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In this week's Tuesday edition of the Wall Street Journal, the feature article on the front page of the Marketplace section was a long piece discussing Jeff Immelt's 10-year anniversary as GE's CEO.
It's worth observing, in this age of blogging, how advertising-paid media still refrain from the blunt honesty of a blog like, well, this one. I've criticized Immelt for over five years, just based on the cold, available facts of GE's and Immelt's performance, Immelt's outrageous compensation, and the comparable S&P500 performance.
With the same information, the Journal was significantly kinder and less pointed in its evaluation of Immelt's reign.
For example, take the article's second paragraph,
"The part he might want to leave out: GE's stock ended that week in August down 15% from the start of the year and 61% lower than when he took over as chairman and chief executive of the industrial conglomerate 10 years ago."
Fine as far as it goes, but how about comparing GE to the index? The nearby price chart for GE and the S&P500 Index show that, while the index has been roughly flat for 10 years, GE has fallen precipitously. So much so, in fact, that Immelt has nearly wiped out the entire GE performance premium earned since 1960!
Great job, Jeff!
Why doesn't the Journal provide this objective measure? Probably because they'd like to continue to run GE advertising and have the occasional interview with GE senior management.
So much for real analysis of business news, eh?
But here's something even more bizarre. The next passage in the article reads,
"If I had to grade him, he is a solid B student, not lighting the world on fire," says Peter Klein, a senior portfolio manager at Fifth Third Asset Management in Cleveland, which holds GE shares. "The pieces now are probably at a point where they are getting polished and getting attention that profitability will improve." "
Is it just me, or is Klein more of an embarrassment to Fifth Third than Immelt may be to GE? Or this article to the WSJ? After reading Klein's rating of a guy who destroyed 40 years of value at GE, calling him a "solid B student," would you invest in his portfolio? Or anything at Fifth Third?
How completely destructive must a CEO be to earn a 'D' from Klein, if GE under Immelt is a "solid B?"
Then there's this laughable section,
"Inside the 131-year-old company, where executives are more accustomed to accolades than censure from Wall Street, the sluggish share price has created palpable frustration. Mr. Immelt counters that only two other companies, Exxon Mobil Corp. and Royal Dutch Shell, have made more money over the past decade. GE has paid out $87 billion in dividends over the period and is sitting on a company record $189 billion book of orders."
This is more of Immelt's deliberate ignorance of modern finance, in favor of the hoary old notion that simply being big is good enough.
Ever hear of total return, Jeff? And where's the Journal's criticism of a CEO so brazenly old-fashioned as to flaunt the notion of earning a competitive return for the risk he's taking on his shareholders' behalf?
The stupidity and ineptitude at GE clearly extends to its board, as we read in these passages,
"Size is working against GE as well. Mr. Welch took GE to nearly $130 billion in revenue from less than $30 billion. Today the company has $150 billion in revenue, but continuing double-digit gains is tough at that scale.
"Is it going to grow the way it did 25 years ago when it was a third or a quarter of the size? No, the math just works against you," says Ralph Larsen, the lead independent director on GE's board."
That's all that Larsen can manage to articulate about Immelt's colossal failure as CEO? Maybe he's best buddies with another firm's board member, a chairman, no less, currently under fire. Reading Larsen's quote, what sane investor would buy, or continue to hold, GE shares?
The Journal article at least includes someone else's criticisms of Immelt's bad timing on acquisitions and disposals,
"Some former GE executives and investors say Mr. Immelt sells late and buys too high.
"GE hasn't been as strategically adept as it was 25 years ago," says Jack De Gan, chief investment officer for Harbor Advisory Corp. in Portsmouth, N.H.
GE sold its plastics business after the market peaked and jumped into subprime lending too late to reap the rewards, exiting with a $1 billion loss, critics say. The company failed in a 2008 attempt to sell its slow-growth, low-margin appliance business and scrapped the plan a year later.
Mr. Immelt bought security companies after 9/11, agreed to a big premium to acquire U.K. medical research company Amersham in 2003 and is buying into the oil business with prices much higher than they were in the first half of his tenure. Buying Enron's wind business out of bankruptcy created a new business for GE, but multiple acquisitions in water treatment haven't paid off.
Mr. Immelt rejects the criticism. He says the dispositions of plastics and insurance were "home runs" and that the acquisitions were a mixed bag. "You can't do a lot of deals and have them all be great.""
Leave it to Immelt to simply stonewall the facts when he doesn't like them. The record on his disposal of plastics, NBC/Universal and parts of its financial business is quite clear, and it's not pretty.
The simple truth is that GE is an anachronism- a dinosaur. As a diversified conglomerate in an age of hyper-efficient capital markets and ultra-low brokerage fees, there is no longer any reason for such a corporation to exist. It should have been split into its large constituent businesses many years ago. That Jack Welch was able to confuse and bedazzle analysts and investors for so long with his charm and character just served to obscure this truth.
If Welch had truly had shareholder interests at heart, he'd have broken up GE after he stabilized it in the early 1980s. Then he'd have avoided the disastrous RCA and Kidder Peabody acquisitions, as well as the mistaken swelling of GE Capital, while allowing shareholders to directly benefit from each large unit's individual performances.
This morning I happened to catch a few minutes of self-aggrandizing New York Times columnist Tom Friedman on CNBC. It seems he and a co-author are out with a new book which celebrates the decline of the US. I write celebrate because, despite what Friedman likes to portray himself as on CNBC- a champion of individual initiative- he is, after all, a liberal Times columnist who never met a government program he doesn't like.
Today, he was breaking the shocking news that globalization of competitions means that every worker is now subject to those forces.
What previously unthought insight will Friedman provide us with next?
Of course, I'm being sarcastic. I wrote this post in late June, spurred by Michael Spence's WSJ editorial, regarding how globalization has likely rendered a global lowest-ranking group of people unfit for competitive employment. Specifically, I contended,
"Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.
But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.
My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.
It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.
Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.
While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.
Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?
Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.
A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonable facsimile of "the American Dream." Others will not.
I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.
Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.
America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning."
Friedman solemnly intoned that now every US worker must adopt two attitudes- that of an immigrant (being hungry) and of an artisan (provide unique skills).
I don't disagree with Friedman, but I've been thinking and behaving along those lines since 1983. That's when I left a dissolving AT&T. Looking up the management chain above me, I realized none of those self-satisfied, but mostly insecure executives were going to magically protect me or my job. When I went seeking other employment, and landed at Chase Manhattan, that view was reinforced, along with Friedman's second point.
Within just a year or so of arriving at the bank, it began its first rounds of hiring freezes, then layoffs. It was at that time that I began, with my late business partner, Debbie Smith, to create a body of intellectual property that was severable from my employer and transportable to other venues.
I view Friedman's current realizations as ones that I came to nearly 30 years ago. Rather than write about them, I, as tens of thousands of other entreprenurially-oriented Americans also have done, I behaved according to these understandings.
From his longstanding, cushy job at the liberal New York Times, Friedman seems so isolated from reality that his every thought seems, to him, worthy of a book informing us lesser beings of the truth he just discovered.
But I have another story of a fairly frequent CNBC guest which is interesting for another reason. It's in the vein of my posts about how the ethically-challenged network continues to use also ethically-challenged Steve Rattner as a guest-host and guest. Searching on "Rattner" on this blog will provide you with a list of posts, among which are some that detail his run-ins with the SEC and implicit admission of some pretty serious misbehaviors concerning 'pay to play' asset management.
On the theme of "it's a small world after all," I happened to make the acquaintance, on my recent hiking trip to the White Mountains of New Hampshire, of a criminal practice attorney whom I'll call Dave. Learning of my professional activities in equity investing, and one-time hedge fund partnership with a former Salomon Brothers partner of some repute, he asked if I knew a hedge fund manager whom I'll call Mr. O. O is a periodic guest on CNBC.
When I related my close 'degrees of separation,' but not personally-direct, connection to O through the former Salomon partner, Dave related the following story.
Dave has a client who was induced to participate in one of O's hedge fund investments. I should clarify that, when O appears on CNBC, he's always portrayed as a large-cap US equities investor. His background is one of being an equity strategist at a noted Wall Street firm some years ago. He usually speaks of specific US equities, effectively talking his book.
In this case, however, the investment was an energy project in either Russia or one of its former Republics. The investment went bad, and Dave's client's stake was entirely lost.
Dave then recounted some of the developments of the subsequent lawsuit over the investment. It seems that there were violations of the Foreign Corrupt Practices Act, which is the law that forbids US firms from paying bribes overseas in order to secure business. Dave told me that O escaped conviction but was pretty clearly involved. One of O's lieutenants, however, was not so lucky, was convicted, and did jail time.
Needless to say, O continues to appear on CNBC. This, and the use of people like Rattner, with whom Dave was also familiar, in the same manner as I am, was why, Dave explained, he doesn't even bother to watch the network anymore.
What struck me as interesting new information from Dave was that O's hedge fund apparently involves not-inconsequential investment activity in vehicles which are quite far afield from the traditional, liquid US equities with which he and his fund are typically identified. And they would seem to be fairly important as a proportion of the fund's activities, if members of the fund's management are being convicted of violating federal laws in order to operate said investments.
Maybe CNBC should do themed mornings with guest hosts and guests who all share a trait, like having entered into a settlement with the SEC, or having employees convicted of violating federal laws in the course of managing fund investments.
After I wrote this post yesterday, I heard and read some more punditry regarding Yahoo. The salient points which I found insightful, as I don't follow Yahoo as if I were an analyst, were that the firm's breakup value is almost certainly far higher than its current value because of its passive investment in Alibaba.
Thus, another parallel between GE and Yahoo arose. Both essentially shouldn't exist as they are any longer. I've argued for years that GE should have been split up after Welch left. It appears that Bartz should have set about spinning out the Alibaba investment from the start, which would have increased shareholder value by putting that extra piece of equity paper into each shareholder's hands.
What was left could then have been either restructured to actually make some money, or sold for parts to another online-oriented firm.
One more parallel? Roy Bostwick, Yahoo's chairman, is a long-standing board member. When I heard how much he paid Terry Semel for presiding over the firm's stall- hundreds of millions of dollars- I realized that, like GE, Yahoo also has a lapdog board. Between Jerry Yang and Bostwick, the board's ineptitude is so enormous as to basically absolve Bartz of any failure. Bostwick is such a shadowy chairman that yesterday was the first I'd heard of him in ages. Yet, when his long, sorry involvement in the firm was catalogued by an analyst on Bloomberg, it became clear that Bostwick, far more than Bartz, owns the current Yahoo mess.
Reading the Wall Street Journal's piece this morning on Bartz's dismissal, I was amused to see that the board set as her goals to halt the viewership slide, raise revenues, and improve the price of the firm's equity. All reasonable over time, perhaps, but not on a quarterly basis. Further, if Bartz hadn't done it in two years, another 6 months was unlikely to matter.
No, what's becoming clear in Yahoo's case is that the real solution was and remains one that Bartz probably wasn't allowed to consider- sell or spinoff the valuable parts to unlock value, then deal with the detritus.
I rarely find that longtime banking analyst Dick Bove has much of interest to say. His buy ratings on large banks are often so short-term as to be encouraging retail investors to time their trading to quarters.
But this morning, Bove had several useful comments regarding BofA CEO Brian Moynihan's so-called Tuesday afternoon massacre, in which Sally Crawchuck and Joe Price, both consumer senior executives, were fired. Two institutional banking executives were elevated in rank.
Bove sees the moves as reasonable reactions to Dodd-Frank, which has made consumer banking more difficult and less profitable. He further forecast 600 branch closures and 30,000 employees shed on the consumer side of BofA in the next two years, as the bank shifts resources from consumer to institutional businesses.
That makes sense.
But perhaps the shrewdest insight Bove made was one worthy of my old boss, Gerry Weiss, of Chase Manhattan Bank. By reshuffling senior executives, Moynihan, in Bove's opinion, bought himself several years time as CEO.
It's an old trick, yet, still works. A struggling CEO, rather than wait for the board to fire him, moves first and rearranges the deck chairs himself. This allows him to do three things: blame the fired execs for problems, claim to be (and look) forceful in making the changes, then, most importantly, use the new appointments to buy himself time while the newly-promoted managers and organization structures pan out.
It should not surprise that CEOs using these maneuvers are typically the ones whose companies are in the most trouble. Here, Bove and I part company. I believe Bove, with Tom Brown, predictably, both reacted with even more praise for the large, stumbling bank.
I believe it signals just how troubled BofA actually is. Moynihan's had plenty of time to do this, and Dodd-Frank is a year old. Either he's slow- take that any way you wish- or he realized, with this summer's appalling collapse of BofA's stock price, that if he didn't act soon, he'd be out.
One of the big business news items out this morning was Carol Bartz' firing in a phone conversation late yesterday. Pundits on both CNBC and Bloomberg were all over the story this morning, harping on the flat performance of Yahoo's stock during her 21/2 year tenure which began in early 2009.
Meanwhile, just yesterday the Wall Street Journal did a Marketplace section lead feature on GE's hapless CEO Jeff Immelt. More details on that in a later post.
For now, let's look at a chart I think I can safely guarantee you will see nowhere else this morning. It's the past five years of performance for the S&P500 Index, Yahoo and GE.
Look closely at the chart from early 2009 onward. I last wrote about Bartz and Yahoo here, in early July, when the rumors of her exit began to heat up in earnest. I noted there that, under Bartz, at least Yahoo's price had stabilized- stalled- in contrast to its decline prior to Jerry Yang begging her to become the firm's CEO. The chart illustrating that is in the linked post.
Exact timing to the day is impossible to do from this chart, but, generally, from early 2009, when Bartz assumed the helm at Yahoo, to now, both GE and Yahoo have had about the same relative stock price performance- up slightly, but much less than the S&P500, which rose more than 30%.
So doesn't that make you wonder why Bartz is getting axed, while Immelt gets a softball puff piece in the Journal, complete with friendly reviews from a fund manager?
For the full five years, Immelt's down nearly 60%! And so is Yahoo.
Regarding Bartz, I stand by my comments of my early July post,
"Personally, I think Yahoo's sluggish performance is less about Bartz and more about the wreck she inherited. A wreck with nearly nothing left on which to build the fabled "turnaround."
As I've contended in many posts, after Jerry Yang screwed up the exit strategy of selling the firm to Microsoft, there was little left to do. For shareholders, just selling and walking away was the best option.
Whether Bartz ought to be replaced or not is probably moot. Yahoo's fortunes are unlikely to improve under any other CEO. At this point, though, there may not be any buyers for the firm at prices that the board and shareholders will tolerate, so badly has the firm been mismanaged since when Terry Semel ran it."
Anytime a marquee CEO is bought by a desperate, failing firm, that CEO really has no downside. If s/he succeeds, everyone applauds yet another lustrous chapter in her/his turnaround and leadership career. If s/he fails, many judge the situation inherited as too far gone for even that well-regarded CEO to salvage.
Remember, just 21/2 years ago, Yahoo wanted Bartz so badly that they gave her a contract that runs through 2013.
Not surprisingly, as my many posts about GE under Immelt contend, I believe he should have been gone over five years ago, and GE broken up into its large business units. It's an aged, diversified conglomerate with absolutely no reason for being in the modern financial era.
So if Carol Bartz deserves to be fired for her last 2 1/2 years of performance at Yahoo, so, too, does GE CEO Jeff Immelt.
I returned from some time away just before Labor Day to read and hear that the administration is now really focused on jobs!
Nice, but it demonstrates a predictable, lamentable failure to comprehend the nature of job creation.
Many politicians of both parties speak of jobs as if they are simply units of income-production which magically appear if and when government does things with taxes. Currently, the thinking is to spur job creation by lowering the after-tax cost of employees with various employment tax reductions.
As it happens, I met a genuine small businessman on last week while hiking in New Hampshire's White Mountains. While discussing the recent behavior of US equity markets, social welfare programs and the economy, I asked him if lowering the costs of hiring and paying workers would lead him to bring on more people.
It would not. He owns and operates a picture-framing business. Over the past few years, he's had to lay off most of his small staff. As is often the case, family members will assist him to meet peak demand. But he only has one remaining full time employee.
He confirmed that he could only hire another worker if demand for his services rose and remained steady. That might take 6 months to a year. But there's simply no way, in this economy, that a reduction in payroll taxes will have any effect on his hiring plans.
The current political thinking about reversing causality, and the confirmation of my view which I received from my fellow hiker, led me to recall the words of an old grad school professor.
Morris Gomberg, one-time labor leader and, many years ago, management professor at Penn's business school, was lampooning federal inflation-fighting efforts. I remember Gomberg laughing at the notion of government capping prices, thus expecting that by manipulating an output, inputs would react accordingly and fall, too.
He quickly offered a comparison that went something like this,
'It's like you want someone to eat less, so you shove what comes out of them back in. What you would get, instead, is a very foul and disgusting mess.'
So it is with this equally backward notion of attempting to game payroll taxes, which is a result of hiring, hoping that by temporarily lowering them, hiring will magically appear. It is a sad statement on the state of government that the best economists federal money can buy don't have a clue regarding what drives job creation. At best, their tax reductions could affect the prices at which additional labor would be hired, meaning a total after-tax cost could be maintained and more paid to workers, or the savings kept and workers paid no more. But the payroll tax gimmick won't spur raw demand for hiring.
It's the prospect, for a business owner, of steadily rising demand for his products or services which cause him to add employees. Not a totally unrelated cost element being temporarily lowered.
Of course, the federal government tried several times in the past three years to stoke demand via its stimulus programs. Nothing worked.
So now it's on to completely unrealistic fantasy schemes which display a gross lack of appreciation for how businesses actually function.
I was away for most of last week, having set two posts to auto-publish. The post for 31 August failed, per Blogger's frequent problems with scheduled posts, so I manually published it this morning.
When I began to clear my inbox over the weekend, I noted the precipitous fall in the S&P500 on Friday after fairly uneventful days from Tuesday through Thursday. Guessing I'd read of some significant event or news for that day, I was not surprised in the least to learn of the jobs report showing no net employment increase for August. The net result for the S&P for last week was to end essentially flat.
Happily, when I checked the values of the equity portfolios selected by my proprietary quantitative process, I saw that they continue to average more than 10 percentage points of total return above the S&P returns for the respective matching timeframes. For 2011, at Friday's close, the index had lost 6.65%. As of late morning today, it's lost more than an additional 2%.
The pundits and co-anchors on CNBC and Bloomberg all have 'this might be a rerun of 2008' looks on their faces and distress in the tones of their voices. Finally, after many months of administration attempts to make mountains out of pathetically weak economic data, said data is looking decidedly worse, and these financial news network on-air staff can't hide it anymore.
Between continued investor nervousness about European debt problems, and their hyper-sensitivity to bad US economic data, it probably won't take much non-good news during September to drive equity markets down even further.
On Monday I caught the second half of Tom Keene's noontime Bloomberg program. Within the space of just 20 minutes, I had two reminders of why sell side analysis provides so little value to investors.
First, I caught Citigroup's Deane Dray's monologue on why he prefers GE instead of UT.My 2008 post on the two conglomerates couldn't be more different. Dray essentially cast doubt on UT's decades of consistent performance, while essentially arguing for a timing play on GE.
The price chart on the left illustrates the point of my 2008 piece, even three years later. Dray, however, thinks UT's decade of impressive share price growth, which has outstripped both the S&P500 Index and Immelt's hapless GE, is just a souffle waiting to deflate. He apparently believes GE will experience a magical mean-reversion, despite the lack of adult leadership at the top.
Along with that, Dray talked about 3M, mixing in discussions of economic expansion phases and relative merits of the various firms. That took me aback, since I've seen work suggesting that the concept of simplistic, always-sequential and reliable economic phase occurrence is largely a myth. Not to mention, as I listened to Dray, that one would need to be correctly forecasting the phases flawlessly for his approach to work- if it does.
Honestly, that sort of 'analysis' seems to me to descend to the levels of voodoo.
Next up was Paul Miller of FBR. Miller spent his time questioning BofA's purchase of Countrywide. Well, I was already there the day after the acquisition. Does that make me a standout bank equity analyst or seer? No, I think it just makes me a sensible business person with some banking experience who saw one ailing firm buying a near-dead one and drew the obvious conclusion that the deal wasn't going to rehabilitate the former.
Moreover, Miller missed the essence of what BofA really is. At its core is, of course, the old BofA retail California franchise. But to that has been glued North Carolina National Bank's, a/k/a Hugh McColl's Nationsbank's dispersed bank acquisitions in the Southeastern US, plus, later, by McColl's lieutenant, Ken Lewis, the dying Countrywide and staggering Merrill Lynch. Which is to say, an unfocused mess of a financial utility which paid too much for its last two mistakes, which were pursued in the same spirit of the banking acquisitions which bulked up the original NCNB. In fact, BofA itself was stumbling when Nationsbank captured it in 1998.
The second chart compares the S&P500 with BofA's share price from 1985. It's not a pretty picture. Lewis' tenure from 2001-2009, was marked by the bank essentially treading water relative to the index. The latter fell after the technology bubble burst in 2000, against which BofA appeared to rise. But a decade later, the bank is back where it was 26 years earlier, while the index only fell slightly.
You needn't have been a genius, or, I guess, Paul Miller to have had doubts about BofA for at least the past three years. Probably a lot more than that.
Why Tom Keene happened to have these two analysts as guests on Monday, I don't know. But it troubles me a bit that he seemed so enamored with both of them, when their comments were so unremarkable, when not specious.
I was somewhat stunned to learn that Alan Krueger's appointment as the administration's chief economic advisor makes him the third in.....three years.
Good God! Can the US be so badly off that we literally have changed chief economists an average of once each year in this administration?
I heard various pundits praising Krueger. Douglas Holz-Eakins described him as well-qualified. Bloomberg's Tom Keene said that Krueger 'knows more about the American wage' than anyone else.
Great, Tom. Too bad what our nation needs is capital investment in business which will draw with it more employment. Jobs don't just grow by themselves.
While I'm on the subject, I would observe that the recent anemic US quarterly GDP growth rates hardly constitute the sort of activity which one associates with an expanding effect of Samuelson's accelerator-multiplier effect. A table in a weekend edition of the Wall Street Journal editorial by Alan Reynolds showed private sector quarterly GDP growth to have been worse than the topline numbers, including two recent negative quarters.
I don't care how much Krueger knows about wages, nor how vociferous he is about employment tax credits. Without sufficiently positive and sustained US GDP growth, no amount of temporary tax breaks are going to bring about a sustained private sector recovery.
However, according to recent surveys of business owners, the results of which I've seen and heard on CNBC and/or Bloomberg, an investment climate of less uncertainty regarding government intrusion, less regulation, and lower tax rates on capital gains and profits would all have a more positive effect than minor fiddling with payroll taxes.
Maybe we should find an economist who believes those things and make her/him the nation's new chief economist for this year.
Last Wednesday's Wall Street Journal contained an editorial by Jose Angel Gurria, secretary-general of the OECD. It's a study in either institutional denial or simply complete ignorance of economic reality.
Gurria wrote of the recent pronouncements by Sarkozy and Merkel,
"The new Franco-German proposal to strengthen euro-area governance and to speak with one voice is welcome. That clearly has been lacking. But even more important is the call from German Chancellor Angela Merkel and French President Nicolas Sarkozy that the commitment to balanced budgets over the medium term should become legally binding in euro-area countries. Sounder national regulations and institutions coupled with stronger European Union rules and discipline will reduce the need to use the European Financial Stability Fund, which was established last year to issue guaranteed debt to member countries that can't borrow in the markets."
Can you seriously imagine "legally binding" balanced budgets "in the euro-area countries?" The US is one nation and we can't even manage it. The harsh truth that the Euro has benefited southern European economies, to the detriment of the northern ones, is apparently too bitter a pill for Gurria to swallow.
Then Gurria moves to the ECB. Here, he openly calls for the bank to prop up bad sovereign debt, which will insure that private credit risks gone bad become taxpayer obligations.
"The European Central Bank should for the time being continue to play a key role in crisis containment, not least as a buyer of last resort of sovereign debt. But we need to consider greater involvement by private-sector creditors to tackle the debt problems of some European nations, so that the resources of taxpayers support the growth prospects of the countries in trouble rather than being used to pay their private creditors."
Just guessing here, but I would think that means German and perhaps French taxpayers, those being the largest European economies. Curiously, Gurria seems to be hypocritical within a single paragraph. First he argues for the ECB to rescue troubled Euro banks, then writes that those banks need to clean up their own messes. Which do you suppose he actually means?
The secretary-general then turns to general monetary and fiscal policy, writing,
"Given the weaker outlook, central banks should postpone or even reverse their previous plans for tightening. The U.S. Federal Reserve's signal that it expects rates to stay exceptionally low for another two years is very forceful.
Given that state coffers are empty in most cases, governments need to go structural. Reforms to product and labor markets should be a primary focus of the long-term strategy to restore sustained growth. This will create jobs and help tackle debt."
Pretty funny, eh? Near-zero rates, which distort private investment decisions and suppress investment generally, are lauded. Meanwhile, governments will magically "reform...product and labor markets" because that will "restore sustained growth....(and) create jobs."
I know that in America, low rates have completely screwed up asset pricing since 2008. Meanwhile, lots of government intervention, such as abrogating bankruptcy laws and favoring unions in the GM and Chrysler bailouts, plus obstructing business with lots of new regulations, has slowed business activity and hiring to a near-halt.
But my favorite head-in-the-sand passage by Gurria is this one,
"Governments should also go social, focusing on policies to help those made most vulnerable by the crisis. The urgency of this is evident in the streets of a growing number of cities in countries at different levels of development. Unemployment benefits or targeted job-creating measures should be enhanced, both to reduce hardship and to stimulate demand. Help for overindebted households and those with "underwater" mortgages also needs to be more effective. Giving people hope and a sense of common purpose is not only crucial for their involvement but also for creating the necessary consensus to support the reforms."
Already-lush unemployment benefits are to be further sweetened. Again, we see the wrong-headed notion that paying more for people not to work is really a 'demand stimulus'.
Let's hope Gurria doesn't actually hold an economics degree.
Then he addresses housing by declaring that those who unwisely bought homes in hopes of ever-rising prices, and now cannot afford those homes, should not be expected to comply with standing legal processes of loss, foreclosure and resale, at lower prices, to families who can actually afford the houses. Instead, more financial aid must be given so those who took unwise risks may continue to enjoy the benefits of those risks without any of the pain of their mistakes.
Nevermind the support of those who behaved prudently and now could afford those homes as their foreclosure provides housing markets with their much-needed bottoms.
Well, with economic thinking like this, is it any wonder nobody looks to the OECD to help solve any serious global economic problems?
August has been a notable month in the US equity markets. Since I won't be writing posts next week, I thought I'd express some thoughts about it today.
If the S&P500 Index closes next Wednesday anywhere near it's current (mid-day Friday) level of 1168, it will be the worst monthly decline for the average since February of 2009.
My proprietary volatility measure for options soared from a 'call' allocation to a notional, but not very strong 'put' by the second day of August. Just two days later, the measure was in full put territory. And has more than doubled since then. My volatility measure hasn't been this high since late March of 2009.
The options-related indicator, however, is much more sensitive than my equity signal. More 'real-time,' if you will, because options move so much more quickly.
That said, such high volatility rarely persists for months. It did persist in the fall of 2009 through early 2010, thanks to the compound nature of an economic recession and a financial sector crisis. I doubt anything quite like that is looming just now. So to benefit from the decline either through puts or shorting equities, one may have already missed the fattest part of the phenomenon.
The equity signal has yet to move to either an 'out,' i.e., uninvested or cash, allocation, or 'short' position. But it's easily only a few months from signaling short, depending upon how badly the S&P continues to perform. Suffice to say, even a merely lackluster index performance for the next few months could signal short allocations by year's end.
With this background, it's been entertaining to listen to the many guest pundits and hosts on Bloomberg and CNBC this month argue back and forth that it's either the best of times, or the worst of times.
Really, it all depends upon your asset levels, risk appetite, and time horizon.
While I continue to believe that macro-trends argue for lower global economic growth rates among developed nations for the foreseeable future, as consumers save more, to replace the expected shortfall of non-existent government-promised pension and health care benefits, that doesn't mean I see equities collapsing.
Rather, I believe equity strategies like my own, which has continued to handsomely outperform the S&P this summer, even amidst the continued market decline, will identify and hold shares of companies which generate positive total returns, both absolutely and relative to the index.
If one can maintain a long investment horizon and sustain some near-term softness in returns, I suspect that, mostly long positions will continue to pay off. My own equity strategy may yet signal a period of being in cash or short. However, barring it being of a duration like that of the post-tech-bubble collapse, or 2008, such a period of short positions are unlikely to be significant. It's too early to tell.
What is clear is that August's sudden spike in volatility in US equity markets is a warning to be prepared for an investing inflection point. The speed with which, and the levels to which volatility has risen are rare. If the equity market is provided sufficient fuel to prolong and increase such volatility, look out. Otherwise, chances are good that it will begin to ease, accompanying a long, slow rise in the S&P500.
Yesterday's other major business news story, aside from Steve Jobs' resigning as CEO of Apple, was Warren Buffett's Berkshire Hathaway buying $5B of BofA preferred stock with a 6% dividend, plus warrants- terms set by Buffett.
As with his prior capital infusions to Goldman Sachs ($5B @ 10%, plus warrants) and GE ($3B @ 10%, plus warrants) during the 2008 financial crisis, Buffett capitalized on BofA's weakness in the eyes of investors, but carefully avoided buying common equity.
Despite Moynihan's and Buffett's comments that this represents the latter's vote of confidence in the bank, that's not strictly true. If it were, Buffett would have purchased common equity in the market. It's more a case of Buffett extracting a hefty price- the 6% dividend and warrants- for being an unofficial credit rating agency whose selective investments calm other investors.
It's crucial to understand that in all three cases- Goldman, GE and, now, BofA, Buffett focuses on preferred stock, which is senior to common equity, and on which he can demand a special premium, plus warrants, just in case the firm pulls out of its problems.
Think of him as a sort of reverse greenmailer. Instead of the greenmailers of old, like Carl Icahn, whom companies paid to go away, these companies pay Buffett to come on in. In short, it's crony capitalism, because you'll never get access to the deals Warren Buffett does. But don't expect the SEC to be investigating him anytime soon for extracting such a high dividend rate on his preferred shares. Or, apparently, the BofA board for being so wasteful with its shareholders' money.
However, as the nearby chart illustrates, and at least one Bloomberg talking head had the guts to say yesterday, Buffett's equity kickers, the warrants, have been busts. Neither his GE nor Goldman warrants are in the money.
I've included in the nearby price chart Wells Fargo, as well, since Buffett is known to maintain a large position in that bank. I don't know when he began building his position, but it, too, has underperformed the S&P500 Index for the past five years.
In searching for articles with information on the date of Buffett's initial Wells Fargo investment, the best I could do was to estimate that he's been invested in the bank since at least 1999. He says he bought equity prior to the 1998 Norwest merger. The second price chart displays WFC's and the S&P500 Index's prices since 1985. If Buffett bought Wells in, say, 1995, then he's done better than the index. But if he bought later than sometime in 1997, he's probably no better off than he would have had he bought the index.
So much for Buffett's fabled equity selection skills, and back to the BofA preferred equity buy.
Late this afternoon, a family office manager and guest on Bloomberg explained that he had done much the same as Buffett only about a week or so ago. Not wanting to risk his capital on BofA equity, he found the preferred to yield an acceptable dividend with much less risk. But his yield is not as great as the one demanded by Buffett.
One of the Bloomberg anchors jokingly asked a pundit if he thought the administration asked Buffett to shore up BofA by investing in it. I don't think that's just a joke.
It also focuses on the lack of risk in Buffett's position, which is different than that of the bank or its common equity holders. First, Buffett has so ingratiated himself with this administration that it's unlikely to take any actions toward BofA which would endanger Buffett's investment.
Second, Buffett knows that BofA is one of the 'too big to fail' institutions, so chances are it will be bailed out by the government before Buffett loses his investment.
Recall, if you will, that freely-operating markets are supposed to result in neither buyer nor seller having sufficient power to dictate price or terms. Buffett's move, the third such example of his dictating investment terms to his targets in three years, demonstrates how our financial markets aren't fair. Buffett can engage in crony capitalism, using his name and resources to extract expensive terms for his borrowers, while other market participants have to resort to the markets to buy their investments.
On that subject, I learned yesterday that Buffett had insisted, as part of the terms of his Goldman Sachs investment, that no Goldman senior executives could sell shares in the firm until he had his money back. In that case, I suspect Buffett realized he was playing with some very sharp operators who wouldn't think twice about leaving him holding an empty bag.
In BofA's case, it was reported that no such terms were required. I suspect that speaks both to Buffett's sense that the firm's management is mediocre, and that the government will unquestionably step in to save his investment before it would vaporize amidst a bankruptcy.
Watching this sort of activity by Buffett, while generating no whiff of impropriety, validates for me how useless the SEC has become.
After the equity markets closed last night, Apple released the news that Steve Jobs has resigned- permanently, it appears- as Apple's CEO, but will be chairman of the board of directors. Tim Cook will assume Jobs' duties.
The major buzz on business/finance cable news and in the Wall Street Journal is the future of Apple and its equity price.
For example, in a development to which I alluded in today's prior post, Tyler Mathisen grilled a guest technology sector analyst by demanding that he forecast Apple's equity price two years hence. This, of course, is a perennially stupid question because equities always have some component of their price movement linked to equity index levels. To be a veteran financial network executive and/or anchor and not understand the uselessness of that question is, well, to be Tyler Mathisen.
But, back to Apple......
Apple has been in my equity strategy's monthly selections frequently for the past few years. Anyone holding the stock has had to expect that some day, any day, this event could occur, probably triggering a decline in the equity's price.
Between yesterday's close and this morning's open, Apple's share price declined 5%.
But to put that in perspective, here are the respective returns for Apple (post-Jobs departure decline) and the S&P500 in my strategy's portfolios since November:
Month Apple S&P500
Nov +14% -4%
Dec +13% -3.8%
Jan +7.5% -7.5%
Feb 0% -10.9%
Mar +6.3% -11.8%
May +3.5% -11.8%
So if the 5% decline constitutes most of the damage to the stock, I don't think it's a big deal.
To me, there are three elements to assessing the effect of Jobs' departure as CEO on Apple and its equity price.
The first is actual product development and strategy. I believe those are probably set for the next 18-24 months, so the company's fundamental performance shouldn't suffer. Moreover, I would anticipate that as long as Jobs is alive and able, he will continue to be involved with these areas, with management's blessing.
The second element is investor perception of the impact of Jobs' departure as a full-time operating executive at the firm. In that regard, I believe that one should largely ignore this element, so long as the company's strategy and operations continue to provide strong fundamental performance, i.e., earnings growth.
In this regard, I recall holding Dell in 1998, when nearly every analyst publicly said the company couldn't sustain its torrid profitable growth. My portfolio held two of the S&P500's top ten total return equities for that year- Dell and Schwab. Both were negatively assessed throughout most of the year, only to defy predictions of their demise. In Dell's case, most analysts failed to see how much more capable Dell's management then was, compared to their peers, and how attractive their product/market segment was. The stock doubled that year.
My quantitative strategy's proprietary evaluation criteria determined Dell to be surprisingly within a normal range of performance on an attribute that most analysts viewed differently and, thus, incorrectly.
For Apple, now, I believe that its fundamentals are very similar to Dell's 13 years ago. It won't be for perhaps two more years that Apple's strategy and products suffer from Jobs' absence.
Finally, there will come a time, probably about 18-24 months after Jobs' ceases any active involvement, even if it were reduced to periodic dabbling in development and product strategy, when the company's performance begins to falter. That's when it will be time to be out of Apple.
But I suspect that time is still a few years off. In the meantime, it's very likely that consistently superior returns will be earned by owners of Apple equity. The cost of being a few months late to sell will almost certainly be offset by owning it until then.
The goods news- I awoke to view CNBC's SquawkBox this morning and was delighted to see and hear Rick Santelli co-anchoring in the studio! Evidently he was dragged in during the annual vacation season when all three regular anchors are out.
The bad news- brainless Tyler Mathisen is there, too.
Who said life was fair? But it's not too hard to mute when Mathisen is talking or just ignore him. I can never get enough of Santelli's candid remarks and solid, spontaneous assessments.
Another week...another disappointing decline in BofA's equity price. This morning's Wall Street Journal carried an article highlighting the record prices of insuring BofA debt, and the implied higher borrowing costs for the financial utility down the road.
Most assuredly, then, bank fund manager Tom Brown was on Bloomberg, all carefully coiffed and attired in conservative blue suit yesterday, naming BofA as first among his three top financial service selections.
Meanwhile, this morning on Bloomberg, veteran fund manager Mike Holland politely said, when asked, that he had zero interest in BofA shares. He quickly lauded the bank's lawyer/CEO Brian Moynihan as being "all over" the various legal issues involving lawsuits from the legacy home lending business his predecessor, Ken Lewis, bought via Countrywide.
But Holland made clear he wouldn't touch the troubled North Carolina-based bank with a ten-foot pole. Except, of course, he said it in a manner calculated not to cause a run on the bank or a bear attack on its equity by short-sellers.
A check of the nearby 5-day chart of equity prices for BofA, Chase, Wells Fargo, Citi and the S&P500 Index reveals that the index beat all four of the banks. Wells and Chase declined by only about 5%- just a bit more than the index.
Citigroup fell by about 10%, and BofA by more than 15%.
I have no direct knowledge of Brown's fund. I don't know its size or its management style, other than it is restricted to financial entities and selections are apparently on Brown's subjective whims.
Thus, I don't have direct knowledge as to whether Brown tries to juice returns with leverage. But can you imagine the panic he would feel if Brown had borrowed to fund the BofA positions which he (see my prior posts under the BankAmerica label for details) late in the spring?
The second chart shows the same entities' price series for the past three months. The rank orders and relative performances look about the same, except, of course, that magnitudes are larger.
The S&P, Chase and Wells Fargo are down twice as much as for the past five days, while Citi and BofA are down about three times as much.
On a raw actual price basis, the third chart shows BofA fell from between $11-$12 after mid-May to $6 and change yesterday. I don't know exactly when Brown bought his BofA positions for his fund, but it must have been prior to his June 3rd Bloomberg appearance.
The worse news for Tom Brown's fund clients is that BofA's equities have declined pretty much monotonically for the past six months. So their loss could be in the 50% range on that position.
No wonder Brown is on Bloomberg as often as possible shilling for the hapless financial leviathan's equity. His fund's holders- and presumably Brown, as well- have lost a bundle on his call this time.
Oh, as an aside, in his Bloomberg appearance yesterday morning, Brown replied "yes" to the anchor's question/assertion that Brown was only a financial sector portfolio manager now, and no longer holds himself out as an (presumably-objective) analyst.
Stephen Moore wrote an editorial in Friday's Wall Street Journal decrying the current administration's wholesale, unquestioned embrace of Keynesian macroeconomics. He began his piece with these passages,
"Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance "creates jobs." She received this slap down: "I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper."
Mr. Carney explained that unemployment insurance "is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren't earning a paycheck are going to spend the money that they get . . . and that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring." "
If you stop and think about Carney's response, it's a lot like Keynes' own suggestion that, if necessary, pay men to dig, then fill holes, in order to 'prime the pump.'
If economics were a so-called hard science, like physics or biology, these theories would have been carefully tested to determine their veracity, and, if so, under what conditions or constraints.
But since economics is considered more of a social science in actuality, but taught and beheld by many politicians as a hard science, Keynes' theories gained credibility without real tests.
Over the years that I've written this blog, I've reviewed articles in the Journal by eminent economists and near-economists concerning the lack of evidence that Keynesianism ever worked. For example, recently, I wrote this post discussing Richard Rumelt's recent Journal piece reminding us, via facts, that FDR's domestic spending during the Depression didn't rescue the US economy. Neither did WWII. It was the forced savings during the war, via rationing and bond drives, that led to the subsequent economic growth from all that savings and pent-up demand which was forcibly denied during WWII.
Earlier, in this post, I cited Alan Reynolds' empirical survey of analyses of government spending and recessions. A quote from Reynolds in that post is appropriate here,
"A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that "real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe." Ms. Romer also noted that "recessions have not become noticeably shorter" in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long.
In the late 19th and early 20th centuries, nobody thought the government could or should do anything except stand aside and let the mistakes of business and banking be fixed by those who made them. There were no Keynesian plans to borrow and spend our way out of recessions. And bankers had no Federal Reserve to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent.
It's clear that U.S. history does not support the theory that Big Government means shorter and milder recessions. In reality, recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed. What's more, recessions ended more quickly before the New Deal's push for Big Government than they have in the past three decades. The economy's natural recuperative powers before the 1930s proved superior to recent tinkering by Big Government economists, politicians and central bankers."
With those examples in mind, here are the later passages from Moore's Friday editorial,
"How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.
As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.
The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us. "
I highlighted Art Laffer's comment because it seems useful to me to focus on the true fundamental nature of man's economic problem: scarcity. Economics has always been, at root, about how to allocate scarce resources for the production of goods and services to satisfy a population's demands, at prices which satisfy both producer and consumer.
I may be one of the very few Americans to have read a slim volume on economics from the 1939 entitled The Theory of Idle Resources by W.H. Hutt. It was a response to Keynes' General Theory of Employment, Interest and Money (1935), which I have also read in full.
Keynes' basic ideas seem sensible, until you read Hutt's rebuttal. Particularly Hutt's scathing rebuke of Keynes' notion of MPP (the marginal physical product of labor). Hutt studied economics at the LSE and taught in Cape Town all of his professional life. The jacket of my copy of the book contains an approving accolade from no less than Von Mises, attesting that Hutt was "not contested by any competent critic."
Prior to Keynes, the classical theory of macroeconomics correctly equated PQ and MV, or the price of goods and services produced, multiplied by quantities, and the money supply multiplied by its velocity. But nobody believed that macroeconomic forces could or perhaps should be forcibly altered by government action. No economic theorists were that vain and egotistical to believe that they could counsel government on how to prevent economic cycles.
I have always found it ironic that neo-Keynesian Paul Samuelson (father-in-law of the current administration's economic maven, now departed, Larry Summers) won his Nobel prize for a theory, the 'accelerator-multiplier,' which actually explained why the classical approach of macroeconomic non-intervention would allow economies to pass through their various cycles without interference.
Of course, Samuelson and his followers instead used his theory to argue for government intervention in order to magically short-circuit recessions. Something that, as Reynolds noted, even citing another current (also now departed) administration economic advisor, Christine Romer, has never actually occurred.
I shudder every time I hear new-Keynesians and their followers decry classical economics as some hoary pre-Enlightenment sort of faith-healing. Though Keynesian proponents can offer not one credible shred of evidence for the actual effectiveness of government debt-financed spending as a tonic for economies in recession, they seem to appeal to human nature's desire to believe that doing something is better than simply allowing the large, complex and difficult- if not impossible- to control entity that is a modern developed nation's economy to experience the natural cycles it must. Patience is hardly a modern virtue, either, so that's another basis on which classical economics seems to be judged guilty by modern Keynesians.
But the reality is that without naturally-occurring cycles in economies which clear out failure, re-allocate resources and allow new growth, you don't get constant economic expansion with low inflation. Instead, you get politically-allocated resources borrowed on behalf of taxpayers, along with the recession that was promised to be ended sooner and more mildly than without the deficit spending.
After writing this post earlier this month about Michael Lewis' 20+ year old book Liar's Poker and exchanging comments with a reader presenting himself as a young prospective investment banker, I went ahead and bought two of his subsequent books, Moneyball and The Big Short. Incidentally, in keeping with the times, I ordered both as nearly-virgin, used copies from Amazon resellers for no more than $10 each, including shipping. The latter arrived looking every bit like a brand new, unopened book.
Despite my intentions to save The Big Short, published last year, to read in a classic summer situation of electronic unconnectedness, I have read roughly one-fifth of it already. Being the second of Lewis' financial books that I've read, and having reread Liar's Poker, his first, in the past few weeks, I have a few observations to offer on The Big Short.
The first is simply how Lewis focuses on people with amazingly good luck. In Liar's Poker, he made the point of how few people were granted the exalted status he enjoyed by being hired by then-dominant Salomon Brothers.
In The Big Short, he initially profiles a one-eyed doctor-turned-equity portfolio manager, Mike Burry. Burry first attracts attention from Joel Greenblatt and his colleagues, New York-based hedge fund managers, rather unbelievably from their following his selections as posted on stock trading message boards of the time, and his own nascent AOL 'blog.' Later, Lewis confirms that Burry was the only person Greenblatt's firm ever subsequently approached with an offer to buy part of his firm. Then Burry, seeking to profit from the troubles of companies involved in sub-prime finance, shifts from equities to debt, buying derivatives on CDOs which he is certain will lose the bulk of their value due to underlying defaults. His investors, learning of this, want to, but can't redeem their funds because of Burry's lock-up rules.
Then Burry manages to coax, badger and persuade several banks to sell him the derivatives he wants on selected mortgage-backed CDOs. Eventually, the banks catch on and begin doing the same, all the while Burry and the traders at these banks lie to each other about exactly what they are doing.
What's ironic is that Lewis paints Burry as the most honest of hedge fund managers, eschewing a fixed management fee. But he doesn't adequately, in my opinion, explain the very serious fraud Burry committed when he informed his investors and backers that he'd completely changed the investments in his portfolio. That Burry survived this is even more immense luck.
It's likely that Burry's being a subjective stock picker had a lot to do with his intellectual property not simply being stolen. I have friends who unwisely approached GE Capital years ago with a financial concept. The management at GE officially rejected the concept, but only months later were seen having appropriated the idea and implemented it at the unit, at scale. Suffice to say, my friends were out millions due to unrealistic expectations of GE Capital's operating procedures.
Similarly, when, a few years ago, an intermediary offered to introduce a then-business partner and me to Goldman Sachs, in order to obtain investment funds, we declined. We realized we weren't going to be, for example, in a private meeting with the firm's CEO or any other single senior officer. Instead, the intermediary was probably going to have us presenting our IP to, and answering the questions of, a dozen or more smart, hungry Goldman junior staffers all eager to climb over each other- and us- to make their fortune.
One of my business partner's colleagues in private equity later confirmed that it was imperative we never let a large investment bank or fund manager, like Goldman, have any whiff of the details of our approach, lest they move heaven and earth to obtain information on our trades and mimic them for free. And that we were correct to avoid providing any details of my equity portfolio management approach to anyone at Goldman.
More often than not, an existing financial firm will take what they can, rather than formally approach someone with a new, profitable concept and offer value for it.
Thus, it's very difficult to adequately explain, or overstate, just how wildly improbably Burry's good fortune was. First, to be a subjective equity analyst-cum-investor who actually beat the S&P500 is pretty rare. To have divulged his selections online and then have a hedge fund find, track and ultimately buy a piece of his operation is even rarer. And to survive essentially completely changing the nature of his fund without giving investors a chance to redeem.
Think rare as in the exceedingly long odds of any one low-income, uneducated minority youth devoting all his time to playing basketball, and eventually making it through a college basketball program to be selected by an NBA team and actually playing for at least a few seasons, thus scoring the sports equivalent of a lottery win.
Lewis writes engaging, interesting and true stories. He has a wry manner of educated the novice in the arcane ways of finance, while exposing fraud, luck, and many other aspects of the human condition.
The way in which Lewis has, so far as I have read at this point, composed The Big Short gives the appearance of a few honest, initially-naive souls at Oppenheimer and elsewhere standing up to widespread housing finance fraud, fighting the good fight and, I'm assuming, ultimately triumphing through immense financial gains.
As I read Chapter Two, In The Land of the Blind, about Burry, I couldn't help but think about the legions of other analysts and investors who could and probably did have other equally-profitable approaches, but, at some stage of their efforts, failed to receive the luck which found Burry.
In short, I think Lewis' tales of finance give the illusion of skill trumping fraud and greed, when, more accurately, it's luck and some skill accidentally getting a lightning strike amidst greed, fraud and herd investing mentality in the fund management, trading and investment banking businesses.
