Gordian Knots

Money is like the ball in a game. After the game, the ball just sits there, no longer being fought over. Attaching value to money is like trying to score a goal after the game is over.

Jim Grant interview with AP

I read the book ‘Anatomy of the Bear’ over last winter. Here is a new FT Interview with Russell Napier.

Don’t confuse Net Worth and Self Worth

• WSJ Interview with Stanley Druckenmiller: What If the U.S. Treasury Defaults?
• SSRN-The Liquidation of Government Debt by Carmen Reinhart, M. Sbrancia
• The Biggest Urban Legend in Finance by Rob Arnott
• Texas University to Hold $1 Billion in Gold Bars – Bloomberg

Via Embracing heresy | Ultimi Barbarorum

It is not true that individual investors are always going to lose
when they enter a stock market dominated by sophisticated institutional
investors like, well, like me. I have a huge disadvantage stopping me
from doing the right thing; time frame. I have a boss breathing down my
neck to whom I have to justify my bigger trades as well as my weekly,
monthly, quarterly and annual returns. I have a liquidity constraint.
Some of the most interesting ideas can’t make it in my fund if there is
not enough daily volume to take a meaningful position. I cannot “dollar
cost average”. My investors like to invest more at the top of the
market, and panic at the bottoms. I have to be largely fully invested at
all times, and I have to spread my genius over a diversified portfolio
of 30-80 stocks. I have to avoid market strife and draw downs. I cannot
embrace declines in the way that I should. I have to watch every twitch
of the market. I have to worry about things like the VIX.

You don’t! Really….

Via Calculated Risk:

• Mortgage Servicing
• Negative Amortization
• FICOs and AUS
• Private Mortgage Insurance I
• Private Mortgage Insurance II
• Foreclosure and REO
• MBS I
• MBS II
• MBS III
• Delinquency and Default
• Reverse Mortgages
• Leverage, Ratings, and Forced Unwind
• Mortgage Origination Channels

Do Investors Face Another Lost Decade from Japan? by Edward Chancellor of GMO
Robert Sapolsky and Human Behavioral Biology from Stanford University
Portfolio theory is dead, now what?

Link to Mohnish Pabrai’s talk at Columbia

A bird in the hand is quickly eaten. Two in the bush will increase their numbers.

Via Distressed Debt Investing:

• He was attracted to investing because he was evaluated on performance not whether or not he looked people in the eye or was socially adept
• Being looked down on by more credentialed professionals is a hallmark of most trailblazing success stories, noting how John Bogle openly criticized him in a Forbes article
• He has always been attracted to “ick investments”
• Aside from being short $1.8 bln notional of sub-prime CDS he was also short $6.6 bln of corporate CDS in names including AIG, Wamu, Countrywide, Fannie and Freddie
• Due to Wall Street marking against him and his growing investor unrest he was forced to sell his corporate CDS and side pocket his subprime bets
• When he was first buying protection on sub-prime CDS he was making a psychological bet on the first real defaults, which he expected to soon start, causing the broader mortgage market to collapse. By late ’05, when defaults actually started occurring EVERYBODY should have seen what was coming
• Instead technical factors—most notably the deep CDS offer from synthetic CDOs and correlation traders—pushed the mortgage basis even tighter
• He really went after Goldman noting that e-mail have subsequently been disclosed that revealed GS orchestrated a short squeeze “to cause maximum pain” to existing shorts in order to pile on the trade themselves at better levels
• Paulson and Bernake grossly underestimated the problem. He is amazed that Paulson didn’t realize the extent of sub-prime exposure given his tenure at Goldman
• He notes that many people at different government agencies saw the crisis coming—even more so than he did—but weren’t listened to
• He expects easy monetary policy into the next presidential term
• QE “seems” to be working but is really just a big gamble
• QE2 brings the governments motives into question
• The “Toxic Twins”: fiat currency and an expansionary Fed will be a disaster
• Glass Stegall needs a 2nd go
• We are building a debtors’ prison for our children. Legacies are a fatal burden in a fast changing world
• Don’t tolerate blind faith, figure things for yourself
• Open a bank account in Canada
• When asked how to improve the mortgage industry he said that the first step would be eliminating the government’s stance that they should incentivize home ownership. People are smart enough to make their own rent/buy decisions. He would also require originators to hold 50% of their production on their balance sheets.
• He was very reluctant to reveal details of what he is investing in now
• He has bought some farmland, but for very specific factors including currency (didn’t really expand on this)
• He has funded some venture capital type investments in Silicon Valley; noted that Silicon Valley is the only place where pure capitalism exists today
• There are opportunities in small caps because they have lost sponsorship at most sell-side firms
• Doesn’t think large caps are as cheap as others do
• Hard to determine when people will lose faith in USTs
• You don’t have to be the smartest analyst, he was 50th percentile at best in his med school class; you just have to be most dogged
• Read every line item until you get it

Michael Steinhardt in CNBC

H/T Farnam Street