Black Friday: Spain’s Biggest One-Day Drop in its History

Yesterday, Spain’s equity market – as measured by its IBEX-35 – experienced its largest single day decline in in its history (the index was launched in 1992). The IBEX-35 fell 12.4%. The previous record (for largest daily decline) was 9.14% in 2008. Italy’s equity market fell by similar magnitude, but it is not clear if yesterday’s decline broke the record for a single day decline in Italian equities.

The decline in Spain’s stock market wasn’t quite as steep as Black Monday’s crash (Monday, October 19, 1987), when the Dow fell 22%. But a 12.4% decline is most definitely a rare event…a statistically significant event.



2016: The Halftime Report – Purchasing Power & the Case for Active Management

“On one point only were economists agreed. Without exception those consulted say: ‘There is no sure hedge against inflation.’ ” – Hedging Against Inflation

2016’s midpoint is fast approaching. The following has occupied my mind for the first half :


The “Inflation” vs “Deflation” trade(s) – January 1 through early February of this year was (largely) defined by the “deflation” trade(s)…indeed, if you examine the hedge fund performance figures through early February, you see that the best performing funds had high exposure to “deflation” trade(s). Since mid-February, the “inflation” trade(s) have been where capital has been (mostly) rewarded…that is, until the last 2-4 weeks.

At this juncture, the inflation bulls believe we are experiencing a pause/counter-trend before the inflation trade(s) resumeth. The deflationistas, on the other hand, appear to believe the February – April rally in the “inflation trade(s)” was largely driven by a pro-longed short squeeze coupled with explicit/implicit coordination between US and China (specifically as it relates to fx).

Either way, I see only one truly superior risk/reward trade (and the rest are terrible in comparison), with respect to the “inflation” and “deflation” trade(s). That is where I should and/or will devote most/all my energies/capital when it comes to the inflation/deflation framework.

This “truly superior risk/reward trade” I mention may prove to resemble going long the JPY in 2014.

Purchasing Power – In terms of trading/speculation, ‘inflation’ and ‘deflation’ hold concrete/actionable meaning for me. In terms of economics, I don’t know what ‘inflation’ nor ‘deflation’ mean anymore.  The economic measures of inflation/deflation don’t make sense to me.

For example, the medical care component of CPI only shows an aggregate increase of 15% since 2011…yet I know for a fact premiums have risen far more than that over the last 5 years (more like 10% CAGR over 5 years!).

On the other hand, ‘Purchasing power’, makes sense to me.


Purchasing power erosion

I know that the overall (domestic) purchasing power for most individuals/families in America is lower today versus 10 years ago, and 20 years ago. I know that the purchasing power of most residents in New York and San Francisco have dramatically eroded over the last 5 years.

Purchasing power accretion

I also know that most Americans’ purchasing power with respect to buying foreign goods/services have dramatically improved over the last 1-2 years (due to the strength of the $).

Technology has also improved purchasing power for us all, in some specific ways (e.g. smartphones). Yet the economists call this ‘deflationary’ (almost as if it’s a pejorative). I consider this ‘progress’.

I estimate that ‘purchasing power’ will matter in more obvious ways in coming years.

I believe that “they” want inflation… the “they” I’m referring to are government and central banking officials with fiscal and monetary policy responsibilities. The following lead me to believe that “they” want inflation:

  • “They” know that debt is a problem.
  • “They” know that history suggests that large (but not excessive) inflation is the least socially disruptive means to address the debt, so long as the inflation concurrently increases cost of living and wages in similar orders of magnitude.
  • “They” probably would prefer relatively steady 5-15% true inflation, versus 2%-3% they claim as objectives, so long as the 5%-15% inflation doesn’t spiral upwards.
  • “They” don’t mind eroding the balance sheets of savers and the wealthy, so long as they can preserve / minimize damage rendered to real wages.

The question remains whether “they” will succeed in “creating” inflation…I for one don’t know. Inflation is not inevitable, as “they” can elect (instead) to severely raise taxes, severely cut spending, debt jubilees, etc. No path is inevitable. Also, on a more optimistic note, further innovation/technology advances may improve productivity in coming decades, which would only help the real economy.



I’m uber-bullish Active management…and concurrently bearish the current hedge fund paradigm – The sentiment towards active management, specifically (but not only) aimed at the 2/20 crowd, is (justifiably) very negative. Alternative investors have performed rather poorly over the last few years.

The incentive fee component does not seem the problem – it’s the management fee component. Perhaps limited partners should demand a refund for all the management fees paid for abysmal performance, a la a ‘clawback’.

Yet I see the seeds for future active management outperformance. The “risk/reward” in going “long” active management is skewed in favor of active management. A key driver (i.e. a necessary condition) for active management seems to be firmly in place.

Returning to Hedge Fund Entrepreneurial Roots

While I consider myself (uber)bullish active management, I doubt the extraordinary returns will originate from the well-known, worshipped, investment conference-frequenting, mult-billion $ aum hedge funds. Rather, they will hail from the:

“crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently.”

My belief is not without precedent: recall that hedge funds were defined by the misfits, troublemakers, etc. until fairly recently (i.e. the last 10-15 years). For example:

  • A sociologist turned diplomat turned journalist became the ‘father of hedge funds’ (Alfred Winslow Jones)
  • English major turned taxi driver turned macro hf manager (Caxton)
  • Academic/professor turned trader turned greatest investor (Rentech)
  • Academic turned casino ‘gambler’ turned hf mgr (Thorp)
  • A crew of high school + college dropouts turned alpha machines (Feshbach)
  • Medical student dropout turned excellent/exceptional investor (Icahn)
  • Medical resident dropout turned message board legend turned investor

The “institutionalization of hedge funds” have only served to place returns in institutional strait-jackets.  The institutionalization of hedge funds have castrated hedge funds of their very essence, replacing them with sterile qualities that bureaucrats would love, e.g.:

  • Accreditation/pedigree vs aptitude
  • Pro-cyclical behavior
  • Mediocre / loser mentality, i.e. hug the indices and think like mutual funds…but get paid like hedge funds.
  • Dis-incentivizing long-term decision-making, and true investment-oriented thinking and behavior.
  • Dis-incentivize those with entrepreneurial leanings, incentivize those with bureaucratic leanings.

“I think you are like us. You are one of the pirates, and I’d like you to join my ship.” – Crispin Odey


Regime Change(s) in Financial Markets and Politics

The phrase ‘regime change’ appears apt when describing the present state of financial markets and politics…worldwide. A few considerations that come to mind:

Financial Markets

  • The Federal Reserve / Janet Yellen would like to lead the US and the world out of the post 2008 monetary maneuvers (e.g. QE, ZIRP, NIRP, etc). The Fed’s wishes have been complicated by the BOJ, ECB, market reactions to the BOJ, ECB.. and other forces. Monetary regime change (?)
  • The on-going construction and related credit bust in China remain on-going…coupled with counter-cyclical policies e.g. tax cuts, market liberalization, etc. Forced/necessary/desirable economic rebalancing, i.e. regime change (?)
  • Record level of NIRP-related debt outstanding, as well as record-breaking negative interest rates. FX considerations aside, the marginal non-Central Bank buyer may at some point question the notion of providing negative-carry debt capital to governments that refuse to structurally reform. Not to mention what to make of insurers, pensions, etc. that require payouts.
  • Calls for banning cash by… non-law enforcement figures, such as Larry Summers, Mario Draghi, etc.
  • US housing in NYC/SF/DC face downside risks due to notable affordability problems. Housing in rest of the USA, and demographic drivers,look reasonably healthy. Real estate is local again? Regime change
  • Private tech/VC valuations marked down, but deal volumes remain at same (if not higher) levels versus YoY.
  • “only 1 of the 10 largest banks in Texas survived” re: late 1980s …something to think about, especially coupled with fact that banking/credit/employment related implications of energy bust have LAGGING EFFECT. (I’m not necessarily fixated on Texas per se…it’s a case study/analogy on causation).
  • “Trafigura estimates that the world’s 10 top commodities hedge funds now manage $10 billion altogether, a fifth of what they did in 2008.” Yes, as the joke  “what is down 80% can go down 90%, as the joke what is a stock that has been cut in half?
  • Wages are rising. Signs are widespread. This is a significant paradigm shift… concurrently, usage of automation/robotics something to watch.
  • The market has been experiencing the ‘other side’ of a bear market in recent weeks. ‘Leadership’ has differed from prior years.


  • Rise of Nationalism. Pretty much everywhere.
  • Trump is winning. Bernie Sanders Super Tuesday results disappointing. The loudest Trump critics appear to misunderstand him and his fans. No matter, both point to regime change. Note that “regime change” in Asia and Europe before the modern era, were often accompanied by executions.
  • Supreme Court, replacement for Antonin Scalia.
  • Regulatory enforcement is rising (after decade-low levels of white collar fraud enforcements through 2013/2014″ e.g. Valeant Pharmaceuticals. Regime change.
  •  Europe – Brexit, Spain (Visca Catalunya), threats to Schengen, etc.
  • China – Xi regime gives off the impression of a more nationalistic tone.


The above lead me to believe that we are transitioning from one state to another… methinks the ‘regime change’ may resemble the transition from the dot com bubble/bust to housing bubble/bust. We’re somewhere in between two different regimes.

China Government Bonds

The following got my attention:

  • The People’s Bank of China said in a statement on its website Wednesday that most types of overseas financial institutions will no longer require quotas to invest in the interbank bond market, which accounts for the bulk of debt in the nation.
  • Commercial lenders, insurance companies, securities firms and asset managers were included on a list of those eligible and the authority said it also hopes to attract long-term investors such as pension funds and charities.
  • Hedge funds were not included, while foreign central banks and sovereign wealth funds won access in June.
  • Bonds outstanding in China totaled 48.8 trillion yuan ($7.5 trillion) at the end of December, according to the central bank.
  • The interbank market totaled 35 trillion yuan at the end of January
  • Foreigners held less than 2 percent of this, ChinaBond data show.
  • China’s 10-year sovereign yield of 2.87 percent compares with 1.69 percent in the U.S., the world’s largest bond market, and sub-zero in second-ranked Japan.


George Soros and 1987: when your longs & shorts BOTH go against you

I can relate to situations where all my positions went against me…and I’m sure some participants can relate to that as well YTD. So imagine the following scenario:

It’s 1987 and you’re the Quantum Fund:

  • Soros’s team was up ~60% by the end of September, 1987
  • Quantum was positioned short Japan but long the U.S. market.
  • On October 14 Soros published an article in the Financial Times reaffirming his view that the crash would arrive in Tokyo.
  • That day, followed by the 15th and 16th, US equities declined precipitously.
  • October 19, went down in history as Black Monday. The Dow Jones index lost 22.6 percent of its value. Soros, having been short Japan (Nikkei index fell too), was hedged.
  • US equities rallied Tuesday and Wednesday.
  • Later in the week (Wednesday) however, the nikkei-related short (structured via futures in HK, due to greater liquidity in that market) position INCREASED in value by 9.3% (its biggest one day gain since 1949). He had wanted to get out of these contracts, but HK halted them.
  • US Futures declined on Thursday…and Soros sold us futures.. his position sizing was too large, exacerbating the move down.
  • In roughly a week, Quantum had gone from being up 60 percent for the year to being some 10 percent down; $840 million had vanished.


A week or two after Black Monday, Soros spotted an opportunity to short the dollar, and he put on a gutsy, leveraged position as though nothing untoward had happened. The dollar duly fell, and the gamble paid off. Quantum ended 1987 up 13 percent, despite having languished in the red only two months earlier.

Source: More Money Than God by Sebastian Mallaby

Steve Eisman’s Wisdom

Question: Is there any wisdom you can impart to average investors?

Do your own homework. I can’t overstate the importance of this. When things start to go bad, speaking to the management of the company may be the worst thing you can do. You can walk away thinking things are okay when in fact they’re not, because seeing outside your own paradigm is sometimes the hardest thing to do. In the big-bank industry from 1995 up until the crisis, every year was basically a good year. Every year, people got paid more, and every year the leverage got bigger. What happened is that the people who ran these firms mistook leverage for genius. If you had gone to one of the senior people in one of these firms in 2006 or 2007 or 2008 and said, “Dude, the entire assumptions by which you have governed your career are wrong,” they would have said, “Are you crazy? I made $50-million last year. How could I be wrong?”

source:  Invest like a legend: Steve Eisman

Even after reading the above, I probably will at times not do my own homework, trust management, and/or lend too much credence to someone due to their recent financial gains…but I am posting this here so I can read this before banging my head against the wall (the next time I err…and there will be a next time).

How To be a Hedge Fund Douchebag: for Dummies Edition

The politicians (and occasionally) media love to vilify “hedge funds” and “hedge fund managers” in an almost Pavlovian manner. I personally think their knee-jerk and indiscriminate hate is unwarranted (especially when your child’s spouse is a hedge fund manager). Having said that, there are times when certain hedge fund professionals live up – and exceed – the douchebag stereotype:

  • You make someone an offer. He/she accepts (after he/she has already slaved away for you before).
  • You don’t provide concrete documentation, instead telling him/her (for several) months you are “working on it”.
  • You ask them for some information, in order to “help put the package together”
  • You then send an e-mail saying the offer is now out of the table. And you offer a bullshit explanation.

Make no mistake: if you make an enemy out of my friends, you make an enemy out of me. I totally understand that sometimes circumstances merit hiring freezes, delays, etc… but otherwise?

It’s a small world and…I eagerly look forward to following your career and 13Fs.