Category Archives: Finance

i don’t think you invest the way you think you invest

Sometimes you read or hear something and for a long period of time you’re like Kubrick’s chimps around the monolith. You don’t know what it is, but it’s big and you can’t leave it alone. Bashing at it doesn’t help.

Usually its @interfluidity’s fault but in this case the problem is neurobiological. Epicurean Dealmaker linked to a quick interview with neurologist Robert Burton who thinks even brain researchers are still monkeys:

because we have an innate sense of agency and yet simultaneously believe that mental states must have preexisting physical causes, we are left debating free will versus determinism. If we didn’t have a sense of agency, I’m not sure that the free will question would even arise.

I take this to mean that we’re nowhere near the point where any researcher has enough perspective to understand something by using that same thing to analyze it.

Add to this the findings of another neuroscientist, David Eagleman, who wrote a book concluding that:

Brains are in the business of gathering information and steering behavior appropriately. It doesn’t matter whether consciousness is involved in the decision making. And most of the time it’s not. Whether we’re talking about dilated eyes, jealousy, attraction, the love of fatty foods, or the great idea you had last week, consciousness is the smallest player in the operations of the brain. …, most of what we do and think and feel is not under conscious control. Our brains run mostly on autopilot, and the conscious mind has little access to the giant and mysterious factory that runs below it.

I’m not thrilled with this.  I’ve lived my whole life thinking my conscious brain was the quarterback and the subconscious was a combination of reference library and haunted house.

In corporate terms, what it sounds like now is that what I consider “me” is actually a satellite office taking vague orders from an all-powerful HQ based in Liberia or an underground lair or somewhere else deeply foreign and unsettling.

Instead of corporate profits and legal compliance, the subconscious imperatives would include –  basically in this order – physical security, sustenance, acceptance at the highest rung of social status possible because it leads to widest mate selection.

Quick example and, although I cringe, it actually pretty much happened:

You’re in 10th grade. There’s a very cute but quiet girl who sits next to you in math class but you’re obsessed with a girl on the cheerleading squad. At some level, you even know the math class girl is not only cuter more physically attractive – rounder [redacted] and bigger [redacted]. But you want the cheerleader and you don’t know why.

Well, you think you don’t know but your subconscious sure as fuck does. Social status. Bragging rights.  These are head office initiatives, you’re just following orders.

No wonder everyone sucks at investing. Corporate policy is out of date by 20,000 years. What we convince ourselves is a good investing idea – buying Apple at $600 say – is mostly conforming to the HQ’s corporate initiative for acceptance and belonging. The 5 per cent chance of a ten bagger in junior mining is associated with dreams of wealth that will get us laid and provide security for our genes offspring. The bulls versus bears battle of the tape gets the same lights up the same dopamine pathway as protecting the tribe from an onrushing lion.

I’m not saying re-programming isn’t possible and biology is destiny. There are at least hundreds of professional investors who have hacked the mainframe and changed the code – or at least deactivated it. But Eagleman says that for most of us, our conscious minds don’t have security clearance for the vast majority of the calculations and policy decisions being made – in our own heads. How the fuck are we going to push out the old management?

Requiem for Investing Twitter

I don’t have a lot of specific investing thoughts lately which is ironic because there’s been more activity than usual in my PA. Two full positions have been added – a brewer with big emerging markets exposure and a maker of giant bespoke valves for oil pipelines. Decisions will be made this week on a big winner in biotech and a big loser in telecom equipment.

 

One thing I’ not doing is trying to beat the index because I’m more than a little concerned that its infected by twitter or, to be more precise, infected by the same things that have made my timeline so depressing lately.

 

The big problem in market prognostication currently is that the action has moved beyond the view of most investors. Central bank involvement in yield curves has made currencies the more accurate gauge of regional macro health.  Currencies are notorious for trading away from fundamentals for years at a time and unlike debt, there is no CDS market for a second opinion. To make mattes worse, the world’s second largest economy – the primary driver of commodity prices – has largely pegged its currency while under the surface a misguided Manhattan Project builds a massive bad debt bomb.

 

With equity performance determined by central banks in a big way – God-like, infinitely wealthy exogenous entities – the MarketTwitter has taken to squabbling like medieval clerics. Every data point is held up like pieces of the true cross: You fools! I HAVE THE TICKET TO YOUR INVESTING SALVATION!

 

The degree of this triumphalism seems to be metastasizing rapidly. There has always been a maddening segment of twitter who’s whole existential value (an extension of academic life, one supposes) was realized by a desperate search for political heresy, after which the trumpets could be blown and the forces of righteousness led to vanquish the heretic.  In investing, this practice was previously confined to the gold bugs.

 

The predictable danger in market twitter was the acceleration of investing time frames but at first it seemed like the medium was too open, too conducive to correction, to allow a new one per cent to dominate the discussion. But at least in my timeline bullying, both in politics and investing, has become the norm. Being right and living your life the way you see fit is no longer enough – “macro tourists”, “bearshitters” and any random political thoughts not conforming to the orthodoxy must be humiliated and driven off.  Twitter, once a place to connect and ask questions, has given way to the exercise of follower power.

 

Tadas at Abnormal Returns linked to a piece on the isolation involved in being a value investor and I’ve written about the same thing. It’s odd how well this phenomenon applies to MarketTwitter at the moment.

 

Nobody wakes up in the morning and thinks “You know, I really feel like herding today. Just joining up with the biggest, most popular group I can find to make myself feel psychologically safe.” But as always our subconscious is driving the bus while letting our conscious minds think they’re in charge. The subconscious will feed the herding instinct to us in delicious, bite-sized portions like “if I say tweet something really funny and someone with 10,000 followers RTs it, then I’ll really belong with the hitters.” The impulse is in no way different then holding a widely-held stock that doubled last year and now trades at 25 times sales.

 

Ever thus, I guess. Like television, those looking for answers rather than affirmation could desert as Twitter devolves into utter dreck but hopefully not. As long as new centers of influence keep arising, things are likely to stay reasonably healthy. But

I have no idea where the market’s going to be in 12 months and for all the sneering neither does anyone else.  Hopefully all this shit is temporary – everyone’s just Vitamin D-deprived and irritable – and spring finds a more constructive community.

Scumbag Storytime

I’m in a venomous mood so let’s play storytime. Keep in mind I can’t prove any of this in a legal sense. The only way to do so would be testimony from witnesses and victims, which won’t happen for reasons I’ll get to.

Story 1: Friend of mine, broker, starts work at a new firm. One of the established brokers comes in to his office, welcomes him to the firm with the usual backslapping “GREAT TO HAVE YOU ABOARD! WE GOT A GREAT THING GOING HERE!” disingenuous bullshit.

Oh, and established broker happens to mention he is personally underwriting a tax-exempt product and if the new guy really wanted to be a team player, he’d take down AT LEAST a million bucks of it. New guy takes the million, distributes it to clients and two weeks later the thing is trading with a value of exactly $0.  The tax exempt status had been pulled.

Established guy, who collected a check for somewhere around $500K when the deal sold, barges into new guy’s office when he hears questions are being asked and tells him “DON”T BE A PUSSY. YOU PLAYING WITH THE BIG BOYS NOW”.

Story 2: Institutional sales guy has a sideline underwriting his own deals in same way as the asshole in the above example. Two days before a secondary offering in a  (very) junior mining company, he borrows all of the available shares of the company from every major brokerage. Why? So no one can short it when the new shares come out no matter how egregiously priced they are. Smaller check this time, maybe $300K.

Story 3: This is complete hearsay but because I know the broker involved a bit – someone who annually massages government documents to keep handicapped parking priveleges he doesn’t need  – I believe it. Rumor was that one of his clients was one of the top five new issue buyers at the firm (a large one). Problem was that the woman who’s name was on the account had Alzheimer’s disease and had been hospitalized for a decade.

Story 4: The great rare earth metals scam. This was a helicopter drop of free money for a certain type of unscrupulous broker.  China is the source for the vast majority of rare earth metals and when the government slashed exports after a diplomatic spat, the private deal underwriting machine kicked into high gear. “WHAT A GREAT STORY! THE DEFENSE DEPARTMENT NEEDS THIS SHIT! I know this guy with a property way up north with a huge Yttrium and he only needs $10 million to develop it. We can get in on the ground floor.”

Never mind that rare earth metals aren’t rare. The reason they come from China is they are massively un-environmentally friendly to process and China is one of the few countries where they don’t care if the groundwater eventually turns fluorescent purple. Which is why, in developed countries, it takes seven years from groundbreaking to production.  Oddly enough, the “ground floor” investors in new rare earth metals stocks weren’t informed that cash flow was seven years out, long after China would ease export restrictions. Most of these companies no longer trade but there were lots and lots of $300k checks issues to the brokers who underwrote these deals.

These are the worst examples that came immediately to mind but with a few phone calls I could give you 30 more horrific tales.  The reason outsiders don’t hear about them is two-fold. One, companies make a lot of money ignoring these types of things. Some, like the rare earth scam, are mostly legal anyway. The second, and more important reason, is that no other insider is likely to complain because almost all of them, at one point or another, have done something shady themselves. They do not need a regulator going through all their trades over the past decade.

The Daily Mail today published an expose Saturday entitled “The regime of fear inside Barclays” and to be fair the whole thing sounds pretty bad. Shredding a report is a new level of sweeping compliance problems under the rug. But in light of personal experience my suspicion is that Barclays’ (who I never worked for btw) biggest deficiency is an inability to avoid detection.  Horrible shit happens everywhere, every day and it takes a complete and utter moron to get caught.

So my first reaction to the Daily Mail’s tut tutting about the state of the industry is “You have no fucking idea”. Barclays isn’t a company “out of control” its just a run of the mill brokerage company. I have no idea how we got to this point but its going to take a whole lot more than a few breathless newspaper reports to fix it.

Finance Mythology

I think I’ve found a thread through yesterday’s shooting, economics and gender politics. Its actually a lot less impressive than it sounds. What we’re going to deal with – collective mythology – runs through everything but still, in the immortal words of Crash Davis, “we’re dealing with a lot of shit here.

Before I lose any more readers let’s quickly establish the link between myths and economics because few things are more collectively expensive than maintaining mythologies. Why do you think defense contractors get away with charging $2500 for a bolt? Complaining about it interferes with the myth of “America, the most powerful country in the world”. The disgusting morass of agricultural subsidies is politically ringfenced by the Faulknerian Pastoral Legend of The American Farmer.
This mythology shit is expensive.

Mythologies compete, too, and the arena is politics. Politics is merely the art and science of packaging mythologies into consumable portions. There is more myth in the phrases “American Values” and “Social Justice” than the Illiad and the Odyssey combined. Note also that the two examples above conflict with the myth of Free Market Capitalism.

“But wait”, you object. “America is the most powerful country in the world. Its not a myth.” That’s because you are misusing the word, or at the very least treating it disrespectfully. Real myths are more true than almost anything else. Why do you think they’re kept vague? Like newborns, they are way, way too important to be brought out into the sunlight, subject to the elements and dissection. Northrop Frye (on the short list of “Non-Hockey-Playing Canadians of Which We are Most Proud”) puts it this way:

Persecution and intolerance result from an ideology’s determination, as expressed through its priesthood, or whatever corresponds to a priesthood, to make its mythological canon the only possible one to commit oneself to, all others being denounced as heretical, morbid, unreal or evil. This means that there is a strong resistance within an ideology to placing its excluded initiative, the myth it lives by, into focus and examining it in a broader perspective. (“Words with Power, p24)

Try this. Grab a pen, unstrap the Rolex and put it on the desk where you can see it. Now give yourself 30 seconds and write down the ten words that best describe the financial industry. Don’t think, just write.
There’s your Finance Mythology. There will be plenty of overlap with other industry people, but its yours. Everyone, as Bellow wrote, has his own book of poems.

The Fly gave me the link between this, Newtown and finance. His appropriately somber and respectful post yesterday concludes thusly:

This country is diseased through an acute lack of morality and integrity. Everything about America has become rotten to the core. I am disgusted by this news, but also saddened for what it says about us.

The thing about the Fly is that for all his derision and highly entertaining trolling he is by far the most transparent money manager on the Internet. Every single trade and why, including losers, for free. Why would he do this?

I’m guessing, but would be willing to bet, that LeFly’s 10 words about finance focus on its more helpful aspects, the “helping clients achieve their financial goals”. With this interpretation, his hilarious dickishness is just a cover for the fact that he’s being helpful despite the fact he’s convinced the world’s going to shit. This takes belief.

Technology and social adaption are threatening any number of mythological structures. I deal with the slow, painful death of The Cult of Good Journalism every day. The average  dude is struggling with the Death of Manhood as prescibed by Hemingway, Emerson and our grimy, factory worker grandfathers.  (How, exactly we’re doing this is none of your business, btw – its The Myth, far too important for outsiders).

I’m not about to predict the future for the Mythology of Finance. Well, besides the part where demographics virtually makes it a certainty that it will be at least 30 to 40 per cent smaller as a percentage of GDP by 2030. But I am curious as to how it will happen. Let us not kid ourselves – money is how we value societal contribution and finance has most of it still. This, combined with the fact that the roots of the cult run deep – Smith, Hamilton, Morgan, The Industrial Revolution-led British Empire – suggests that a spirited defense, possibly a victorious one in the end, will be led.

But it is about mythology.

Pretty Lies

In a survey of literate financial industry professional I can more or less guarantee that the voting for McMurtry”s Lonesome Dove versus McCarthy’s Blood Meridian would fall along growth versus value ideological lines. Written in the same year, both are very, very good books, arguably the seminal achievements by each author. Only one will be read until the lights go out for good on humankind.

McMurtry’s book is a pretty lie, post-modern in the sense that its subject matter is the myth of the West rather than the history itself. The truth and accuracy, and there are considerable amounts, are woven into the myth.

Blood Meridian, on the other hand, is a poetic horror. It is devoid of heroes, building a story outwards from historical accounts of genocide. For the cynical, value-oriented reader, it also feels true.

McCarthy detractors will happily trot out numerous excerpts where his writing is almost comically overwrought. This doesn’t change my view. It is analogous to pointing out basketball games where Kobe Bryant or Larry Bird took too many shots – it doesn’t deny their greatness, just highlights its borders. In any event we’re not really here to discuss literature.

The question of the day as it applies to finance is: Is it worthwhile to know the truth?

I suspect that the eminent Steve Randy Waldman would argue that in aggregate, the benefits of investment truth are overrated. In his Why is finance so complex?, which is among my top five blog posts ever written in any field, he argues persuasively that one of the central economically-constructive tasks of the financial industry is to hide risk. Otherwise, fewer people would invest, and the entire economy would be poorer.

This notion would horrify the conventional Blood Meridian-loving value investor. What is net asset value, after all but the accounting TRUTH. What could possibly matter more?

Strict value investors almost always exist outside of the daily operations of finance. They don’t buy new issues and they don’t take pitch meetings. They are not susceptible to the “its a great story” growth stock pitches from the trade desk, so they don’t get many calls. The contact between value managers and investment banks usually takes the form of the manager asking complicated accounting questions of the analyst. As clients, since they don’t trade a lot, they are often considered more of a pain in the ass than they’re worth

They also miss out on all the fun. With rare exceptions in the severely distressed category of cigar-butt investors (Michael Price being one) there are no 10-baggers and no Laird Hamilton big wave “riding the winners” surfing episodes.

Longevity and consistency are the most obvious benefits of conservative value investing. Value funds will lose client assets during big rallies but rarely blow up. Even moderately talented value managers rarely go out of business.

But its a weird, anti-social type of victory. You are never in with the In-Crowd, not in THE GAME, with all of its incumbent go-go, chest-thumping, hand tailored suit, Master of the Universe mythology.

So who wins in this search for the truth? Is it enough to note that Lonesome Dove has outsold Blood Meridian by at least 400%?

Wherein Finance Arbs Out the Better Angels of Our Nature

Most people who live or work in an urban center have had the disheartening experience of trying to help out a homeless person only to find track marks up their arm when reaching for your dollar. The fact that the money will likely end up in the hands of a local heroin impresario instead of food is one thing, but at this point we are used to being lied to. I submit that the real discomfort comes from the erasure of what we believed was a humanitarian gesture, that an impulse we were secretly proud of has been used against us. In deciding not to help out the next homeless person, our attempted affiliation with the Good Samaritan has been “arbed out”.

At its Utopian best, capital markets are designed to attract savings towards worthwhile investment to the benefit of the economy as a whole (stop laughing, I’ll get real in a second). In this perfect Platonic world, a small number of traders would step in on the occasions where short term sentiment pushed assets to levels well above or below some concept of longer-term Buffett-y value. This is not, however, the world we live in for rational reasons too numerous to recount. HFT combined with the widespread successful use of technical analysis has created an environment where traders and automated scalpers, measured by daily volume, outnumber long term investors by a significant margin. The resulting increase in volatility has “arbed out” a good part of the impulse to invest for the long term, particularly among retail investors.

I swore I would not allow the word Facebook on this blog, but in abandoning that pledge I promise in turm to keep this section short. The NASDAQ’s technical problems and the potential for improper dissemination of information aside, FB’s IPO went largely to type in the sense that MS priced the deal at the highest point the market would stand. This is their fiduciary duty and the fact that the Supply/Demand curves met at $38, if only temporarily, implies that the price was fair according to classical economics. Because FB’s fundamentals do not support the price, however, means that lottery-induced dreaming and ignorance among retail investors went a long way to getting the deal off. Retail optimism, in this sense, has been partially arbed out.

In the efforts to keep things concise, I wont extend this thought into the broader economy beyond noting that Madison Avenue are the uncontested kings of leveraging or arbing any consistent psychological trait, good or bad, into changes in consumer behavior. To date, admittedly, there is not a lot of revulsion beyond grumbling at the constant Orwellian barrage but at some point some kind of Laffer Curve Peak Advertising will be reached. Despite recent positive comments on advertising from Conor Friedersdorf, my belief that advertising in a capitalist society performs the same function as Soviet propaganda – the sanctioned, unconsciously-accepted-through-mind-numbing-repetition lies that keep the wheels turning – remains pretty much unshakeable.

I’m not at the “End of the World” sandwich board stage yet, but do think we’re playing a dangerous game if this trend keeps up longer term. The pervasive testing of the boundaries of our collective gullibility-politically, socially and economically – feels cumulative, a heavier weight over time if collective cynicism (coughJonStewartcough) is any yardstick. The money pouring out of equity funds could definitely represent an ongoing indicator that mom and pop have had enough of playing Charlie Brown with the investment banks holding the football. The Facebook deal’s certainly not going to help – the next time a broker calls a client with a once in a lifetime IPO opportunity, the client’s likely going to remember the junkie’s track marks.

Askers vs Guessers in Finance: Askers are Annoying, Rich

Any follower of @Real_Interloper is aware of my fixation on the issue of Extroverted versus Introverted personality types and the possibility that Introverts will be devalued in a service-based, technology-heavy economy. * There is a subset of this discussion which relates closely to relative success in the financial industry – Askers versus Guessers – which is helpful in understanding the frequent annoyances experienced by clients and prospective clients of investment banks.

The popularization of the Asker/Guesser Paradigm began with a blog post by Andrea Donderi quoted by the Guardian HERE:

We are raised, the theory runs, in one of two cultures. In Ask culture, people grow up believing they can ask for anything – a favour, a pay rise– fully realising the answer may be no. In Guess culture, by contrast, you avoid “putting a request into words unless you’re pretty sure the answer will be yes… A key skill is putting out delicate feelers. If you do this with enough subtlety, you won’t have to make the request directly; you’ll get an offer.

The most obvious general manifestation of Asker/Guesser are the dudes that internalize the dating scene as a numbers game, and will spend an entire night at a bar getting shot down until some definition of success is achieved. The necessary psychological equipment for this practice is incredibly thick skin, an ability to soldier through mass rejection that would emotionally cripple a Guesser.

The stereotypical retail broker is virtually the Platonic ideal of the Asker. Successful brokers are often immune to rejection, criticism or introspection.  To provide a specific example, I was once involved with a merger where the retail wing of one company combined with the capital markets department of another. About a month in, a broker sent an email to all capital markets staff informing them that they would be required to switch all of their investment accounts into the new retail division, and since this was the case, they might as well sign up with him.  No such policy was ever discussed or established. When confronted, the broker just said, “Oh, sorry, I must have made a mistake” and went on with his daily routine.  Didn’t work, on to the next.

Not everyone employed in finance is an Asker and self-doubting Guessers are particularly prominent among strategists and economists.  Askers however, particularly in their most subtle form of investment bankers, tend to make the bulk of the money. This makes sense in that the asking is generally for money, and Askers rightly demand their cut.

The Asker/Guesser dichotomy operates on a continuum – very few people are 100% oriented either way. However, the differences are so fundamental that communication between the two groups is often fraught with danger. The Guardian article describes this well:

An Asker won’t think it’s rude to request two weeks in your spare room, but a Guess culture person will hear it as presumptuous and resent the agony involved in saying no. Your boss, asking for a project to be finished early, may be an overdemanding boor – or just an Asker, who’s assuming you might decline. If you’re a Guesser, you’ll hear it as an expectation.

I suspect that Asker/Guesser issues form a significant part of anti-finance sentiment.  Finance asks to maintain its current privileged status and an audience guesses that this represents a sense of entitlement.  Guessers, including politicians and regulators, could potentially be surprised at the extent to which rank and file financial employees would accept a puppy-like smack on the nose or, in more common trading floor parlance, told to go fuck themselves.

 

 

*Two aspects of Introvert/Extrovert interest me most. One, that the rise of extroverts corresponds to Professor Cowen’s Great Stagnation thesis. Two the possibility that the necessary skill set for success has made an almost exact 180 degree change from the 19th and early  20th.

Defending Analysts: The Mouth of Sauron, Not the Dark Lord Himself

One of the few consistent themes of this blog is that bad things, including client-screwing ethical lapses, happen not because of the rise of individual evil people but as the end result of a steady erosion of principles caused by the temptation of huge pig troughs of potential compensation. In rebutting Josh’s reinforcement of the useless, self-aggrandizing analyst stereotype printed by the FT yesterday we’ll go through how this process works for the typical equity analyst.

First, picture a Laffer curve with some measure of ethical behavior on the Y-Axis, “number of retail clients protected from being fleeced” for instance, and potential commission along the x-axis. To simplify things somewhat, we’ll assume that the moving out on the x-axis to higher cake is primarily a function of payments made to an analyst as a result of commission on investment banking transactions in their sector. The peak of the curve, which will be a different for every analyst is the “too much money to ignore” level, where visions of a decent-sized ranch in the Hamptons replace early-career notions of “helping people with their finances” and general adherence to the extensive but flushable CFA ethics guidelines.

It is important to note here that the vast majority of equity analysts toil away in obscurity, even within their own firms. They cover their companies in sectors where investors currently don’t care or where they are overshadowed by a CNBC-friendly, dominant counterpart at another firm. The 5% of analysts you have heard of cover hot stocks like LULU that are “in play”, attracting oceans of daily market liquidity or in sectors where significant M&A activity is apparent.

Interloper’s General Rule of Understanding Finance applies directly here: Whenever something looks fishy, look to how the situation benefits Investment Banking revenue. That’s where the big checks are – new offerrings and M&A consulting. An analyst covering a stock where this activity occurs goes “behind the wall”, generating a fat personal check in the 100s of thousands when a deal is completed.

Now we’re ready to discuss Josh’s Jamba Juice example where the analyst kept hyping the stock as it collapsed into nothingness. For our purposes, the important part of the story is that the analyst in question was the biggest name covering the stock. Why is this important? Because it implies (almost assures actually) that this analysts’ company would be the primary banker on any capital raising, hopefully a number of them over a decade, that Jamba Juice would do to fund its expected growth. Lots of big checks for I-Banking, and enough potential personal revenue for the analyst that they, at some point, reached the “too much money to ignore” peak of our bastardized Laffer Curve after which the permanent pom poms came out.

This happens all the time and Josh is right to call them out. On the other hand, I find the stereotype unfair, not least because it does not reflect the day-to-day efforts of 95% of analysts who diligently follow their companies and answer client questions to the best of their abilities. More importantly, the analyst is not the driving force in these instances – they are just the visible vanguard for Banking. The I-Bankers just quietly move on to shoo-fly another potential big pile of money when things don’t work out and the analyst is publicly hung out to dry. And no, I am not excusing analyst behavior when this happens, just suggesting that blame be apportioned more generally.

As a group, equity analysts in my opinion are the most ethical of all capital markets staff. They are the ones forced to live with their public declarations. Furthermore, whereas the finance industry inexplicably sidestepped regulatory punishment after the GFC, analysts suffered a disproportionate beating and increased legal liability after the tech bubble imploded. The driving force behind Blodgettgate remember, was banking revenue and yet notably few restrictions were put on Banking as a result. The TMT analysts were a much smaller percentage of the problem than most believe, The Mouth of Sauron rather than the dark lord him-or herself.

Again, I am not defending the crappy, client-unfriendly things analysts do all the time. But in my experience, which features hundreds of research meetings, analysts are not routinely dishonest. Bankers, particularly when retail investors are involved, kinda are – they are looking for the highest fees they can possibly get and they could care less what happens after a deal is done. I don’t have space really to get in to Structured Products, but I will note that the term “cesspool” is unfair to outhouses in this regard.

It is really convenient for an investment bank to have public and regulatory focus on the analysts, as if changing or adding disclaimers will do anything to affect research content. They are an effective screen obscuring where the sausage and all the money really gets made. Analysts are just the rock that must be lifted so that sunlight can reach the Investment Banking department.

Beware the Prince

I’m about as well sorted psychologically as I’m ever going to be but I get to use a shrink as consultant for niggling issues, an arrangement that suits us both. During a recent conversation, we were discussing some completely impersonal topic and after commending my insight, looked at me purposefully and said “But you’re not a Prince”. He started to explain what he meant, but I just raised my hand to stop him. I got it, I just didn’t like it.

As a group we like societal anomalies as long as we can feel superior to someone. The sick fascination with serial killers fulfills a violent prurience with the added benefit of guilty Shadenfreude regarding the victims. Positive outliers that make us feel inferior are less welcome. We don’t like those, to the point where psychological self-defensive concepts like “luck” and “cheating” arise immediately like squid ink.

Princes, winners of the genetic lottery in exactly the ways that count most, do exist unfortunately. Princes are separate from savants, the latter with skills so focused in one area that they’re completely useless and awkward in others to make us feel better. For the true Prince, as the name implies, the aptitudes and will are so strong and varied that future success is virtually preordained. They are not only capable of breezing through an applied economics final after no lectures and 30 hours of studying, but also know what you are going to do and say before you do or say anything.

Too many viewings of Good Will Hunting, you’re thinking. I wish that were the case but I actually know a Prince well who has operated so well in the back section of the FIRE acronym that having never been anything but self-employed, he personally owns his own jet (money enough not to waste time) and funds a major post-graduate school that has his name on the door. His social skills are legendary, maintaining varied and rarely overlapping spheres including prominent politicians, assorted billionaires, and his friends from high school. He is also a former professional athlete.

There is another business acquaintance whose history may indicate Princedom, but I don’t know them well enough to say for sure. He shares, and here finally we reach the point of this exercise, an interesting set of outwards traits with my friend, marked stillness and a vagueness equal parts camouflage and obfuscation. Whether this represents confidence, focus, strategy or an inability to connect to us regular mortals I have no idea. But, these characteristics make it extremely difficult for even the most observant meeting attendee to know what they’re dealing with.

Princes (of both sexes, I refuse to use “Princesses” here) do exist, which is the first thing to keep in mind. The second, more business-related point which follows, is that it is a very good idea never to be on the other side of the table from them. I’ve seen the advanced negotiation tactics and I will state unequivocally that an attentive person of above-average intelligence will not even know they are being applied. A lot of it is flattery, not sales, with hearty congratulations for coming up with an idea that “I never would have come up with myself”, even though the counterparty has been subtly nudged in that direction for a week and will have to get a cab home because they have unwittingly thrown their car into the deal. (that actually happened, btw). On the other side of the table, you will have brought a knife to a gunfight while being lauded for your impressive strength.

Money attracts talent and despite widespread charlatanism and scumbaggery, finance likely has more royalty than any other field. Beware the Prince.

Following Bunk Moreland on Gold, Monetary Policy

There is something about monetary policy that drives significant portions of the investing populace insane. As a guess, it’s possible that the physical act of printing dollar bills, and the virtual act of money creation in the banking sector, is enough like magic to tap into the medieval part of the brain to generate the “BERNANKE’S IN LEAGUE WITH LUCIFER!” reaction so common from those compelled to comment on any story involving aggregate liquidity.

People done digging dog face in the banana patch. I can safely write sentences like that because half of this post’s readers have already closed their web browsers and have started composing 2500 word responses to paragraph one. They will marvel at how I can be flip about an issue that is clearly at the core of our democracy. My answer is: I don’t care. Yet.

The simple fact is that for the next week and next month, the value of global currencies will be largely determined by cross-border asset flows. Political news from Southern Europe will be offset by ECB transfers to maintain bank liquidity levels. As with the yen and the yuan, these are policy questions not theological ones. The veracity of MMT theory or the “hocus pocus” of fiat currency will not enter into it. The believers being fully invested already and any notion of intrinsic value being tossed out the window already, gold will rise or fall based on sentiment and technicals. Again, I don’t care. Yet.

Bunk on Money

The forces of hipsterdom have decreed that any discussion of The Wire as the greatest show in broadcast history are cliche. Nonetheless, I am still following the advice inherent in Bunk Moreland’s  Season 5 admonition to McNultey with respect to monetary theory, “That will teach you to give a fuck when it ain’t your turn to give a fuck”. Until bond yields move in some inexplicable degree in one direction, or any signs of a 70s wage/price spiral pop up, monetary theory will have little or no effect on my investing decision making. If either of those things do happen, however, Mosler is going to make some money off me, along with a giant host of other published experts.

Fidelity and Predicting Currency Values

In the mid to late 1990s the consensus economic view was that the US dollar was significantly over-valued, by between 20% and 40% depending on the year and measuring device. At the time, Fidelity Investments built a decent-sized team of macro specialists looking to “add alpha” to the company’s then-famously index hugging portfolios by predicting changes in global currency values. The team was disbanded in five years not due to lack of effort or expertise, but because global currencies trade with complete disregard to economic fundamentals for years at a time. These were all experts in the field, remember, and although I never saw CVs, since we’re talking Fidelity there’s a 98% chance that all of them came from extra-fancy Ivy League schools. They were not, in other words, retail investors attempting to benefit from reading a couple books from the non-fiction bin at Barnes and Noble published by the Smith and Wesson Literary Fund. For me, the primary lesson from this parable is that currencies are not predictable.

Knowing What You Don’t Know

Knowing that you don’t know is among the most important aspects of investing, for both professional and non-pro investors. The most financially dangerous response to an information vacuum is to reach desperately for a framework that makes things intelligible. It is particularly dangerous to grab at one that just happens to fit your personal politically ideology. (Your most vicious associates will brand you an economist if you do this too often).

Take it for what its worth, but my advice would be to watch and consider. Read Cullen Roche on MMT. Watch the exchanges between Senator Paul and the Fed Chairman. Look for signs and accept those that are contradictory to your current understanding. Don’t, in other words, paint yourself into an ideological cul-de-sac that may cost you a lot of money to climb out of. It is time to learn, but there will be plenty of opportunity to become a believer when its time to give a fuck.

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