Tag Archives: Hedge Funds

New Normal

Friday’s employment numbers have caused many analysts to set their hair on fire. Initially the Dow fell more than 100 points before saner money returned in the afternoon. This reinforces a theme I have been pursuing on these pages for the last year. For 22 years since George Soros made $1.5 Billion in a week, shorting the British Pound and forcing the Bank of England to devalue the currency on Black Wednesday, September 16, 1992, most of the great fortunes on Wall Street have been made short selling. Since that time, with the rise of the Hedge Fund Industry, built to take advantage of the misery of others–be they firms or whole countries as with Soros and the UK or with Paul Singer’s current pusuit of Argentina. The great fortunes made during the 2008 crash, were those betting the market would crash. Exhibit A would be John Paulson, who actually designed the catastrophically toxic mortgage securities, that he then arranged for Goldman Sach’s and his other banking partners to sell to money managers after they had paid the ratings services Moodys, S & P and Fitch to rate this crap AAA. This is what my finance mentor Richard Rainwater used to call a “self-fulfilling prophecy”. John Paulson bought all the short positions in these toxic bonds that he had designed to blow up and then just waited for the sound of the explosion to collect his billions.

Unfuckingbelievable.

And these guys are not in jail?

Anyway, back to my thesis. The great fortunes of the next fifty years will be made betting on the upside of an emerging global democratic capitalism that actually capable of delivering smart and reasonably priced services to all classes of society. People who bet on the short side are going to be the fools of the future. I agree with Ruy Teixeira, The Whole World is Getting Much, Much Better.

For many on the left, a positive attitude toward economic growth and globalization seems counterintuitive. After all, isn’t there a basic lack of progress in the world today—aren’t things just getting worse rather than better?

No, in fact they’re getting better — much better — and that is despite trends toward increased inequality which have damped down economic advance for average citizens in some countries. Consider the American case, where trends toward inequality have been particularly serious. In 1947, the median family income in the US was around $27,000 in today’s dollars. Today, median family income is around $61,000. Looked at another way, in 1947, 60 percent of families made under $30,000. But today only around 20 percent make less than that figure and 40 percent make over $75,000, a figure that was exceeded by less than 5 percent of families in 1947.

So let’s go back to those unemployment numbers and see why all this fear that the Wall Street Bears are constantly trying to gin up is really just guys “talking their book”. First, traders view the fact that the unemployment rate actually fell in a month when only 88,000 jobs were added, as if everyone had just given up looking for a job. What they hardly ever mention is that 300,000 boomers Every Month are reaching retirement age, with fairly decent pensions and good Social Security Benefits.No wonder many of them are “leaving the workforce.” That’s what “Social Security” means. And in a few months at least half of those people’s positions will have to be replaced every month. Not everyone reaching 65 can or will retire, but we will witness a big transition in the workforce from the Boomers to the Millenials, and that in itself will change the way business is done.

That was also remarked upon by Teixeira.

By the end of the 20^th century, more technological advances had been made in the previous hundred years than in all of history before 1900. There is no good reason to believe that this breakneck pace will slow in the 21^stcentury, since we are just on the verge of mastering knowledge gleaned from technological revolutions in three interwined areas: computer science, biomolecular science/engineering, and quantum physics. Indeed, as we transition from an era where we have discovered the basic laws and building blocks in these fields to an era where we apply that knowledge, the pace of innovation, if anything, may accelerate.

We think we are seeing this same acceleration happen in the USC Annenberg Innovation Lab. All of this is counter to the End of the World Crowd, filled with idiots like David Stockman.

So here is my advice. Stop obsessing with the end of world theme. Stop reading the doom and gloom books, Stop buying gold. Stop trading in and out of stocks every time you get scared (like Friday morning). Invest in companies you think are innovative and have a long term plan and pay dividends. And stick with them. I can assure you, Groupon does not have a real long term plan. Apple does.

In your politics, work with candidates that want to build a world of justice and peace. Not with ones who want to scare you that a vote for the other party will mean the end of the world as we know it.

Aspen Effect

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When my flight from Los Angeles touched down in Aspen, Colorado I counted 80 private jets parked at the airport. I had come for the annual Aspen Ideas Festival and what follows is a critique written with some affection for the institution but with the full knowledge that I may never be invited to speak there.

Aspen aspires to be an American Davos–a meeting in the mountains of top government policy makers, important pundits, authors and academics; all interacting with the corporate elite. Thus the enormous private jet fleet. It seemed to this first time attendee that the whole program was built on three suppositions.

That the economics of globalization are as inevitable as water flowing downhill on Frying Pan River.
That technological innovation is the salvation of society.
That American politics are so polarized that nothing can be accomplished at a national level.

These assumptions lead to a kind of philosophy of inevitability. Leadership is reduced to management and so problems really can’t be solved, they can just be managed. The pundits, politicians and managers on the stages of Aspen are there to tell us they know how to manage through crisis. This leaves the audience feeling as if there are no choices left other than the personal choice between eating steak or fish, wearing khakis or Levis, buying a Gulfstream or a Bombardier corporate jet. The notion of the political choice of fundamentally changing our society seems to be in the realm of the Higgs Particle. Does such a choice really exist and if so, how would we know?

On the stage the pundit interviewers were obsequiously polite with the politicians. Gillian Tett of the Financial Times never bothered to ask Larry Summers if he regretted eliminating Glass-Steagel at the behest of Citibank’s Sandy Weill. Charlie Rose sat mute as Mitch Daniels poured forth Romney talking points about how government regulation inevitably inhibits growth and how Obamacare was a tax on all Americans. The Atlantic’s David Bradley never challenged Pervez Musharraf’s assertion that military Coups were necessary to save Pakistan’s fragile and corrupt democracy. Tom Friedman allowed Ehud Barak to ramble on for minutes on why Iran’s joining the nuclear club would be different than any other previous nuclear aspirant, despite convincing evidence to the contrary by Kenneth Waltz in this month’s Foreign Affairs. Continue reading →

Private Equity Myth

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As many of you know, David Brooks is one of the few conservative columnists that I regard highly. But occasionally he writes something that is so boneheaded, it makes you wonder. Such a column was his defense of Mitt Romney and the Private Equity Business this week. Here is Brooks.

Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.

The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient.

This version of the 1980′s could have been written by one the hundreds of Lobbyists deployed by the Private Equity Industry in Washington. That was probably where Brooks “researched” his story. The real history of the era is quite different.The 1980′s was the start of the financialization of American business, with it’s wave of complex financial instruments that only a quantum math scholar could decipher. Writing after the Great Depression of the 1930’s, the economist Joseph Schumpeter spoke of “vanishing investment opportunities” by which he meant that the enormous growth of productivity, combined with the oligopolistic pricing structures of American capitalism generated a growing surplus which went beyond the capacity of system to absorb it. As I researched this post I began to wonder if Schumpeter’s concern still applied to the American economy and certainly Ben Bernanke in a 2005 speech called “The Global Saving Glut”, seemed to believe so. American capitalism had always been a boom and bust cycle as an historian of the Panics of 1837, 1857, 1869, 1873, 1893, 1903, 1907, and 1929 would know. However, by the late 1960’s economists had come to believe that fiscal and monetary policy had eliminated the extremes of the business cycle. But by the mid 1970’s, after the Arab oil embargo, the American economy began to fall into a condition known as Stagflation—a brutal combination of business stagnation and unemployment mixed with the inflation brought on by rapidly rising energy prices. Continue reading →

Bring it On

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Cory Booker revealed the real stakes for the November Election. Faced with having to raise most of the money for his next campaign (maybe Governor?), Cory chose to suck up to Wall Street on Meet The Press and trash Obama. Booker’s remarks defending Bain Capital forced Obama to reiterate why Savage Capital is an issue in this election.

In the spotlight of the world stage, President Barack Obama on Monday unapologetically defended his campaign’s attacks on Mitt Romney’s record at the private equity firm Bain Capital and vowed to keep up the onslaught all the way to November.

“This issue is not a distraction,” Obama defiantly declared at a press conference wrapping up a NATO summit in his hometown of Chicago. “This is what this campaign is going to be about.”

“If your main argument for how to grow the economy is ‘I knew how to make a lot of money for investors,’ then you’re missing what this job is about,” the president said, evidently relishing the opportunity to knock Romney.

“It doesn’t mean you weren’t good at private equity, but that’s not what my job is as president. My job is to take into account everybody, not just some. My job is to make sure that the country is growing not just now, but ten years from now and 20 years from now,” he said.

To my mind this is a bit of a gift, even though Booker clearly was looking out for his own reelection not Obama’s. Bain is just exhibit one in the argument against the Leveraged Buy Out Business. Financed by ex-con Mike Milken in the 1980′s, Mitt was just a piker compared to Henry Kravis or Steve Schwartzman. He was B League. The whole industry of leverage is a plague upon our society.Before Mitt Romney and Miker Milken, debt to equity ratios were rational. After them, the use of junk bond debt exploded and we never looked back until the whole House of Cards collapsed in 2008. Now we are considering electing this man, Romney, the Leverage Buy out guy, President?

No. Bring on the populist battle we have been waiting for. The 1% vs the 99%.

Let them eat cake

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Bernard Marcus

Our some time correspondent, Tennessee William Shakespeare sent me a link and I wrote a friend who used to work for Bloomberg News to ask if this story, written by one Max Abelson for Bloomberg Business Week was tongue in cheek. He replied no, it was totally serious.

Dimon, 55, whose 2010 compensation was $23 million, joined billionaires including hedge-fund manager John Paulson and Home Depot Inc. co-founder Bernard Marcus in using speeches, open letters and television appearances to defend themselves and the richest 1 percent of the population targeted by Occupy Wall Street demonstrators.

If successful businesspeople don’t go public to share their stories and talk about their troubles, “they deserve what they’re going to get,” said Marcus, 82, a founding member of Job Creators Alliance, a Dallas-based nonprofit that develops talking points and op-ed pieces aimed at “shaping the national agenda,” according to the group’s website. He said he isn’t worried that speaking out might make him a target of protesters.

“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”

I want a reality show where the Billionaires come on every day and talk about their troubles. It could be like the old TV show “Queen for a Day”. The 1 Percenter with the biggest sob story wins a brand new dishwasher.

Inequality Smackdown

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I always love it when David Brooks and Paul Krugman tussle on the pages of the New York Times. On Monday, Brooks wrote a column called The Wrong Inequality, arguing that the Occupy Movement was wrong to target the 1% and that the real inequality problem was between the people who didn’t have a college degree and those who did. This is what I call the feeble attempt on the right to change the subject.

So this morning Krugman weighs in with Oligarchy, American Style and without ever mentioning Brooks by name, performs an epic smackdown.

Pundits try to put a more benign face on the phenomenon, claiming that it’s not really the wealthy few versus the rest, it’s the educated versus the less educated.

So what you need to know is that all of these claims are basically attempts to obscure the stark reality: We have a society in which money is increasingly concentrated in the hands of a few people, and in which that concentration of income and wealth threatens to make us a democracy in name only.

He then goes on to point out that the biggest gains are really going to the top .01%, whose incomes have risen more than 400% since Ronald Reagan first started cutting taxes for the wealthy. Of course the rationale for Republican supply side economics from 1980 on has been that cutting taxes on the wealthy encourages investment in the productive industries which in turn fuels employment for all, leading to higher consumption of products in a virtuous circle. But that obviously is not working out to be true and so the Republicans now contend that the investment of all this surplus wealth from both corporate and billionaire balance sheets is not happening because they are “uncertain about the future” under the Obama administration.

This is nonsense. What has happened in the last 30 years is very clear. Because all of the income gains have gone to a very small number of people, the purchasing power of the average household has fallen dramatically. For a while (1989-2006) this was masked by the explosion of consumer credit as people used their home equity like an ATM to keep up with the aspirational lifestyles of the rich and famous. As for the rich and famous, they were not investing in new productive enterprises, they were speculating in the casino we call Wall Street. Investment bankers worked long hours to invent new instruments of speculation as the explosion of derivatives masked the sad truth that the traditional role of finance as the engine of new enterprise faded into the background noise on the trading floor.

As for the one real area of Innovation in our society, the Internet Industries, it has become increasingly obvious that the capital needs of these businesses are relatively low compared to the last boom of industrialization that fueled the post war growth of steel, autos, chemicals and oil. Why else would Microsoft, Apple, Google and IBM each have over $50 Billion in cash sitting in the bank?

We are not going to get out of this stagnation until the gains of our economy are spread a little bit more evenly. The Koch Brothers and their mouthpiece Herman Cain (with Rick Perry in the Green Room) are trying to cut their taxes even further by floating flat tax proposals. I think an election fought on the lines of “Whose side are you on?”–forcing the Republicans to defend their “Oligarchy, America Style”–will be good for our fading democracy.

Year of Living Dangerously

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One year from today we will enter the final two weeks of the Presidential Race. The punditry are making certain predictions they see as “inevitable. But there is a big chance that the radical spirit in the air on both Left and Right as represented by Occupy Wall Street and the Tea Party, could prove the pundits wrong.

As to the Republicans, the conventional wisdom is that Mitt Romney is now the “inevitable” nominee of the Republican Party. He may in fact prevail next summer, but it is far from inevitable. Two factors will make this a long and brutal race for the nomination.

70% of Republicans want a hard line conservative. At some point the Tea Party Candidate will emerge between Perry and three dwarfs (Bachmann, Gingrich and Cain). They will never back Romney.Just read Rush Limbaugh fulminating last week that “The GOP Elite declares War On the Tea Party”. Limbaugh’s influence in the Tea Party is huge.

Money-Rick Perry has raised a lot of money and he’s not going to shrink back to Texas without a fight. Reporting Romney’s quarterly total the New York Times noted.

The amount gives Mr. Romney what is expected to be the second largest third-quarter haul in the Republican field, behind Gov. Rick Perry of Texas. Mr. Perry’s aides said last week that he had raised more than $17 million for the period, which covered his first weeks in the campaign.

On the Democratic side, the rise of the Occupy Movement it is making it easier for Obama and the Democrats to fight a Populist Campaign for 2012 which isn’t on Tea Party terms, but on theirs. If Tea Party really does decide to throw their support to the very same Elite Republicans who Limbaugh claims are at war with the Tea Party,it would be a really revealing moment. To decide to throw away the revolutionary attitude and fight in an election—to “Help the One Percent”—(i.e. to have no “Billionaires” surtax). The Tea Party is welcome to fight that war, but it will reveal them to be the Dick Armey Astroturf movement some have suspected as being from the start.

I continue to argue, we are in this wild Interregnum Moment. The very fact that the elite keeps asking that the Occupy Movement create a leadership structure. And they refuse. May be they know what we do to leaders of nascent movements.

Savage Capital II

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This morning it is deja vu all over again. In March of 2008, after having warned my readers for three months that a crash was coming, I wrote a piece about what I called Savage Capitalism. The short selling sharks had managed to crash Bear Stearns and now were swimming around with blood on their snouts looking for their next prey. It would be Lehman Bros. The whole notion that the great fortunes of the present day were made selling short, was a particularly dispiriting one.

I’m a boomer and I was raised in the 50′s with a healthy respect for the great companies and fortunes made from producing the goods America wanted. Whether General Electric, Ford Motor, AT&T, IBM, all were producing world class quality products. Even banks like Chase Manhattan and Bank Of America added great value to the American economy. But things are different now. The great fortunes get built betting on failure. John Paulson, who personally made $5 Billion in 2010, did it by shorting mortgage securities that he designed to fail. George Soros made $1Billion in 1992 shorting the British Pound.

At this very moment the school of short-selling sharks is circling the bonds of Portugal, Greece, Italy, Spain and Ireland. Their big score is if they can get one of those countries to default. Continue reading →

Farewell, F**k Off and Pass the Bong

Jonathan Taplin

Director, USC Annenberg Innovation Lab

Tag Archives: Hedge Funds

New Normal

Aspen Effect

Private Equity Myth

Bring it On

Let them eat cake

Inequality Smackdown

Year of Living Dangerously

Savage Capital II

Farewell, F**k Off and Pass the Bong

Farewell, F**k Off and Pass the Bong