settled. Looks like I owe the US Air Force Staff College a free lecture. I checked the NATO meteorological website, and miraculously, it looked like a cold front was veering to the right, and would just miss the Olympic site.
After my Zermatt strategy seminar, I literally ran to the heliport next to the Banhoff. In minutes, we were revving up the engines, and tore down the valley to Sion, an almost instantaneous free fall of 4,000 feet. The route the train covers in 80 minutes we did in ten. As soon as the chopper landed next to the G5 I hopped in with an overnight bag and we taxied for takeoff. At full power, we covered the route via Frankfurt and Paris in just 2 hours.
At Luton, a black Daimler limonene was waiting for me. I held my breath as the driver expertly negotiated the back roads to Stratford, hoping he wouldn?t get tied up in an immense traffic jam. Finally, a mile from the stadium we hit a wall of unmoving cars.
I jumped out and started briskly walking, carrying every form of ID I had, expecting to get challenged at every point. I was armed with a giant full page Olympic ticket with my photo that hung around my neck, a passport, my Department of Defense DD 214, a US commercial pilots license, a membership to the Surrey Rifle Association, and my old Scoutmaster?s card from a Boy Scout troop in west London. I made it just in time.
The atmosphere was absolutely electric, with everyone on a high. Try to imagine the excitement of the Super Bowl, the World Series, and the World Cup combined, and you might have an inkling of the emotions. Just getting here was a major achievement for all in attendance. The sound system was so loud that it reverberated straight through your body.
I sat in a high security VIP area about 100 feet from where Queen Elizabeth II sat surrounded by security men. No one can top the Queen on Olympic credentials. She opened the 1976 Montreal games herself.? Her father, King George VI, opened the 1948 London games. Her grandfather, King Edward VII, did the same for the 1908 games. I never believed for a second that she arrived by parachute with James Bond. Her husband, Prince Phillip, the Duke of Edinburgh, has origins that lie with the Greek royal family. Presidential hopeful, Mitt Romney, was not far away, sitting close to Bill Gates and Sir Richard Branson.
The ceremony opened with a medieval pastoral scene of farms, animals, and maypoles, even though most of the British lost their connection to the land ages ago. The London Symphony Orchestra tastefully opened with Elgar?s Nimrod. I quickly became the historical interpreter for the guests who surrounded me, as few could identify the significance of the Isambard K. Brunel figure played by Kenneth Branagh, the builder of Paddington Station and the first iron ship, the SS Great Britain.
Isambard K. Brunel
The rise of the industrial revolution was truly impressive, with its towering smokestacks, and the costs to the people and the land were clear. This was climaxed by the symbolic forging of the Olympic rings of steel. The smoke gave off the genuine stench of a steel mill.
After that there was so much going on in the arena, it was hard to keep track of it all. It was also a challenge to integrate the story line that played out on the big screen with the live action in front of you, and we all struggled to keep up. Unless you were an authority on English history, it was easy to lose track of what was going on.
I?m not sure many understood the significance of Emily Pankhurst and the suffragettes, the red poppies of WWI, and the blitz of WWII. Then 200 beds on wheels with nurses suddenly appeared as a tribute to the National Heath System created in 1948. After our recent Supreme Court decision on Obamacare, I wonder if we will do the same someday.
Rowan Atkinson was brilliant as the bogus member of the orchestra.? When 50 Mary Poppins holding umbrellas descended from the sky, I was afraid the whole thing would degenerate into a clutch of British clich?s. But then Paul McCartney played Hey Jude and we all nearly lost it.
The parade of the teams certainly challenged one?s knowledge of national flags. We took pictures of them and they took pictures of us. By the lime Lesotho appeared, I was starting to fade, so I told my neighbors to wake me up when the United States appeared. When they did, they looked glorious in their Chinese made Ralph Lauren designed blue blazers and berets.
Of course, the big suspense was over whom would light the Olympic flame. As a former marathon runner, I was hoping for Roger Bannister, who broke the four- minute mile in 1954. Then we were teased into thinking it would be soccer great David Beckham, who grew up nearby and arrived with the torch in a giant, glowing, powerboat. In the end, we saw seven British Olympic greats handing off torches to seven unknown kids to symbolize the passing of the generations. Finally, fireworks went off to the sound of Pink Floyd. How cool is that?
Only through the miracle of cell phones, Mapquest, and GPS was I able to find my forlorn limo driver. By the time I was dropped off at a friend?s house at Hampstead Heath, it was 4:00 AM. I heard it took three hours for Britain?s high-speed rail system to empty the 80,000 spectators from the stadium.
My return to Switzerland was considerably less dramatic. When the G5 landed back at Sion the next day, I took a taxi to the train station and caught a train up the mountain to Zermatt. En route, my friend called me and asked what my big trade for 2012 would be. I said I?d get back to him, but with a presidential election, a continuing European crisis, and a fiscal cliff ahead of us, I had great hopes. I got back to my chalet just in tine to turn on the TV and watch Michael Phelps blow the 400-meter individual medley.
The day checked another item off my bucket list, allowing me to give thanks for my life. And I?m now on my forth bucket list. Sorry, no financial stuff today. The surprise day at the Olympics blew a 24-hour hole in my work schedule, and I?m getting up at 5:00 a.m. tomorrow morning to climb the Breithorn.
Given the choice of bagging another 14,000-foot Alpine peak and publishing the 1,400th Diary of a Mad Hedge Fund Trader, I?ll settle for the altitude. You?ll just have to settle for the two Trade Alerts I sent out Thursday to sell short Treasury bonds and the yen, which I?m happy to report turned immediately profitable.
?Computers crash, and you have to reboot them. That will happen to the global economy,? said Mark Faber, publisher of the Gloom, Boom, and Doom Report.
I don?t just think he hates me. He truly despises me. In fact, he does everything he can to put me out of business.
Take next week, for example, when the Federal Reserve Open Market Committee meets, and he will attempt to give my views and me a complete thrashing. I doubt he?ll launch a QE3 because he needs to keep some dry powder as a last resort. But he probably will announce some minor back door easings, like expanding his ?operation twist? to include mortgage backed securities for the first time, or ceasing interest rate payments on deposits from private banks. Just the mere prospect of this is forcing me to stay entirely in cash, preventing me from making more money than I already am.
It?s not that I am not an all right guy. I am kind to children and small animals. I donate generously to many charities. I send my mother cards on her birthday (happy birthday mom!), even though she is 84 and not expected to last much longer. I even occasionally escort little old ladies across the street, although this is a holdover from my days as an Eagle Scout.
It?s just that Ben Bernanke and I don?t see eye-to-eye on a lot of important issues. He wants stocks to go up. As a hedge fund manager who plays from the short side more often than not when the economy is growing at a paltry 1.5% rate, I want them to go down. He wants bonds to go up too, as he clearly elicited with his ?twist policy? last year when he bought long term Treasury bonds and shorted overnight paper against it. I, on the other hand, want bonds to sell off because I know that when the bill comes due for all of this monetary easing, the crash will be momentous.
These are not the only matters we differ on. He wants to create jobs. He can wish this until the cows come home but he?s not going to get them because of the gale force demographic headwinds the country is now facing and the massive deleveraging by the public and private sector. The 25 million jobs we exported to China are never coming back.
However, all he has to do is make a mere mention of his desires, or even just mention the letter ?Q?, and asset prices go through the roof, forcing me to stop out of my shorts at losses. This is why I was in such a foul, acrimonious, and detestable mood during the first quarter, when stocks went up almost every day.
My problem is that Ben Bernanke isn?t the only person who dislikes me. President Obama doesn?t think much of me either. He talks about jobs too. He frequently speaks about the need to improve our education system, even though I know he is poised to slash the budget for the Department of Education as part of some deal with the Republicans. Ditto for Social Security.
Fortunately for me, I wrote off any prospect of getting a retirement check a long time ago and have made other arrangements, like becoming a hedge fund manager. Either the payments will be too small to live on, or they will be made in Zimbabwean dollars and will be effectively worthless.
I get along with Treasury Secretary, Timothy Geithner, OK, which keeps me on his ?must see? list whenever he stops in San Francisco on his way to Beijing to ask to borrow more money. But we go way back. There are only four people in US history who can discuss Japanese monetary policy of the 1920?s in depth, and do it in Japanese just for laughs (it was clearly too easy). Two of them, Senator Mike Mansfield of Montana and Harvard professor, John K. Fairbank, died ages ago. So he is kind of limited on choices. Besides, there are not a lot of people out there who can give him a 40 year view on the global economy, and I am one of them.
There are plenty of others who don?t think I am so hot, too. Try making a fortune in a market crash when everyone else is losing their shirt. While others in the locker room at my country club are slamming doors, tearing their hair out, and breaking golf clubs in half when they see the price feed on CNBC, I am chirping happily away about selling short at the top. I might as well be letting out a loud fart in Sunday church service. This explains why I stopped getting invitations to dinners ages ago.
It?s not that my relationship with Ben Bernanke is totally hopeless. When the demographic picture turns from a headwind to a tailwind and individuals and corporations cease deleveraging and return to releveraging, we?ll probably be reading from the same page of music. But according to the US Census Bureau, the earliest this can happen is 2022. By then, he probably won?t be the Fed governor anymore and I won?t care if he likes me or not.
Besides, I may be able to make a new friend or two in the meantime. If Mitt Romney wins the presidential election he says he?ll fire Ben Bernanke on his first day in office. He can?t really do that, but Ben?s term does expire a year later. His two most widely rumored picks to fill the post are president of the Federal Reserve Bank of Dallas, Richard Fisher, and Stanford University professor, John Taylor.
These two are not in the least bit interested in all this quantitative easing malarkey. They are much more similar in philosophy to Herbert Hoover?s Treasury Secretary, Andrew Mellon, who popularized the ?let the chips fall where they may? approach to economic policy. Kick the props out from under this market and all of a sudden Dow 3,000 is on the table, as argued by Global strategist and demographics maven, Harry Dent.
They might even go as far as unwinding the Fed?s hefty $2.7 trillion balance sheet. That would give the Chinese, who hold $1 trillion of these bonds, a heart attack. But who cares? It would create the mother of all trading windfalls for me. Hell, they might not even care if I torture small animals, beat children with a switch, and leave little old ladies in the middle of onrushing traffic. I think we would get along just great.
Screw Social Security, and Ben Bernanke too.
The full force of soaring oil prices really hit home when I arrived in Paris yesterday. As we passed a gas station, I mentioned to the driver that I didn?t know that they sold gas by the gallon in France. He answered that they didn?t. Those were the prices in liters I was seeing. He then voiced concerns about the future of his taxi business as fuel prices ratcheted up from $10 to $15 a gallon! It makes our own bleating that our prices at $3.50 a gallon appear somewhat detached from reality.
The Paris strategy luncheon, held at the Cercle National des Armees, or the French Army Officers Club, was one of the best yet. You know, the place where Napoleon used to hang out? I gave my talk under the watchful eyes of the portraits of Charles de Gaulle, President Francois Hollande, and the French Foreign Legion. Renditions of the battle of Waterloo were nowhere to be seen.
When I gave my event here last year, Internet access was only available in the lobby. Perhaps that?s why the French lost Vietnam? At the table on my right a group of French Air Force officers were planning the next air strike on Libya. On my right several Chinese admirals were negotiating to buy an aircraft carrier from the French Navy. It was some of the most fascinating eavesdropping I have ever done.
The event turned in to something of a reunion for me, with my former institutional clients from the 1980?s dropping by, as well as some of my French staff from the London office of Morgan Stanley. A gentleman from Warsaw, Poland won the prize for the greatest distance traveled. Spend your Zimbabwe dollars wisely. Maybe you can offload your holding to Bashar Assad, who may soon need them.
The big question at all of my recent lunches is ?Will there be a QE3? I offered the simplest of all possible explanations. Asset classes that prospered mightily from the $600 billion infusion of the Federal Reserve during QE2, like stocks, commodities, precious metals, and oil, will suffer the most from its demise. Asset classes that suffered from the rapid expansion of the monetary base this encouraged, like the US dollar, should see a rebound. The political balance in Washington makes a QE3 impossible, unless the stock market crashes first, vaporizing Ben Bernanke?s wealth effect. So don?t hold your breath. It would be a last desperate act.
Not All is Well in the City of Light
Everyone present complained that the Euro was in freefall at $1.22, but conceded that momentum could take it as low as $1.00 before it sees a reversal. I brought an extra suitcase to Paris, hoping to fill it with goodies for those on the home front at the department store Gallarie Lafayette, Mon Dieu! But prices were still so high that I only purchased a few postcards, knowing I could buy the same products at home on the Internet for half the cost, with free shipping and no import duties.
I spent the weekend playing tourist and visiting my old favorites, such as the Louvre, the Musee d?Orsay, Sacre Coeure, Montmarte, the Eiffel Tower, and a fine dinner floating down the Seine on the Bateaux Parisienne. The food is so good that even the local corner brasserie produced a meal to remember. A stylish people make it impossible to be overdressed, no matter where you go. In Paris, even the homeless have taste. A search for my front teeth on the Left Bank, which I lost in a riot there in 1968 when a flying cobblestone hit me in the mouth, yielded no results.
My next report will be from Frankfurt, Germany.
?Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,? said Andrew W. Mellon, President Herbert Hoover's Secretary of the Treasury. The Republicans did not win a presidential election for 20 years after that comment.
