Simplicity and Causality

Friday, 5 December 2008 - 4:22 AM (journal:Daily Journal[2008\12\05+042254734])
Simplicity and Causality

We are living through a time of financial turmoil; what I find startling are the fancy theories "experts" are using to explain the solutions to our current situation. To my mind the fact that we find ourselves in this financial mess was so glaringly obvious to all, not just a few, it was greed that blinded us to believe that the show will carry on. We were all scared to miss the boat in case this time things were different or our neighbours would somehow enjoy more of the largesse than we would. There is a cliché my father taught me that is so apt for the current malaise, "easy come easy go".

Markets have existed in some shape or form alongside man for 1,000's of years. Yes innovation has allowed the pattern of market behaviour to develop in different ways often tricking us into believing this time is different; but the axis on which the wheels of the market turn are the same - supply and demand remain. All that changes is our interpretation or quantification of supply and demand. For those of you who like economic history like I do "The phrase "supply and demand" was first used by James Denham-Steuart (http://en.wikipedia.org/wiki/James_Denham-Steuart) in his Inquiry into the Principles of Political Economy (http://en.wikipedia.org/w/index.php?title=Inquiry_into_the_Principles_of_Political_Economy&action=edit&redlink=1), published in 1767. Adam Smith (http://en.wikipedia.org/wiki/Adam_Smith) used the phrase in his 1776 book The Wealth of Nations (http://en.wikipedia.org/wiki/The_Wealth_of_Nations), and David Ricardo (http://en.wikipedia.org/wiki/David_Ricardo) titled one chapter of his 1817 work Principles of Political Economy and Taxation (http://en.wikipedia.org/wiki/Principles_of_Political_Economy_and_Taxation) "On the Influence of Demand and Supply on Price".

I recently spent some time in the US; sitting on an airplane observing a 20yr old girl next to me feverishly texting as if she were sending an SOS to save the world it dawned on me how far we have strayed from the basics. It is a simple fact of life that you cannot always get what you want (great song). It is not a sin or something to be embarrassed about it is a simple fact. However, financial engineers in all their many disguises would like us to believe that most things are attainable. What a load of rubbish, and we believe it because we want to. Lets face it some of us will earn enough money to buy the $2m house and gas guzzling SUV, but most of us wont. Lets not fall for it will only cost us $10k a month bull when we are only earning $12k.

There is no rocket science we are a society that is living way beyond our means. How can we expect to build lasting wealth when we are consuming more than we have. Adam Smith that famous economist who coined the free market term of the "invisible hand" spent far more time examining mans moral behaviour ("The Theory of Moral Sentiments") than economics as we think of it today as represented by Marshall and Walras's demand and supply curves. What I am saying is that we don't have an economic problem but rather a moral one, TARP or SHMARP are not the answer, the answers are very simple but are we ready to face them?

What has been put on the table by political and business leaders infuriates me, we haven't seen lasting solutions, all we get is political soothsaying and the part that angers me most is that the so called intellectuals have bought this crap. Lets just try and think about this logically. The leaders have all agreed the mess we find ourselves in today is because of a housing and credit bubble, yes this is part of the reason, ok so lets work within this framework. How can the solution be more easy credit via lower interest rates and propping up bad mortgages with government purchases, surely someone must pay for the mistakes?

The equation is very simply "easy come easy go". The perceived wealth we experienced over the last few decades is quickly evaporating and there is nothing we can do about it because there was nothing really there. No government or business can stop the process of easy come easy go it is a law of nature, and until such time as nature has taken its course we are at the mercy of civilization grappling with "fair value".

Is it reasonable to think that the engineers of the problem are likely to be able to fix it? I think not when the tools being used are infected with disease. Ludwig von Mises the great Austrian Economist and his disciples Murry Rothbard and Ron Paul clearly explain that our banking and monetary system are flawed. They in fact go much further and claim we are being extorted by government in a massive fraud. You should all do yourself a favour and buy Congressmen Ron Paul's book "Pillars of Prosperity" for a lucid critique and solution to many of today's problems. Let me simply say that a system that enables a government to create money out of thin air
can only result in an erosion of the value of this money through inflation. Giving government a free reign on the printing press will always lead to the solutions we are currently witnessing whereby more and more money is added magically to the system so that government is able to inflate away the costs of its debt. The system is flawed, the system is corrupt and the system will die.

The many solutions the Fed and Treasury have put to work clearly demonstrate that the powers that be are far from ready to relinquish their grip on society and far from the free market principles the founding fathers of the USA constitution envisaged. We live in a time of increased intervention and government interference. Nobody from government is shouting about what was allowed to develop, it is very hard to shout at oneself. Government and its market interference is to blame for today's financial crisis and until such time as policy makers stop bailing out protagonists and rather step back to allow the market to heal itself we are going to continue to witness booms and busts on the grand scale we are currently experiencing.

You are probably saying to yourself what the hell does this guy know, we have the greatest minds in the world working on a solution. If you are thinking this then you don't get it. The system is the problem and the people telling you they are working on a solution are part of that system so until the system dies there are no solutions only further problems disguised as a way out. This isn't a conspiracy theory, we are currently living in a massive economic experiment and I am sad to say we are the null hypothesis.

I have probably upset most of you with what I have said but the sooner you start accepting that you have to live within ones means and that a consumption society will inevitably self-destruct the sooner will a solution develop to lead us forward. We all know the folklore of the shoe shine boy trading tips at the time of the Great Depression and the hairdresser, etc trading tips during the dot.com bubble well I feel that today we are currently witnessing the same thing in reverse. Everyone has an opinion today on what is going on in the financial crisis. From the cab driver to the au pere. We clearly have a long way to go on the downside with all this market interest. As Robert Prechter says we will know we are near a lasting bottom when stocks and all things economic are reviled. When people want nothing to do with the stock market and fancy schemes. At the moment people are scared and panicked but I have not yet seen disgust. I believe we are years away from a lasting bottom, as the economies continue to misfire due to their band-aid solutions. Inevitably we will see true change. Not the kind of change Barrack Obama has in mind but change of the whole system. There is likely to be unrest with this change and I foresee a surge in civil unrest as people lose hope in a system that has no hope.

If you haven't pressed delete already I am going to throw out one last controversial theory that I believe drives the process of economics. This is not my theory it is Robert Prechter Jnr, and it relates to the causality of economics and the market. We have all been taught that the stock market is forward looking in that it discounts what it forecasts the economy to do in the future. So a falling market using this theory would imply that the market is anticipating a weakening economy. This is what I was taught in university and it is what every mainstream market commentator believes. I would go as far to say that 99.9% of people who have a view on the fundamentals of stock market valuation would believe this link. Prechter turns this theory on its head and explains the causality link as follows: the stock market behaves endogenously based on its participants collective moods and the economy in turn is reflective of this mood expressed in the stock market. So if the market is going down, this reflects a negative mood and the resulting downturn in the economy isn't reflective of a discounting process but more profoundly by the causal link of negative sentiment (pretty neat).

So where are we in this cycle? Clearly the mood is extremely negative and if you are one who believes that the pattern of mood behaviour can be forecast on a probability scale then it is likely that the mood will get far worse. We are starting to see the manifestation in the real economy of this negative mood. For those of you not inclined to patterns but staying with the more esoteric, psychology teaches us that mood operates through feedback loops and both positive and negative inputs have the ability to drive perceptions beyond their underlying reality. This is an extremely foreboding insight into the road ahead.

Comparisons with the Great Depression have thus far been restricted to economic comparisons, if we want to get a real insight into how severe the current financial meltdown is likely to be we need to start comparing the collective mood we are experiencing now and what pervaded society in the lead up to and during the Great Depression. Economics is not about financial engineering and measuring utils, it is about understanding mans moral makeup and the collective psychology of man acting in groups.

Good luck

Michael Berman

when will we learn

That’s what Australia said about their Listed Property Trusts 65% ago.
In Australia vacancy in retail is 0% office is very low. Growth is still coming through at around 5% in a 1.5% inflationary economy, gearing is low, interest rates have dropped with 3 rate cuts, Australia's main trading partners are the Asian tigers, China in particular, so fundamentals in Australia are far stronger. The economy here runs a budget surplus not like SA's 7.8% budget deficit of GDP.

I don’t buy it, when a lot of people try and exit a very small door it gets nasty. In SA nobody in property stocks is prepared to be the 1st to exit with a big knock, but the knock is coming...................

-----Original Message-----
From: Brian Azizollahoff [mailto:briana@redefine.co.za]
Sent: Thursday, 13 November 2008 7:18 PM
To: Michael Berman; aazizol@attglobal.net
Subject: RE:

Maybe it's today...

The thing is that fundamentals here are still ok so growth outlook is
positive. This is keeping share prices up.

Regret and Placing Trades

I have discussed this many times before, once I have made up my mind about a specific trade I become increasingly tense that I may not get my trade on. Over the years I have come to accept that for my personality and my style of trading, i.e. I tend to take longer term views typically in the months and some times years, that it is of little relevance to get in on the trade at the "best/lowest if long" price if you run the risk of missing the trade completely.

What I have learnt through deep introspection is that not placing the trade and the following feelings of regret far outweigh the pain of being early and withstanding short term movements against my trade position. My approach to minimize the effects of being early is to stagger my entry. I typically place a 3rd or quarter of my desired position on the 1st trade, this allows me to have a position if the market takes off in my anticipated direction.

Another point making up my entry approach is that as a contrarian investor I need to buy when the market is falling and sell when the market is rising. This approach goes against the conventional trend following wisdom which dominates the investment landscape. Following the trend is a very acceptable means of investing, as it reflects the herd and as many people will tell you "the market always knows best". For the large part this is correct; however, it is at inflection/turning points that the market in fact gets it wrong.

As JP Morgan said during the Great Depression, "you need to buy when there is blood on the street" and as Warren Buffet recently said, " you need to buy when there is maximum fear, and sell when there is maximum greed".

If we know that markets trend for far longer periods than reversals, why don't I trade the trend. The answer is one of probability and psychology. Depending on ones view of market randomness the continuation of the trend following a random walk theory (majority academic view) is not something one can forecast with any degree of certainty other than a random view. (This is not my view, my views are more complex). This still doesn't answer the question. My answer is that I do trade the trend as I do believe markets follow a non random pattern, albeit with a certain degree of randomness interspersed. My problem with trading the trend and staying with the trend is that most systems only pick up a change in the trend after a substantial trend reversal which invariably leads to large draw downs. This brings me to my initial answer of psychology.

I find that I am able to stay with a particular trade an endure the discomfort of a period of loss only by providing my psyche with the mental accounting of having bought something cheaply or sold it expensively. So my answer is actually quite simple. If the markets do possess a high degree of randomness this means that our forecasts are likely to incorporate a reasonable degree of randomness even if one believes it is possible to forecast the future based on probability. With this in mind the ability to position ones mind psychologically to withstand the buffeting of the short term randomness allows me to withstand the volatility knowing that I have as a security the fact that I bought something cheap or that I sold short something expensively.

Australian Economy - Greed Always Comes Back To Bite

I think this article is well worth reading. In the midst of the current financial crisis it is important to realize that the Australian public are still highly leveraged, and will need to go through the process of mending their balance sheets. It is sad but a fact. It is important not to think that rallies in the short term spell the end of this financial malaise but rather a long arduous slog to get things balanced again.
Mike “Bearman”
Greed a deadly sin for the economy
Paul Sheehan
October 20, 2008
On July 30 Hans Redeker, head of foreign exchange strategy at BNP Paribas, Europe's biggest investment bank, predicted: "The Aussie is going down, big time."
Back then - it already seems like a long time ago - the Australian dollar was sitting majestically at 97 cents to the US dollar, which was taking a battering. But the Aussie did, indeed, go down, big time. Within three months it had crashed by 33 per cent to US65.5 cents. Now Redeker has issued another warning to Australia. We'll get to that. But first, let's look at his track record.
December 2006: Redeker predicted a sharp recession in the United States, saying the condition of its housing market was worse than the experts were stating and the flow-on effects would be much worse than predicted. That was almost two years ago. He was right.
January 2008: he predicted the Aussie dollar was facing two years of decline, and expected to see it fall to 66 cents. He was right. He also predicted a rise in financial market volatility, higher inflation worldwide, higher interest rates in Asia, weakening demand for Australia's minerals exports from China, and a weaker sharemarket in China, all of which would drive down the Australian dollar. Since then, the Shanghai sharemarket has crashed 50 per cent from its peak.
October 2008: two weeks ago Redeker repeated his claim that abundant foreign money had been available to Australia and too much of it had been spent on real estate, creating a speculative bubble: "The easy money went straight into real estate c Australia will now have to generate 4 per cent of GDP to meet payments to foreign holders of its assets. This is twice as high as the burden faced by the US."
After the Australian Reserve Bank slashed key interest rates by 1 per cent, Redeker also told London's Telegraph that he was concerned about what the Australian Government may do: "Yes, Australia has a fiscal surplus, but that does not offer as much protection as people think. If the Government boosts spending further, the current account deficit will spiral out of control." (my emphasis – Mike)
And what has the Rudd Government just done? Boost spending.
There was certainly no discussion of the current account deficit spinning out of control, or Australia's excessive debt, when the Prime Minister, Kevin Rudd, launched his $10 billion economic stimulus package last week, nor any from the Opposition Leader, Malcolm Turnbull, who offered in-principle bipartisan support.
It gets worse. Redeker continued: "There is a risk, however remote, that Australia could face some of the foreign funding difficulties we have seen in Iceland."
Iceland! Iceland was the most leveraged economy in the developed world when it became the first economy to be bankrupted by the credit crisis. You do not want to be mentioned in the same sentence as Iceland unless the discussion is fishing or blondes.
After quoting Redeker, the Telegraph's global business columnist, Ambrose Evans-Pritchard, weighed in with his own commentary: "The immediate problem for Australia's banks is that they gorged on offshore US dollar markets to fund expansion because the interest costs were lower. They were playing c on a huge scale with leverage c European banks face much the same problem as dollar liabilities come back to haunt, but Australian lenders have pushed their luck even further."
Gabriel Stein, of Lombard Street Research, weighed in with this, after noting that Australian household debt had reached 177 per cent of gross domestic product, almost a world record: "It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have been coasting after their reforms in the 1990s."
The global financial world is watching the Australian dollar because it holds a key to the great unanswered question of this uncertain era: will the global market punish a currency for its declining interest yield? Or will it reward a currency because of the soundness of its economy? Central banks are acutely interested in the answer.
Evans-Pritchard thinks the early signs are hopeful that the answer is the good one, that nations will be rewarded for having sound economies. But he does not believe Australia can escape the consequences of excess: "Australia has allowed its net foreign liabilities to reach 60 per cent of GDP during a decade-long boom, twice the level of the US. The country will, in effect, have to pay 4 per cent of GDP in the form of rents to foreign asset-holders as the bill for such extravagance falls due." (my emphasis – Mike)
The bill is falling due. Earlier in the year Australians travelling in Europe would have paid about $1.50 for every euro spent. Today they need $2.10. The Aussie dollar is weak again, despite all the luck of the China boom. This raises a number of awkward questions. Did the lucky country became the greedy country? Did it fail to sufficiently embark on a program of nation-building during the resources boom? Was most of the bonus redistributed as tax cuts, which were spent chasing bigger mortgages, bigger homes, new cars and general consumption, stimulating short-term economic growth but not enough on long-term productivity and higher savings?
During 17 years of unbroken economic expansion and a 10-year commodities boom, it took a lot of people, borrowing a lot of money, taking a lot of unproductive risk, to get to where we are today: a nation with excessive debt and excessive vulnerability to external circumstances barely within our control.
This story was found at: http://www.smh.com.au/articles/2008/10/19/1224351052160.html

Financial Advisors - The Blind Lead the Blind

Hi Fonz,
Excellent email and something I strongely endorse.
My quick comment, as a fund manager trading through a “Black Swan” moment; don’t think your tools that you have calibrated so exquisitely over the last number of years are going to do the job in this market. By doing more of the same you are allowing in fact more randomness into what many call a randomly performing industry.
In times like these one needs to listen to the wise counsel of those that have encountered the truly ugly Black Swan.
My only advice to colleagues and friends not just in these times but through all times, never “blow up”. Look after your capital, don’t let any financial advisor tell you it is impossible to time the markets so you must just grin and bare it. No, you need to define in your mind before the game begins what you consider is a “blow up” once you have that stated objective in mind, it is up to you with your advisor to ensure that it never happens.
The advisors I am encountering are all reactionary and hide behind the relative performance baloney by telling their clients that they lost a little bit less than such and such a fund, but what about the persons overall wealth. If the investor is down 50% he or she needs to return 100% in the future to make them whole. What about advisors taking a holistic look and saying your wealth at time 0 was X and now at time 1 it is Y, if things carry on like this you are going to lose more wealth lets rather do the following.
The industry has been due a shake up, and just like the free market even with all the government intervention will expose all the weak spots in the economy so to will this financial maelstrom clean up the financial advisement industry that for all its regulation is an example of the blind leading the blind, and conflicted in all the wrong places.
Catch you later have a good fast.
Mickson

From: The Peer Effect [mailto:info@thepeereffect.com.au]
Sent: Wednesday, 8 October 2008 9:45 AM
To: michael@velocity-trading.com
Subject: Ideas Email No. 32 - It's not business as usual
If you are a LOTUS NOTES user or are having problems viewing this email click here (http://clients.easyemailmarketing.com/ch/1dczjrw/548165/8aef0100mk.html)












Dear Mickson,
Over the last few weeks I've had the opportunity to speak with several advisers to canvass how they are reacting to today's dramatic financial environment. Almost to a person they have replied 'business as usual' or something similar. They tell me that their clients understand what's happening, that their clients are invested for the long term; that they have educated their clients in anticipation of just such a scenario.
Is this possible? Is this panic a media event? Are most investors, particularly your clients, sitting pretty waiting for the shake-out to end? I doubt it. Human nature is what it is. We are prone to doubt ourselves when faced with adversity. We are programmed to swing between greed and fear. We are strongly influenced by common wisdom and the action of the herd.
I understand the importance of a brave face and confident demeanour at these times. The last thing your clients want to hear is a quaver in your voice and uncertainty in your words. But it is definitely not business as usual. By all means show a steely resolve, but it's time for action.
Here are some ideas...
Your Clients
You should be in regular contact with your Segment 'A' clients. They are hearing and reading things that challenge the messages that you have given them. You may have clients who prefer to ignore what's happening. That's fine and you can cross them off your list. But many will seek your reassurance.
Before you telephone a client, jot down three key points that you want to communicate. These points should be relevant to the current situation, not an 'invest for the long term' mantra. Your clients want to know that you are abreast with current developments and have an opinion.
There is a lot of thoughtful opinion and commentary that can be attached to emails. Use email to augment your Segment 'A' contact and as an efficient way to communicate with the rest of your client base.
You need to be careful that this increased communication (although sorely wanted by many clients) does not suggest any panic on your end. Use phrases like 'I'm going to be in contact with you more often while this market volatility lasts. We all know that it will end but I appreciate that the journey can be a bit scary'.
Manage your centres of influence in the same way you do your Segment 'A' clients.
Your Staff
Make no mistake. Your staff are feeling the strain. They may have money invested themselves. They may have introduced family and friends to your practice and are worried that relationships may be damaged. And most of all, many young people and new entrants to our industry may have never experienced an environment like this. They may be entertaining doubts about the value they provide and even whether they have made the correct career choice.
Make some time for one-on-one chats. Deal with issues before they flare up. I wouldn't suggest any group activity here - any negativity can be magnified and there's always the possibility that sensitive issues aren't communicated.
Yourself
By all means show your clients and staff your nothing-can-rattle-me visage. But be honest with yourself. I have a few very close friends in funds management and I can see the strain they're going through. At least they have business-to-business relationships. These are usually a lot more practical. You have mainly business-to-client relationships which are more emotional.
Here are some specific actions that will enable you to manage these times:
Drink more water. Stress releases toxins. These create fatigue and illness. Water assists your body to flush out toxins. Don't skip meals. Now is not the time to neglect your physical well-being.
Share your feelings with a close friend or confidant. Our mind is capable of creating all kinds of nightmarish scenarios. And most of our self-talk is negative. Verbalising and sharing your thoughts often puts things in perspective.
Do some exercise every day - even if this is just a ten minute walk outside your office. Try and get some time in the sun. Sunshine releases brain chemicals which improve your mood.
Redo your budget. Unless you planned for the scenario we are going through, you are well behind your objectives for this year. I spoke with an ex-colleague of mine last week and he remarked that he was 'only 65% of budget'. This can only be demotivating and stressful. So rework your own plan and those of your staff (or if you do not have the time at least communicate that we are going through challenging times and in these circumstances missing targets is understandable).
The collective wisdom of the group...



The Ideas Email is much more than a weekly email. As a subscriber you are part of a virtual community of financial advisers and people who work with advisers. Up until now I have done all the talking. I'd like this to change. If only for one powerful reason: so that you can access the collective wisdom of the group.
I would like you to share any action that you are currently taking to manage today's challenges that has produced great results. Please email this to me and I will consolidate your replies and report back in next week's Ideas Email.



It is not business as usual in the financial services industry. These are epochal times. Let us recognise this and act accordingly.
I wish you great success in your business.
All the best,

Changing the Rules in the middle of the Game - shame on you.

It is a sad time for me as a trader in what I always believed to be a free market system. Yes I am a libertarian and strongly believe that government intervention in the market is not only wrong, it makes matters worse. But my exposure to government intervention was more from an economic point of view, whereby fiscal stimulus package either by tax cuts or government spending had a direct impact on the economy which would feed its way into the market place in an indirect way. Also the Fed which has the powers of monetary policy could also play a role in the markets but once again they are limited to the creation or cancellation of liquidity. So why is it such a sad day for me this Monday morning?

I tell you why, although I strongly disagree with the policies of intervention discussed above; at least I knew the rules of the game when signing up. With the recent banning of short selling on financial stocks in the US and Europe and now the banning of all shorting in Australia, the authorities have effectively entered the ring well into the fight and tied our hands behind our back. This is just not fair play.

One can argue that I am squealing because I am going to lose or lost money, in my case I am fortunately not going to lose too much money, although I will lose. I am more troubled by the fact that the authorities have decided to lay the blame of the current malaise at the foot of an industry that to a large part ensures efficient market pricing. To believe that the reason for the dramatic sell off in financial stocks is because of the hedge fund industry is naïve in the extreme. I don't have all the facts and figures but I believe that around 4 or 5% of the total equity market is out on loan which means that the hedge fund industry and its respective shorts are just tiny and hardly the cause of the damage being laid at them.

There is an overwhelming loss of confidence in a sector that has cooked up a brew of artificial wealth, and this potion has finally proved lethal to its manufacturers and consumers. This realization is at the foot of the problem, and there is no where to hide. The bankruptcies and bad loans need to flush themselves through the system, and the "entrepreneurs" who incorrectly forecasted profits from these institutions need to accept the consequences.

Clearly this is not going to happen, as government authorities do not have the luxury if you can call it that of sitting back and letting the business cycle correct its mistakes. Instead they will try and do "something". On the surface these aggressive steps will provide the system with a degree of comfort that the whole pack of cards will not come tumbling down. However, as soon as the "relief" passes, and the players in the system realize that the rescue is not a real rescue but a system of bringing people who were safe from the devastation into the game, we will encounter a force of revulsion and fear that may blow up in the architects of this systems face.

What they are hoping for is to avoid the death spiral of deflation and reliquify the system to inflate away the debt the government is taking on. This will ultimately destroy the value of the dollar, which already is a currency that is suffering from an identity crisis. Just because a weaker dollar makes sense now do not think a dollar short is a guaranteed trade, as we may still see a flight to safety in Treasuries and Bonds which will keep the dollar alive and probably lose the fight against inflation right now.

Dr Bernanke is a great student of the 2 depression era's in the 20th century, and he is determined to learn from the mistakes made then with his highly aggressive stimulus type package, remember he is the man who said they will drop money from helicopters if they need to. The powers that be long understood where this economy was heading and were sure to employ a man who they believe was/is best placed to fight the deflation monster.

Now I don't know Ben but I wonder how much he understands about crowd psychology, and if my instincts are correct, he is grossly under estimating the risk aversion forces that are spreading across the globe. So yes government holding your hand and saying we will help you get out of this mess can provide some relief, but when you realize the "thing" holding your hand is the actual monster that got you into this mess, you will be reluctant to obey the orders they give. In fact you may actually turn against them.

So yes I am reluctantly holding onto my deflationary views, but I do believe the deflation we are currently experiencing and will experience will be relatively short lived as the seeds for massive inflation have been planted and will sprout. However, given all the action over the last couple of weeks and months, I am forced to take a less bold approach into my trading as I realize I am fighting a battle with my hands tied behind my back, and more importantly against opponents who don't hold by the original rules of the game. I also need to factor in the fact that the relief rally may last longer than what is rational.

At times like these it would be more sensible to lower my exposure to the markets as I fundamentally and technically still believe we should see prices much lower, but I need to factor in the quantum of the "relief" that is likely to continue to manifest from the latest set of stimulation.

It is time for Lehman to Die

It has almost become the catch phrase for so many business headlines lately, "Too Big to Fail". By the Fed intervening like it did with Bear Sterns and now the Treasury more recently with Fannie and Freddie (although here congress messed up way back when it gave the implicit guarantee not actually when Paulson made it real) the threat of moral hazard has become something we have all become weary of.

Is it right for the good people, i.e. those that save and or run profitable companies to have to come in and subsidize the risk takers who have been rewarded way in excess of the norm. I suspected that because of the earlier intervention there was no way government or its agencies could be seen to help Lehman in its current crisis.

As a libertarian I feel strongly that Lehman and the financial markets need to sort out their own mess, even if it has devastating consequences. This business of borrowing from tomorrow in order to smooth things for today is not right, it is in fact theft. The bible does say however, that we pay for the sins of our fathers so I suppose the behaviour that takes us to this point is not unnatural, but it doesn't mean it is right.

What will it mean if Lehman and others are left to falter. Before I answer that question I think the fact that nobody has bought Lehman in any shape or form and whoever sits at the table has walked away without a bid tells me that something is seriously wrong. Now back to the worst case scenario.

Should Lehman go bankrupt, it will send the entire financial market into chaos, as all the derivative players try and establish what in fact is owed by who and to whom. There will of course be further tightening in credit standards and the cost of borrowing will sky-rocket, irrespective of where the Fed drops rates to, they only have 200bps to play with any way. All this uncertainty will have a major impact on confidence and many more companies and individuals will follow the bankruptcy route thus placing further downward pressure on asset prices. The deflationary spiral will take hold. Already because of the Fannie and Freddie commitment by congress the tax payer will be burdened for decades to come with spiralling government expenditure financed in part directly by the tax payer but indirectly through major credit creation from the Fed and Treasury printing press, where the US Dollar will bear the ultimate pain with this inflationary bailout. So from a massive unemployment and decade long depression will come dollar wealth destruction causing massive inflation and then a further economic depression.

Ultimately from all this pain will emerge a stronger more robust financial system, whereby its participants will no longer trust the promises of government to perpetuate the fiat fraud and fraction reserve banking.

Predictably Irrational

I am currently reading a most thought provoking book called Predictably Irrational, by Dan Ariely. He is a professor at MIT if I remember correctly. He crosses into Behavioral Finance and all things psychological as they affect the market place, i.e. mainly from a consumers point of view.

This is a highly entertaining book, and certainly provides one with some remarkable insights into the complexity of the human mind. Especially when aroused or subject to stimulation.

The number of books coming out with terrific insights is quite fantastic, the only problem I have with a lot of these books, in fact most of them is that they alert us to the problem but so few of them offer solutions how to counteract the innate drives of the human decision making brain.

I look forward to doing some work in this regard that works to counteract these strong forces that seem to work counter intuitively and cause us more harm in a financial context.

Sep 14 Weekend View

After going through all my usual news letter writers and observing the market action over the last week, I am left with the conclusion that the probability remains that we are going to see a major sell-off in the blue chip indexes with the US REIT market primed to follow in step.

I am expecting to see some short term strength in the EUR and AUD or said better USD weakness. This should last a week or so and then we should see continued Dollar strength.

I remain well positioned to the short side, with my major shorts being the US but I am short UK and SA REITs as well. My only long remains Australian REITs which I believe offer relative value.

South Africa continues to hold up despite the fact that its currency has recently faltered, its economy is stuttering and emerging markets in general have been sold aggressively. I am convinced South Africa is a bi-polar investment case. I will describe more fully another time.

Nothing like an about turn to put ones call in doubt.

There is no doubt in my mind though so don't read too much into the bounce today. I am going to post this on my blog with some new software.

I am expecting a down day in the US.

Mickson

Aussie Market set for a fall

Things dont look good for the Aussie. We are up against a line of support, if this baby goes then down she will come.

The Beginning of the End.

I have been waiting so long for this time that it would almost be criminal for me not to have it officially on record that I believe the US REIIT market is about to collapse. Yes collapse.

We are down some 10 - 12% ytd (guess I cannot remember the number and too lazy to look it up), but we are about to embark on some reall selling soon.

My fund is well positioned to the short side, and I must confess to suffering some major indigestion on Monday as I swallowed hard as the market rallied with the Treauries intervention with Fannie and Freddie. I truly believed the Treasuries actions are a lost cause and will have no lasting impact on the equity markets. My views were rewarded the very next day.

As things stand the European markets are looking soft and the US equity futures are down. With the high correlation between US REITs and S&P500 I am looking forward to some more P&L.
We are up for the month after given back some to the market in August, I am really looking for a big month on the P&L side.

Back from the dead

It has been a year since I last wrote a blog and I found something very interesting about keeping a journal and a blog.

Here are some sporadic thoughts:

1. Because a blog is there for the world to see and read, I thought I might do better writing my thoughts in a electronic journal.
2. I think writing my personal thoughts in my journal are fine as that is a perfectly legitimate medium to record frustration and also to try and express psychological issues.
3. I found my writing about the market or my trades was hopelessly juvenile and hard to read and follow from the outside.
4. I am now going to try and once again build up my thinking in a more coherent open forum, whereby the exposure to the world forces one to be more articulate and clear with ones presentation of ideas.

Having said all of that I will start writing again pretty soon.

The American Spending Mindset

Correspondence between me and my brother in law.

Hi Fonz,

I have done a lot of thinking about your thesis of inflation fuelled by the unquenchable desire of the American consumer. Please don’t see this debate as rude, but I am trying to flesh out my own thesis on the markets so I think we will both benefit from this discourse.

Although I am attracted to the underlying logic of your claim; yes deductive logic seems to point in the direction of lower interest rates = increased spending, my suspicious mind is telling me rather that it doesn’t always have to be this way. There must be a point of saturation whereby the desire for future spending reaches a point of zero marginal utility, or maybe even negative-“mu”. I would like to propose that comparing the US consumer to the Japanese consumer to support your thesis may be a red-herring.

If I understand your hypothesis correctly, you are saying that the American is not like the Japanese consumer, if an American is given “easy money” he will spend it, whilst a Japanese consumer has an in-bread saving mentality.

In order for me to do this debate justice I need to do a lot more research, I believe I need to research the Japanese Deflation story, if you know of any good books on this subject I will be most grateful. My sense is that one needs to understand the Japanese psyche and its relationship with money more clearly. Yes they may be savers on a consumption level, but I “think” they are uber-investors on the other hand. A deeper understanding of their attitude to money is therefore in order. As a side note, I believe they have fallen for the exact same “bubbles” as have the Americans with their Stock and Real Estate Bubbles in years gone by.

Here comes my gut-feel thesis. I think it will be worthwhile for me to do more research on this before calling it my thesis, but let it stand as such for now.

The American public through the ages has had varied attitudes towards money, it has had periods pre The Great Depression of consuming and investing excess, it has followed The Great Depression with periods of cautious saving. In essence the general mood of the American people, and their attitude to consumption and investment has varied through the decades in large cycles often longer than decades.

A further question I wish to pose in light of this theory is, “Does it matter whether over-valuation is caused by excess investment or consumption?” Is money not money, and the impact of its velocity agnostic to its form? Does the cause of a bubble have any bearing on the mindset of the public (investor/consumer)? This too is worth exploring from a Behavioral Finance point of view, do people with lots of toys and gadgets and homes feel better than investors with a large profitable investment portfolio. My cursory comment would say from a mental accounting point of view the consumer will feel better off as he has experienced the joy of his consumption whereas the investor has only enjoyed the ephemeral benefit of a profitable investment portfolio. This statement on its own would seem to support your hypothesis, but I believe all one can deduce from this understanding is the degree of the bubble. I would say that the bubble of a consumption led over valuation is prone to be far bigger in size than an investment led one.

Before wrapping this mail up I think we need to bring one further wrinkle into the equation, i.e. the effect of globalization. Does it in fact matter what the American attitude towards credit is? Yes the major portion of the US GDP comes from the consumption spending of the American investor. This to a large extent is caused by the profits the American based companies are making. I don’t know the answer to this question but I suspect a large part of these profits are being driven by the current “perfect storm” being experienced in the global economy with demand for American products enjoying record appeal. What if the central banks of the global economies take a more cautious approach to inflation and tighten the money supply.

In conclusion I would like to say the following:
There is every possibility that the current growth phase in the US economy is likely to continue unabated.
There is every possibility that the current inflation in the US is on the verge of an explosion.
There is every possibility that the current growth phase in the US economy is about to end with a recession and possibly a depression.
There is every possibility that the current inflation in the US is about to reverse into a cycle of continued deflation as the asset bubbles created in stock and real estate portfolios – pop.
The only thing I believe we can forecast at this stage is the probability of each scenario.


I hope this is a coherent dialogue, I am at gym in the coffee shop and I am expressing my thoughts freely without too much contemplation.

Regards


Mickson

By the way we TOPPED

As we topped in late July the bounce of the last week has convinced most people we are out of the woods.

Yesterday the markets topped, again (wave 2), and that includes my beloved REITs.

Hang on this can get quite nasty.

MIND POWER

Last night I went to talk by John Kehoe's protégé Robin Banks.

The talk was about 'being happy' and I can honestly say that the talk was entertaining, thought provoking and motivational. Robin ended his talk by saying that motivational talks have a poor track record of lasting beyond the actual talk - they are typically feel good sessions.

I have not read the book Mind Power so it will be unfair of me to criticize the book, I will confine my critique to the Robin Banks presentation last night 5 September.

Whilst the talk was informative and convincing I feel Banks left the audience in the lurch; to be fair he did give 1 tool we could take away to help us achieve our objective of happiness. To this regard he speaks about responding to bad things with a dramatic "….. that is so fascinating!"

So in short I think the strategy he provided us with will once again amount to nothing but a feel good talk because putting the ideas in to practice is the crux, but he doesn’t equip us with tools to implement.

Now I may be unfairly critical because he speaks about a 4 week course which includes practical exercises.

I would like to suggest what I believe the talk is lacking in.

The subconscious mind is far stronger than the conscious mind, therefore the only way to develop a strategy of change is to work through the subconscious mind in conjunction with the conscious mind.

Here is where neuro linguistic programming (NLP) comes into the picture; working with just 1 mind is a waste of time as the self control and discipline required is beyond most of us. The way to effect change is to re-programme the way we think subconsciously together with conscious programming.

In conclusion if Robin Banks programme is combined with NLP I think people will walk away changed people FOREVER.

Too Much Analysis???

Let me say that for some reason when I am making money and the markets are working in my favour I seldom keep up to date with my daily journal. However, when I am in the headlights or I am in two minds about a position I write like someone possessed.

It is at these times (going through one since last week) where I cannot stop analyzing every emotion and trying to define the meaning of life. Is this an advantage or disadvantage?

I think to myself Hedge Fund Manager XY, YZ & AB are real pro's and they never seem phased or 'waste' too much time getting deep and worrying about the stuff I contemplate. They seem to just get on with the job. Am I a sabotaging my chances with all these thoughts.

Let me try and answer this myself.

Firstly, I am not just your average guy, I am an intellectual, I ask questions and I have PhD in Economics to show for it.

Secondly, I am extremely competitive and driven to succeed. So part of all the analysis is to help formulate a strategy to beat the next guy or lets just call it the market.

Thirdly, I am someone committed to being a better person, and part of that commitment is better understanding all the things that make me tick, under all circumstances.

Fourthly, I am human and part of being human is finding fault in the things we do, so over analyzing is just part of being human.

Fifthly, the guy who is a pro definitely analyzes his situation and is honest with his mistakes, but the pro doesn’t dwell on his mistakes he gets on with the show.

Lastly, I have chosen a style that takes time to manifest. I am a medium to long term value trader therefore my calls are almost always early and I have to endure periods of stormy seas. Yes I could block all self analysis out and hope that my original work is what will save the day but that isn't necessarily the answer. In short I have chosen a style that requires patience and yes, analysis, so that when I make mistakes I can learn from them and hopefully never do them in the future. Also the greatest tool in my trading style is my brain and its ability to track my emotions. If I never kept a detailed analysis of my thoughts I would have no means to monitor and improve myself.

AAHHHH that feels better.

Mickson

EXTREME HYPE - OOHHHH this is going to end badly.

The Property Prance
04 Jul 2007 - Finweek -
IntroSome of the wealthiest property investors in Britain, Europe and the Middle East have hit town ready to bulk up their global portfolios with large investments in prime South African real estate
The bigger players have billions to spend. And they're not averse to aggressively outbidding South African buyers for what they perceive to be highly undervalued commercial and leisure property assets. First prize for most of those investors is to buy directly into single, mixed-use developments that offer a combination of retail, office, hotel and residential opportunities - deals that have the potential to become another V&A Waterfront, Century City or Melrose Arch.
But some are also making a play for JSE-listed companies with sizeable underlying property portfolios: gaming/hotel operators and corporates alike. Foreign investors aren't necessarily interested in the core businesses of such companies - it's more about stripping out the underlying property assets. Talk is that a number of offshore players are keen to get their hands on the large tracts of undeveloped land owned by the likes of Tongaat-Hulett and AECI.
To date, the biggest single property deal in SA involving foreign investors was the sale of the V&A Waterfront to British-based London & Regional Properties and its Dubai partner, Istithmar PJSC, in September last year for R7bn.
Both London & Regional - recently rated by the London Financial Times as the biggest privately owned property company in Europe, with assets of around R100bn - and Istithmar want to increase their exposure to SA property.
Finweek hears that London & Regional is already negotiating an offer to buy another iconic SA development: Melrose Arch. Industry insiders place a value of at least R3bn on the trendy, mixed-use precinct just off the N1 north of Johannesburg.
London & Regional is also rumoured to be one of the suitors eyeing listed casino/resort operator Gold Reef Resorts. Earlier this year, London & Regional was involved in unsuccessful talks with Peermont Global, another SA gaming/hotel operator.
Gold Reef Resorts recently said that it was in talks with three or four "selected" parties that could result in a buyout offer for the entire company. Mvelaphanda chairman Tokyo Sexwale, together with Durban-based businessman Vivian Reddy and US-based casino group Harrah's, are other likely bidders.
Casinos in the Gold Reef stable include Gold Reef City (south of Johannesburg), Garden Route (Mossel Bay), Golden Horse (Maritzburg), Goldfields (Welkom) and a majority stake in Casino Mykonos (Cape West Coast). The deal is estimated to be worth R10bn. It will be interesting to see to what extent SA buyers will be prepared to match or exceed the bids of their offshore competitors.
Meanwhile, Dubai-based Istithmar subsidiary Leisurecorp earlier this month announced it had bought Pearl Valley Signature Golf Estate and Spa in the Cape Winelands. Leisurecorp isn't disclosing what it paid for Pearl Valley or how much it will spend to turn the 170ha development into a major international golfing resort. However, Leisurecorp CEO David Spencer says the acquisition was a "significant" investment, both in terms of the initial price paid and the development plans it hopes to implement.
Spencer says it's likely that Istithmar and its real estate investment arm will be involved in more deals in SA. Says Spencer: "SA is currently one of our leading target markets, partly because of the growth in the country's leisure and tourism sectors and partly because of the boost we expect from the 2010 Soccer World Cup."
Lehman Brothers, one of the US's biggest investment banks and asset managers, has also recently entered the fray via a joint venture with JSE-listed Madison Property Fund Managers. Though the deal hasn't yet been officially announced, a large tract of land on the outskirts of Cape Town has apparently been bought for R500m to develop a mixed-use retail, office and residential precinct comprising bulk space of at least 100 000sq m.
Then there's Kuwaiti developer IFA Hotels & Resorts, which is expected to announce a major acquisition within weeks. It's not unlikely that IFA has its sights on AltX-listed golf estate developer Acc-Ross.
IFA's SA-listed arm already owns stakes in other golfing estates, including Zimbali Coastal Resort (near Ballito on the KwaZulu-Natal north coast) and the Cape Winelands estate Boschendal. IFA also recently entered the Namibian hospitality market in a R550m joint venture with Ohlthaver & List.
Other foreign players include Irish developer Howard Eurocape, which is ploughing R500m into the mixed-use Mandela Rhodes Place in Cape Town's CBD. Offshore private equity funds are also starting to tap into SA's commercial property market.
An Irish consortium recently appointed SA corporate finance outfit and designated AltX adviser Bridge Capital to place around R1bn in directly held office, retail and industrial buildings. Ron van der Bos, who together with Tobias Hegele and Jeremy Clark head Bridge Capital's property asset management division, says they've already bought stock worth R300m on behalf of that client. They're in the process of setting up a second fund for the same Irish client and are involved in talks with other British and European offshore consortiums to set up similar property investment funds.
The list goes on. But why the sudden surge in interest in SA's commercial and leisure property assets?
"It's simple. In global terms our market offers value. And with so much offshore money looking for a home, it was only a matter of time before foreign property investors would turn to SA,'' says Arnold Meyer, ex-Broll CEO and recently appointed MD of London & Regional's Africa operations.
Meyer says foreign players have different perspectives on extracting value and structuring transactions. "So foreign players such as London & Regional view SA as a long-term buy."
That does perhaps suggest why international investors are prepared to pay more for prime properties (think V&A Waterfront) than their SA counterparts.
Meyer won't confirm whether London & Regional is bidding for either Melrose Arch or Gold Reef Resorts, except to say that it's involved in "various discussions with various parties". Though London & Regional is a major player in emerging economies, including Poland and Russia, its 50% investment in the V&A Waterfront was its first acquisition outside Europe.
Meyer says SA, and Africa in general, offer double the growth potential over the next five years than any European property market. He says it's likely that London & Regional could have 20% of its assets in Africa within five years.
Craig Ewin, CEO of Old Mutual-managed SA Corporate Real Estate Fund, says there's no doubt that international property players are increasingly looking at emerging markets as the risk profiles of developing economies improve. Ewin says the general view is that international investors can no longer afford to ignore high growth opportunities in emerging economies.
Says Ewin: "South African real estate offers a huge value proposition. Investment Property Databank (IPD) performance figures show that SA's direct commercial property has outperformed all international markets over the past three and five years. Yet we still offer an average income yield that is 200 basis points higher than any other market included in the IPD benchmark."
Madison Property Fund Managers executive director Mike Flax holds a similar view. He says offshore developers regard SA as cheap compared with other emerging markets. "International investors believe SA is now where Poland was five years ago." Flax says in recent years foreign investors have poured billions into Poland's previously underdeveloped commercial property market, unlocking plenty of upside in the process. The same is bound to happen in SA.
Flax says the V&A Waterfront sale has been a major catalyst for further money flow into SA. "The world has suddenly been forced to stand up and take notice of SA."
But it's not only perceived value that's luring more foreign property players to SA's shores. Phillip da Silva, vice-president of operations for IFA Hotels & Resorts in Africa and the Indian Ocean, says SA's highly developed transport and tourism infrastructure is a major plus for international hotel and resort developers.
So too is security of tenure. For example, Da Silva says that SA is far more attractive than Zanzibar or Mozambique, where property investors can't obtain freehold title.
Van der Bos says that SA's well-developed legal and financial framework should also not be underestimated. Even the language factor plays a role. For example, Van der Bos says German investors feel more comfortable entering an English-speaking country such as SA than neighbouring Poland, where language is a barrier.
However, industry commentators agree that the one factor that could slow the offshore scramble for SA property is a growing shortage of investment stock. But that could prompt more overseas investors to go the indirect route via listed property loan stocks and property unit trusts.
Although some may bemoan the fact that SA's crown jewels are increasingly finding their way into foreign hands, Growthpoint Properties CEO Norbert Sasse says the pros of offshore participation far outweigh the cons. "Increased foreign competition for prime SA property assets will help put us on the map as a preferred global investment destination - which can only be positive for our real estate market." Sasse says some of these international players have the vision, money and skills to turn underutilised assets into world-class developments.
But there's also no doubt that foreign interest will push SA property prices up. Flax says increased competition for SA property - both physical and listed - will result in higher prices and lower yields. "However, the positive spin-off is that the expertise that international players bring to SA can only sharpen the skills of our players."
Ewin agrees: "More international investors vying for SA property must affect prices. But if SA wants to play in the international environment, we can't bury our heads in the sand and think we're still going to control our own market."

WESTFIELD DEVELOPMENT OR DESTRUCTION

I have long been a fan of this group, but I think its size is finally going to hurt this behemoth. If this company was just trying to collect the rentals of its vast, superior shopping centres I would be relatively happy. But in order to grow at a superior rate in line with its history it has embarked on an enormous development pipeline.

After 40 years of growing this company I believe the bet on being able to let the new developments coming on stream in the next 3 – 5 years could see the destruction of a large chunk of this company. I give the chances of a global recession into the period in which these developments come on stream around 60%.

Westfield to Raise 530 Million Pounds With U.K. Fund (Bloomberg)

2007-07-02 02:34 (New York) By Garfield Reynolds and Kathleen Chu July 2 (Bloomberg) -- Westfield Group, the world's biggest shopping center owner by market value, plans to raise 530 million pounds ($1.06 billion) by selling stakes in four U.K. malls, giving it cash to build new projects that offer higher returns. The sale means Westfield has raised more than A$7 billion ($6 billion) this year, according to a statement today from the Sydney-based company. Two investors agreed to buy 67 percent of a fund that will buy the stakes and Westfield will market the remainder to a wider group of potential buyers. Westfield is seeking to tap economic growth in spending A$5.4 billion on the construction of 19 malls and plans to start building additional properties at a cost of more than A$9 billion over three years. New malls can deliver greater returns than existing ones. ``This is part of a very smart funding program where they sell more mature assets at high prices and reinvest the money into the development pipeline,'' said Simon Garing, an analyst at UBS AG in Sydney. ``For every $2 billion they spend on development, they make $1 billion of profit.'' Westfield shares advanced 4 cents to A$20 in Sydney, valuing the company at A$35.5 billion. The new fund, Westfield U.K. Shopping Centre Fund, will have stakes in properties worth about 2.1 billion pounds, including Merry Hill, which is worth 1.05 billion pounds.

SUB-PRIME MARKET - what it spells for the future

Alot is currently being written about the recent "blow-up" of 2 Bear Stern hedge funds that have been baled out of a dramatic collapse by their parent BS.

What has been brought to light is the fact that alot of these strucutres do not trade regularly enough for a mark to market valuation to be applied. Because of this artificial valuations and profits are being expressed to the market.

In order to avoid a market price to be used in the market BS has "saved the day" or have they? I believe they have just put off the inevitable. As sure as night follows day there will be an aftermath and the chances are the effect will not be pretty.

It will start slowly (it already has) and day by day the problem will start to manifest, once it is out in the open (FULLY) it will start to fester, and spread all the way up the risk spread curve until its impact is felt by everyone.

This combined with a general re-rating of residential property will start the spiral that will eventually lead the US into the depths of DEFLATION.

By year end everyone and the hairdresser will know about the sub-prime lending market and its ills.