Charlie Rose

An Appreciation of Mike Wallace (Charlie Rose)


Friday, April 13th, 2012

A fitting tribute to one of the greatest, if not the greatest, investigative television reporters of the TV age.

An appreciation of Mike Wallace who died on April 7, 2012. Charlie Rose is joined by Jeff Fager, Executive Producer of 60 Minutes; and 60 Minutes correspondents Morley Safer & Steve Kroft

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12 Brilliant Value Investing Insights from Seth Klarman


Thursday, December 1st, 2011

Recently, in a rare in-depth interview with Charlie Rose, Seth Klarman shared the following 12 brilliant nuggets of value investing wisdom. Here they are thanks to BusinessInsider.com:

1. There’s a “gene” for value investing.

Klarman said being a value investor is completely natural for him.

“There’s a gene for this stuff,” he said.

When the market starts to go down, he explained, a lot of people overreact and start to panic.

“For me it’s natural.  For a lot of people it’s fighting human nature.”

2. Value investors have to “slow the game down.”

“If you can remember that stocks aren’t pieces of paper that gyrate all the time –they are fractional interests in businesses — it all makes sense.”

He says you have to “slow the game down.”

“I can buy this thing for a huge fraction of what it’s worth. What am I worried about if it goes down a little bit more?”

However, the analysis is the easy part, he said.

3. They realize investing is the intersection of economics in psychology.

“Investing is the intersection of economics and psychology.”

That’s what Klarman tells business school students.

“The economics, the valuation of the business, is not hard.  The psychology — How much do you buy? Do you buy it at this price? Do you wait for a lower price? What do you do when it looks like the world might end? Those are the harder things.”

He said with time and experiences those things can be learned, but you also have to have the right psychological make up in the first place, he added.

4. Good value investors know that greed blows you up.

“Value investors have to be patient and disciplined, but what I really think is you need to not be greedy.”

The reason, he explained, is the greedy and leveraged are the ones that blow up.

“Almost every financial blow up is because of leverage,” Klarman told rose.

5. Value investors have to realize leverage can magnify both potential for returns and losses.

Klarman told Rose that he’s been very fortunate to have not really screwed up at work.

“We’ve made mistakes where we underestimated the leverage in a situation.”

Leverage can magnify your returns and your losses, he said.

6. They should balance arrogance and humility.

“You need to balance arrogance and humility,” Klarman said.

“When you buy anything it’s an arrogant act.  You’re saying to markets are gyrating and somebody wants to sell this to me and I know more than everyone else so I’m going to stand here and buy it.  That’s arrogant,” he said.

“You need humility to say ‘I might be wrong.’”

7. They don’t worry about gyrations in the stock market.

Klarman said he’s not worried about gyrations in the stock market.

That being said, he also confessed that he doesn’t have a Bloomberg Terminal at his desk.

“I don’t care,” he said.  “I have a giant pile of papers…I have a computer and a phone.”

8. Value investors ONLY care about market gyrations to score cheaper deals.

Baupost makes medium to long term investments, Klarman said.

“The only reason we care about gyrations is so we can buy something cheaper.”

9. Common sense: They buy when the market is down.

“We benefit from volatility,” he said adding that his fund provides liquidity when people want to sell in a hurry.

However, Klarman emphasized that he does not root for bad times.

“We sort of are with the most opposite.  We buy when the market is down.  We sell when it’s up.”

10. For value investors, buying is easier than selling.

“Buying is easier.  Selling is hard,” according to Klarman.

That’s because it’s difficult to know the exact timing for when to get out.

“You can never tell how big of a bargain you might get tomorrow.  You need to buy it and leave a little room to buy more…”

11. Value investors shouldn’t get in bed with bad people.

“Don’t get in bed with bad people,” Klarman said.

OK. That’s not what he really means literally.  He’s talking about cheap stocks here.

“A lot of stocks are cheap for a reason,” Klarman said.  “A value investor will figure out the reason.”

“Everyone else is sick of management raping and pillaging a company, taking advantage of shareholders,” he said.  “There are stocks that have been perennially undervalued because they are run by somebody who fits that profile.”

Good management in a company adds value because they can buy back a stock when it’s undervalued.  Bad management will hurt the stock.

“Those are early, but profound lessons. “

12. Instead, they want to form relationships with good people.

“We are looking for people who put the clients first,” Klarman said.

If you put them second, he explained, that’s when the whole thing can blow up.

Source: http://www.businessinsider.com/12-brilliant-insights-from-hedge-fund-manager-seth-klarman-2011-11

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Seth Klarman: Rare Interview with Charlie Rose


Monday, November 28th, 2011

Hedge fund maven Seth Klarman of Baupost Group, is considered a superstar among the ‘value investor’ set, but is not very well known in retail circles, as he is not very self promotional.

He is rarely seen in the press – in fact I only have one piece on him in nearly 4.5 years. [May 19, 2010: Seth Klarman Calls for Another Lost Decade].

You wouldn’t know that he is one of the 10 largest hedge fund shops in the country as his name rarely comes off the tip of the tongue.   His out of print book ‘Margin of Safety’ goes for around $1000 on the secondary market.

That said, we have a rare opportunity to listen in to his thoughts in extended format as he has a 45 minute interview with Charlie Rose.  The first 18 minutes or so is focused on the charity, so if you want the investing focus skip along to minute 19.





h/t My Investing Notebook

                
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Dalio: “There Are No More Tools In The Tool Kit” – Charlie Rose Interviews The World’s Biggest Hedge Fund Manager


Monday, October 24th, 2011

When it comes to reading the world’s “tea leaves”, few are as capable as Ray Dalio, head of the world’s biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS’ Charlie Rose that “there are no more tools in the tool kit” of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. Or not… and just to buy S&P futures in hopes that record career risk is big enough to force every other asset manager in the market to do the dumb thing and follow the crowd of lemmings right over the edge. Luckily, there are those who have the luxury of having both the capital and the time to not be drawn into the latest sucker’s rally. More importantly, Dalio shares some unique perspectives on what it means to run the world’s largest hedge fund, his perspective on social anxiety, and Occupy Wall Street and thus the demonization of wealth and success (in a way that does not imply crony capitalism: see Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, and most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio’s conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is “concerned.” And that’s why, unlike the recently unemployed David Biancos of the world, who never exhibit an ounce of skepticism, Dalio is among the wealthiest men in the world (and hence a prime target of the #OWS movement). Well, that and also being smarter than most.

Full video interview after the jump

And complete transcript:

CHARLIE ROSE: Ray Dalio is here. He is the founder of Bridgewater Associates. He created the investment firm in 1975 out of a two-bedroom apartment in New York City. Today the company managed roughly $125 billion in global investments. Its clients include foreign governments, sovereign banks, central banks and institutional pension funds.

Over the last two years, Bridgewater ranked as the largest and best- performing hedge fund in the world. In 2010, his returns were greater than the profits of Google, Amazon and eBay combined.

I`m very pleased to have Ray Dalio at this table for the first time to talk about a perspective on the global economic scene and a whole range of issues having to do with where we see ourselves and also a look at his own philosophy and what has informed his own opinions and the way he looks at the world. Having said that — welcome.

RAY DALIO: Thank you.

CHARLIE ROSE: It`s great to have you here.

RAY DALIO: It`s great to be here.

CHARLIE ROSE: What is Bridgewater Associates?

RAY DALIO: It`s a global macro firm. We assess what the world economy is like and what — how asset classes will change and we are managing money for pension funds and endowments like you described; the Pennsylvania teachers, those types of pension funds. We`re trying to keep them safe.

CHARLIE ROSE: When you look at the world today, the global economic picture, I read today Goldman Sachs had a disappointing performance. JP Morgan did not do as well as some had hoped it might be. What`s happening with financial firms?

RAY DALIO: I think it`s important to understand that we`re going through a deleveraging. So we have to understand the big picture is — there`s a deleveraging. Three big themes: first there`s a deleveraging; secondly we have a problem with monetary and fiscal policies are running out of ammunition; and thirdly we have an issue in terms of people most importantly who are at each other`s throats politically and globally in terms of having a problem resolving those.

Imagine you earned $100,000 a year and you didn`t have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there`s a self-reinforcing process in which your debt rises in relationship to your income.

And that goes on for a long time and that goes on for 50 or 75 years through history. We`ve had 50, 75-year cycles and then you reach a point where you can`t anymore get more debt and the process starts to change. And you can`t leverage up. Traditionally the private sector leverages up, we leveraged up then we got to a point in 2007 where we had a bubble and that same sort of bubble that happened in Japan, same sort of bubble that happened in the Great Depression, meaning we reached our debt limits. Europe`s reached its debt limits.

So then we begin the process in reverse as you can`t spend as much you — somebody else`s income falls. And that process works in reverse. So we`re in a deleveraging. So I think that this is important globally. That`s what Europe`s in.

So when we deal with Goldman Sachs or when we deal with banks and when we deal with Europe I think you can break the world into two parts, there`s the debtor-developed world which has reached its debt limits and is going through a deleveraging. Then there`s the creditor-emerging world, the countries like China which are competitive and are beginning to have those big surpluses and they`re lending us money. So we have this big imbalance in the world.

You can break the world into two parts. Debtor-developed countries and emerging-creditor countries and they have a big imbalance which is a debt problem. That`s the nature of the beast of what`s going on.

CHARLIE ROSE: And how long would the deleveraging take place? Ten years?

RAY DALIO: These take place over ten years. The key is to spread it out as much as you can. Make sure that it`s not disorderly.

CHARLIE ROSE: let me talk about the dysfunction issue. We can`t solve our problems domestically in the United States, our economic problems, unless there`s some sense of respect for other people`s views and some sense of it being able to come together and find solutions that are in the interest of the country, not necessarily always in the interest of the ideology or the party.

RAY DALIO: Yes. And I think that`s the problem so pervasively when we`re talking about culture. It is — when people disagree and you can take thoughtful people disagree, you have then the potential of learning a lot. If people who were disagreeing can say why do we disagree and work through that conversation in an intelligent way to try to find out what`s true, you can learn, you can make progress, it can be a fabulous thing.

When you instead have people who were talking behind each other`s backs and all criticizing and all looking for blame, this is a problem. I think the real question is how we approach those — can we approach that in a thoughtful way in which we work that through?

Let`s say for example the government budget balance.

CHARLIE ROSE: Right.

RAY DALIO: The government budget balance if you raise taxes — if everybody just sucked it in a little bit, you raise taxes by three percent, you cut spending by three percent — I`m using three percent as an example to say not much. Everybody should be able to pay three percent more or you should be able to cut your expenditures by three percent.

CHARLIE ROSE: If the government did that –

RAY DALIO: If the government did that, they would eliminate half the budget deficit — it`s estimated about $8.5 trillion over the next ten years is what we`re going to have as a deficit, they will eliminate half of that. Now –

CHARLIE ROSE: Over how long a period?

RAY DALIO: The next ten years.

CHARLIE ROSE: The next ten years, all right.

RAY DALIO: Now, I`m asking you if we could have every American — can everybody pay three percent more? Can everybody just spend three percent less? You can make a heck of a contribution to that.

Instead we have a division that`s going on in which we — the basic division is Republicans will say that we shouldn`t raise taxes.

CHARLIE ROSE: Or even reduce deductions.

RAY DALIO: Yes — in that way of raising taxes. So we — and Democrats say that we must raise taxes because we can`t cut the spending. So the delineation that as we came into that was the debt limit issue, that remains the debt limit issue.

And there`s vested interests involved; 70 percent of the taxes are paid by the top 10 percent of income earners, income taxes. And so — so what we have is a division here in which there`s not a coming together, I believe, and that means that in a deleveraging at a difficult time we`re not dealing with it in the best possible way. But it`s human nature.

CHARLIE ROSE: We are doing as they say, kicking the can down the road and not dealing with it. Suppose the super committee does not reach an agreement in terms of its requirement and therefore the mechanism — the trigger mechanism kicks in? What does your team think about that and what impact will that be?

RAY DALIO: Charlie, I`m meant to be a realistic person and sometimes when there`s concerns it`s difficult to talk about difficult situation. So I want to try and answer your question as honestly as I possibly can but I want to say that I`m very concerned not just of that. I do not believe that we will find a political solution. I think that that would not be — I`m pessimistic about that.

CHARLIE ROSE: So you have the same opinion that Standard & Poor`s had when they reduced –

RAY DALIO: Essentially.

CHARLIE ROSE: — America`s credit rating.

RAY DALIO: Essentially. So I think — and by the way I think it`s very important to understand that the government debt is the terrible challenging issue that we should talk about maybe but also more important is the private sector debt. So that resolving the public sector debt does not resolve the problem.

That individuals face the same problem meaning that they`re overly indebted and because they`re overly indebted and spend a lot of their consumption through borrowing and they had a — it was like if you borrow you have a party and everything`s good and you have a prosperity and you — you have your party, you hire the caterers, they`re employed and everybody`s happy.

So that there`s a private sector debt issue at the same time as the public sector debt. They`re both. So if you resolve the budget deficit, you do not resolve the private sector debt issue. Both of those things mean we`re both overly indebted. We cannot — the amount that we owe and have promised in its various forms can`t be paid.

Now we can accept is that right or wrong but let`s — and I think we need to talk about it forthrightly whether that`s right or wrong. And if it`s right — and I believe it`s right — then we have to talk calmly and logically about how we can approach that and deal with it in the best possible way without having this battle of one side or another.

Like the issue of is it better to have austerity or stimulus? The basic problem there is that there`s not a quality conversation on the subject. So if people who disagree could sit down and work on a television show or something, work through, how does the machine work, how does the economic machine work? What does it mean to each of those? How has it worked in the past so that they can understand what exists. Get past the ideology part of it and get on with trying to say we have is very difficult situation and how do we deal with it in our best possible way together?

We can`t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a deleveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative.

CHARLIE ROSE: Some people say that they describe that as there are no more tools in the tool kit.

RAY DALIO: There are no more tools in the tool kit.

CHARLIE ROSE: In terms of fiscal and monitory policy.

RAY DALIO: Yes, so number one is we have a deleveraging. Now that deleveraging means we`re going to have more debt problems. You`re going to see — no matter what is solved in Europe you will have a deleveraging. Banks will lend less and lending less will mean a contraction. That`s — that is what I believe is the case, we should talk about whether or not that is the case. Thoughtful people should discuss that.

If it is the case, we should then approach how do we deal with that? Now – - so I`m saying there`s a — I believe there`s a deleveraging going on. There are no tools in the tool kit and everybody`s at each other`s throats.

So that there is not a quality conversation of what is true; how do we best handle it?

CHARLIE ROSE: We have had that debate about the need for growth — which would be a stimulative impact on the economy and at the same time the need to reduce spending because of the debt and the deficit as well as the long- term debt. You need also to make investments for the future in terms of science and research and a whole range of issues so that that the country – - this country can be competitive around the world. Make sure it trained scientists and doctors and people who make a positive long-term contribution to the economy.

What is your own analysis as to how we find the right balance between austerity and growth? Or austerity and stimulus?

RAY DALIO: I think — I think it just comes back to the fundamentals same for us. Individually, the economics for government work the same as the economics pretty much for the individual that whatever we expend money on, we have to make sure — there`re certain things that are critical.

First you have to make sure that it will — it produces an income to pay it back. Investment, in other words, in some fashion or another. What we have to do is make sure that we put that money out and we — let`s say we build infrastructure, I believe that you can build infrastructure. I believe that you can hire people who unproductive people — people now who are idle, I think the worst thing now is not only the economics of it but I think the social impact of individuals who are not working or are living beneath their potential is a — is a dangerous thing.

It`s a social tragedy. It`s not good for them; it`s not good for the society. It`s a cancer that exists. They have to be made productive. But you can`t waste money doing it.

So those jobs — whatever they may end up being — or those investments have got to have a payback. And then –

(CROSSTALK)

CHARLIE ROSE: Did the stimulus program that was enacted by the Congress after the President — this President — assumed office, did it make a contribution to growth at all?

RAY DALIO: Oh, it made — it certainly made a big contribution –

(CROSSTALK)

CHARLIE ROSE: It did create jobs? Because some people would like to believe that that stimulus program didn`t create jobs and you`re here to say with your own analysis it did create some jobs.

RAY DALIO: Oh, a lot.

CHARLIE ROSE: Yes.

RAY DALIO: Ok but we — at the same time — and it created growth and it created some jobs. At the same time we have this overriding factor that is depressing jobs. So it created jobs in an environment — and let`s — so let`s turn to what is depressing jobs.

CHARLIE ROSE: Right. What is?

RAY DALIO: Ok. What`s depressing — what`s depressing jobs is that the world supply and demand for labor has changed. In other words, there`s a lot more people working as China came on and India came on and they are competitive. There`s a world supply of labor has change — has increased and technology has had an effect.

So we`re in an interesting era because I think almost and if you think of a person as — in a machine, an economic machine as being tool, a part of that economic machine the demand for labor has changed in a very profound way. It`s an interesting question. We might enter into a period in which we don`t need people as tools. So what does that mean?

CHARLIE ROSE: The two reasons that people are enormously curious about you: number one, is simply the objective success of what Bridgewater has done and become. And secondly there are interesting questions as to how you think about the world and how you think about investments.

You have mentioned a couple times the economic machine. Give us a sense of what that means to you. Because my understanding is that`s central to a philosophy you have about the way the economy works.

RAY DALIO: Reality works in a certain way. You have to understand how reality works. If interest rates go to zero and you can`t ease monetary policy, how does the economic machine work? Ok, a central bank can make a purchase and get money in the hands of somebody else or blah, blah, blah, blah, blah.

There is a certain machine. It is operated this — you can raise your debt relative to your income to so far but you can`t raise it more than that. And then when you reach that, that changes.

So the private sector cannot — there are such laws of economics, such realities of if — let`s say Europe. I`ll give you another one. We have a debt problem in Europe. You can either transfer the money from one rich country to a poor country –

CHARLIE ROSE: Right, Germany to Greece.

RAY DALIO: You can print the money.

CHARLIE ROSE: You can`t do it.

RAY DALIO: Or ECB could say I`ll find a way to do it, whatever.

CHARLIE ROSE: Right.

RAY DALIO: Or you can write them down. Those are the choices.

CHARLIE ROSE: So-called hair cut?

RAY DALIO: Hair cut.

CHARLIE ROSE: Machine for you is a theory of the way things work?

RAY DALIO: And so — yes, that`s right. It`s a description of reality. If I ski and I`m putting my weight on my downhill ski I will make a better turn than if I don`t.

CHARLIE ROSE: And you always make a point that you know what you don`t know and that`s equally valuable.

RAY DALIO: More valuable. I want to say that — so this is the whole philosophy. I — I so, know that I can be wrong; and look, we all should recognize that we can be wrong. And if we recognize that we`re wrong and we worry about being wrong than what we should do is have a thoughtful dialogue.

(CROSSTALK)

CHARLIE ROSE: Ok, but that –

(CROSSTALK)

RAY DALIO: So the way I get to success. The way — it`s not what I know. I`ve acquired some things that I know along the way and they`re helpful.

(CROSSTALK)

CHARLIE ROSE: It is — it is — it`s not what you know but it is –

(CROSSTALK)

RAY DALIO: It`s knowing what I don`t know or worrying that I won`t — that I`ll be wrong that makes me find –

CHARLIE ROSE: Yes.

RAY DALIO: Well, I want people to criticize my point of view — I want to hold down.

CHARLIE ROSE: Right.

RAY DALIO: Say I have a — I think this but I may be wrong. And if you can attack what I`m saying — in other words stress test what I`m saying — I`ll learn.

CHARLIE ROSE: So that everybody knows so therefore people will be free to tell you what they think.

RAY DALIO: Of course.

CHARLIE ROSE: Because you know that it will not be held against you and you can benefit from it.

RAY DALIO: That`s right.

CHARLIE ROSE: So anybody in a meeting at your company can stand up and say Ray –

(CROSSTALK)

RAY DALIO: Absolutely.

CHARLIE ROSE: — you`re absolutely wrong.

RAY DALIO: Of course.

CHARLIE ROSE: And you have not been precise, and your assumptions are flawed.

RAY DALIO: Oh it`s so essential, right. There`s — the — the number one principle at our place is that if something doesn`t make sense to you, you have the right to explore it, to see if it makes sense.

I don`t want people around who do things that they don`t — they don`t think makes sense because I`m going to have not-thinking people.

(CROSSTALK)

CHARLIE ROSE: Right.

RAY DALIO: So that they have not only the right, they have obligation. Don`t walk away thinking something`s wrong.

CHARLIE ROSE: Failure teaches you more than success?

RAY DALIO: Of course. One of my favorite books is “Einstein`s Mistakes.”

CHARLIE ROSE: Right. And because it showed you that even Einstein, the most brilliant person of the century in common judgment made mistakes?

RAY DALIO: The great fallacy of all — I think of all of mankind practically — I mean that`s a big statement — but the great fallacy is that people know more than what they do and there`s a discovery process and so when you look at — that`s the process for learning.

The process for learning is to say “I don`t know.” Like, I`m — I`m totally comfortable being incompetent. If I — if I — I like being incompetent. I don`t mind being an incompetent. If I don`t — how — how much can you be competent about?

And so that whole notion of do you like learning? Do you like finding out what`s true and building on it without an ego? And that becomes the problem. How many statements do you listen to people that begin “I think this, I think that,” where they should be asking “I wonder.”

CHARLIE ROSE: What`s in here? And why did you write it; because you wanted people who come to work with you to understand what your own philosophy was about openness, about management about dialogue, about the machine.

RAY DALIO: Yes. So what — I think every place has to have a culture.

CHARLIE ROSE: Right.

RAY DALIO: And culture is the values. What — when values are leaving (ph) out and so for example the number one value is it has to make sense to you, we have to talk about it, we have to work it through in a none egotistical kind of way. And so it`s an unusual place and it`s an unusual culture.

CHARLIE ROSE: Are you offended when people sometimes label it a cult?

RAY DALIO: I think that — I think a cult — when I think of a cult it means believe this. And where — it`s the opposite.

CHARLIE ROSE: Yes, you`re taken from on high.

RAY DALIO: In other words a cult mean — yes. Somebody`s telling you believe this –

(CROSSTALK)

CHARLIE ROSE: Because I said so.

RAY DALIO: And follow it.

CHARLIE ROSE: Because I have a superior wisdom.

RAY DALIO: Ok, it`s exactly the opposite of that, right? The number one principle is “Don`t believe anything; think for yourself.” And now let`s go through a process of what is true together. But we can`t stop that with ego. We can`t let that barriers stand in our way. So we`re going to live in a culture in which we can do that.

Ok, now that`s opposite of a — ok, it`s a belief system, in other words I`ll ask you do you believe that we should operate this way with each other. Ok, if you want to call that a cult, I think it`s the opposite of a cult, it means “think,” right? Speak up. Don`t hide it; don`t talk behind people`s backs. Its talking behind people`s –

(CROSSTALK)

CHARLIE ROSE: Did you have these ideas for a long time or these ideas that you came to through, came to through your own experience and your own living and your own sense of what you read and what you question and you came to this?

RAY DALIO: Of course, of course through my whole life. Now as I say when I started at the markets, the knowing I don`t know and the liking to have people challenge me. So when I was young I did like that — to know. I did know that I`m — I`m an independent thinker and I know that for an independent thinker and I like to innovate. We like to innovate.

And if you`re going to have an innovative thinker, they made –there`s a high chance they`ll be wrong and if you have to have an independent thinker they`re going to have a different point of view than the next person.

So if you`re going to have innovation and independent thinking you`re going to have to have the ability to disagree, to find out what`s wrong and I learned through my whole experience day after day that the cost of being wrong is a terrible thing.

So I worry about being wrong and because I worry about being wrong I want to know what`s true.

CHARLIE ROSE: Yes.

RAY DALIO: And we have a community here, I want to know what`s true including my strengths and weaknesses so that I know how to deal with them and I want to be in a community of other people who want to do that.

CHARLIE ROSE: Do you believe as –

(CROSSTALK)

RAY DALIO: And by the way that`s connected to our performance.

CHARLIE ROSE: You have this dialogue with members of the Tea Party on the Republican side and the members of the President`s administration on the other side. What would you tell them about the necessity for revenue in the next ten years?

RAY DALIO: Well, here`s what I would be telling them.

CHARLIE ROSE: You`ve got to tell them more than just talk.

(CROSSTALK)

RAY DALIO: Ok, no but here`s what I would say. Can I, Mr. President — Mr. Alternative Republican –

(CROSSTALK)

CHARLIE ROSE: Mr. Cantor, let`s say.

RAY DALIO: Ok, can we first just together sit down in a room, together with whoever you want to bring in, and go through an exercise of finding — now forget what we should do at the moment — just find out a discussion of how does the economic machine work? How does the machine work? We`re not going to get to what we`re doing at the moment. And can we agree on how the machine works?

CHARLIE ROSE: Do you think they`ve done that or not?

RAY DALIO: I — they don`t do that. They don`t — this is the big thing. Everybody`s looking at what to do and there`s a debate –

(CROSSTALK)

CHARLIE ROSE: Well but no this is about can they do — when I said do you think they have done that or not? Meaning have they set –

(CROSSTALK)

RAY DALIO: No, no, no.

CHARLIE ROSE: Let`s just test all of our assumptions about what`s necessary in the way the system works and the machine works?

(CROSSTALK)

RAY DALIO: No. No, so that`s the interesting thing. Everybody`s looking about what to do and each approaches it with a bias and we`ve not in a conversation that`s a quality conversation –

(CROSSTALK)

CHARLIE ROSE: And part of the argument comes — has to do with how you read history too. Those people who were saying –

RAY DALIO: Well, we could do it together.

CHARLIE ROSE: Right, we read history together?

RAY DALIO: And you can at a very nuts and bolts level I can take any period of history and put it through my template. There`s a template I wrote that describes how I think machine works.

(CROSSTALK)

CHARLIE ROSE: Right, right. When you have signed “The Giving Pledge” with Warren Buffett and Bill Gates, have you not?

RAY DALIO: Yes.

CHARLIE ROSE: When you look at the Buffett rule about 00 as a man who has a huge income, how do you feel about the Buffett rule vis-a-vis the way you look at it in terms of whether there needs to be more sacrifice on the part of people who are at the highest level of the economic –

RAY DALIO: So I — so — I think the answer to that is probably true.

CHARLIE ROSE: Yes.

RAY DALIO: Ok. I think that — but I want to be clear what — I want to say more than this on the subject. I think that there`s not enough discussion on people being — how do we get people to be self-sustaining?

So I want — so the number one thing I want for my kids, the number one gift I can give my kids or the number one gift that I can give anybody is that you`re self-sufficient.

I don`t — it`s not a matter of even living standards. It`s the notion of if you`re self-sufficient you have the freedom to make your own choices –

(CROSSTALK)

CHARLIE ROSE: It`s like a difficult parable about giving fish and teaching how to fish.

RAY DALIO: Yes and you can make whatever choices in life you want to make but you`re self-sufficient. And on an ethical standard it means that what I`m giving is equivalent to what I`m taking — self-sufficiency, right?

So what I want to do, what I think that we need to do is say this large percentage of the population, how do we make them useful? How do we make them self-sufficient? Let`s all agree on a goal of how to achieve that. So like my kids I don`t want to just give money. Let`s — I give — I`m going to give away a lot more than half of my money.

CHARLIE ROSE: Right.

RAY DALIO: I`d be happy to give that to the government –

CHARLIE ROSE: If?

RAY DALIO: If the government put together programs that were like I`m giving away to charity to certain programs in which I believe the money is sufficiently used to help people.

Let`s say for example if the government created a series of programs that said there`s this education, teach for America. If I can read these things off, ok, of these types of things –

CHARLIE ROSE: All those you support.

RAY DALIO: Yes or it doesn`t have to be those.

CHARLIE ROSE: Yes.

RAY DALIO: It just has to be good.

CHARLIE ROSE: Right.

RAY DALIO: Ok? If the government –

(CROSSTALK)

CHARLIE ROSE: The result has to be self-sufficient?

RAY DALIO: Yes. So for example Arne Duncan –

CHARLIE ROSE: The Secretary of Education.

RAY DALIO: Secretary of Education is a fantastic person for dealing with improving the quality of education in the United States and he — “Race for the Top” and such.

(CROSSTALK)

CHARLIE ROSE: So you say I`d be happy for my taxes to be raised if I knew that the money would go to be administered by someone like Arne Duncan.

RAY DALIO: Oh, man. Or even create a series of quality — I will — I will fund that opportunity. Give — don`t waste it. Ok, don`t waste it. Put it to good use for education, for opportunity.

So I`m — I think that what the country`s most important thing to give anybody is opportunity.

CHARLIE ROSE: Let me take this downtown to where there`s an economic protest on Wall Street.

RAY DALIO: Yes.

CHARLIE ROSE: In your sense — you clearly have read about that and looked at it — what do you think is at stake there and what do you think they`re saying to us?

RAY DALIO: I think the number one problem is that we`re not having a quality dialogue. So I wish that I could sit down –

(CROSSTALK)

CHARLIE ROSE: So somebody should be listening and –

RAY DALIO: No, no yes we get together, sit here in a room like you with those thoughts and understand how — how — what`s going on and what`s true. So for example on that particular case I don`t know that I adequately know the various points of views that are behind it.

CHARLIE ROSE: Right.

RAY DALIO: I certainly understand the frustration. I understand the dilemma. I understand that there`s discontent. Ok –

(CROSSTALK)

CHARLIE ROSE: Yes, discontent about there`s somehow a feeling that –

(CROSSTALK)

RAY DALIO: Right so it seems to me –

CHARLIE ROSE: — that some people did better because of the way the rules were or some people did better because –

(CROSSTALK)

RAY DALIO: Right.

CHARLIE ROSE: — they had power to influence Washington and they didn`t.

RAY DALIO: So I think we need to work ourselves through that. I — I`m sorry –

CHARLIE ROSE: No, no go ahead.

RAY DALIO: Ok, so I think that not only do we have to work ourselves through that, I would say like the question really is also a question that should be dealt — designated for our legislators, our government. Because if the government makes the rules, people will behind either — did they break laws or did they not break laws? This is a — this is a question of how should behavior be managed?

Like I think I — I think I did everything right, you know I — I did well for my customers. My customers are pension funds, teachers. I did well when others didn`t and I`m going to say that they are very grateful.

We have a wonderful relationship, 15-year wonderful relationship. That — what happens is I happen to earn one-fifth of the profits.

CHARLIE ROSE: Right.

RAY DALIO: So then –

CHARLIE ROSE: You make 20 percent.

RAY DALIO: Ok, I earn 20 percent of the profits.

(CROSSTALK)

CHARLIE ROSE: And you take a two percent fee for doing it.

RAY DALIO: What — yes that covers my overhead and a bit more.

CHARLIE ROSE: Right.

RAY DALIO: But anyway, I earn this money as a result. Very similar to I would say, any of those companies you mentioned, the eBay and so on and so forth.

CHARLIE ROSE: Right.

RAY DALIO: I pay about one-third in taxes. I pay about one — I give away about one-third. And I`m — and that`s what I do and I follow the law. And if I`m doing something that is incorrect, that they think is incorrect I`d like to know that and I would also like to say should those laws — is that right or wrong.

CHARLIE ROSE: You want the people who work for you to tell you exactly what they believe and to be able to document the fact that it`s not just what they believe but it`s what they have discovered.

And you have to test those ideas in the marketplace of your own firm before you go off and act on those assumptions, correct?

RAY DALIO: Yes.

CHARLIE ROSE: So what is it telling you now if Greece defaults? And that has a contagion ability to leap across the Atlantic and have some influence on the U.S. economy. What is it telling you, you know, about whether China, for example can maintain the level of economic growth it`s had and avoid the kind of social conflicts that might exist in that society.

What does it tell you about emerging nations and what it is that — what impact they will have on commodity prices and what does it tell you about the future of the dollar as a currency? All of those kinds of issues?

RAY DALIO: You`ve got a bunch of questions.

CHARLIE ROSE: No. I know I did.

(CROSSTALK)

RAY DALIO: And also I`ll do the best I can.

CHARLIE ROSE: In my remaining minute. Go ahead.

RAY DALIO: Ok, I would want to say that there is — there are two worlds. There`s debtor-developed countries and there`s emerging creditor countries, classically the United States and China.

CHARLIE ROSE: Right.

RAY DALIO: One is a creditor, one a debtor. They are getting we`re still borrowing, we`re still in debt, we`re still — they`re still earning. Then those two worlds can be broken into two — those that can print money and those that can`t print money.

So now when I`m giving you the total answer in my remaining minutes, Europe is — can`t, a lot of it, can`t print money. Therefore it will have to deal with whether there`s a transfer of wealth, there`s a limit to that transfer of wealth.

And so we are going to deal with the question of whether they would print money or get the haircuts. I think they`ll do both.

CHARLIE ROSE: Right.

RAY DALIO: When looking at China, China because they can`t raise interest rates because of their existing monetary policy, is that they can`t control credit growth in the normal ways that we control credit growth. So there`s a credit bubble emerging there and as — in other words there`s a quality of lending and it`s bypassing the credit system.

And that`s something that the Chinese will need to get a control of because it`s a dangerous thing. And so that creates their risk. If I take then the United States we`re in a position in which there is this deleveraging. Deleveraging is risky so for example banks are leveraged about 12 to 15, 17 times.

CHARLIE ROSE: Right.

RAY DALIO: 15 times is a round number it depends on the bank. They`re leveraged 15-1 and if they go down by one-fifteenth, we have a capital problem and we`re in a deleveraging. Those problems — bank crisis that have existed every ten years normally we are — we can have a problem.

We don`t have the ability to have the same effect of monetary policy as we did before because a central bank — it can buy a bond. It can — therefore buy the bond. It gives that money to somebody who sold the bond and they were going to buy something like a bond. They`re — the — the getting it in the hands of somebody who spends it on cars and houses who really owes probably too much in debt is not an easy thing to do for monetary policy. So monetary policy is not as effective and then we have this social tension.

So we should be able to — there`s this downward pressure of the deleveraging. We should be able to grow at a rate that`s comparable to our income growth if we are — if we keep orderly and we — and we work this through and everything is orderly. That means something between like 1.5 percent or 2 percent we should be growing at maybe about the 2 percent vicinity.

The problem with the 2 percent vicinity is that the employment rate remains the same or can trend higher. That produces social pressures, that produces tension which itself means that you can have a situation analogous to that which is existing in Greece and more social pressure you create the more tension that is existing and emerging in various ways, not just a Wall Street piece. But it`s existing in Spain.

CHARLIE ROSE: Right.

RAY DALIO: So if we can keep orderly and not argue with each other and not do disruptive things and we don`t go down ok and grow at that two percent you know maybe then it will be ok.

If we have disruption and we are not able to have a monetary policy and we can`t have fiscal stimulation and you have a problem of what do you do — you can`t recapitalize the banks. I mean if you should happen to need to recapitalize the banks you can`t have a TARP program again.

CHARLIE ROSE: Politically not feasible.

RAY DALIO: Politically not feasible.

So you have to have a plan. You need to be thoughtful, I think, how do you create that plan and not only it`s a theoretical thing when I say how do you make a plan because you have to be able to have agreement to implement the plan. You can`t have people at odds.

As I say sometimes to policymakers my job is very — is much easier than their job. My job is that I just have to pretty much anticipate what`s going to happen and be one step ahead. That`s not an easy job but it`s an easier job than policymakers who have to do that. They have to then find a solution for the bad stuff not happening. That`s not easy to find solutions and then even if they had solutions they have to get that solution through the political system. In which there`s — there`s — everybody`s saying that you can`t do that, whatever that is and everybody blaming each other.

CHARLIE ROSE: Are you optimistic or pessimistic?

RAY DALIO: I suppose I`m — if I was – I`m concerned. I think it`s a test of us. It`s a test of us in our society. It`s a test of us.

CHARLIE ROSE: On that note thank you for coming.

RAY DALIO: My pleasure, thank you for having me.

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The Value of Losing Money?


Monday, May 9th, 2011

The Value of Losing Money?

by Leo Kolivakis, Pension Pulse

On Saturday morning, I caught a glimpse of CNN’s Dr. Sanjay Gupta interviewing Dr. Joseph Maroon, a neurosurgeon at the University of Pittsburgh Medical Center and a team physician for the Pittsburgh Steelers. Dr. Maroon is a member of the NFL’s concussion policy committee, which has recently been criticized by the House Judiciary Committee for inadequate research and ethics related to player concussions.

But I’m not covering any NFL controversy here. What caught my attention is that Dr. Maroon hit a brick wall years ago when he experienced the three D’s: death of his father, divorce, and a deep depression. He got on the treadmill one day and started running. He felt so good that he said it was the first night he slept well. And from then on, he was convinced that exercise was the key to maintaining his mental and physical health. He’s now a 70-year-old ironman competitor (unfortunately, controversy still hounds him).

What does this have to do with the value of losing money? Hold on, I’m getting there. I also remember an interview with George Soros (think it was with Charlie Rose) where he was discussing when he graduated from London School of Economics. He was sitting in some corner in London watching people go by and thinking that he’s broke and in debt but “there’s only one way to go, up”.

Some of life’s most valuable lessons are taught to us when we hit a brick wall. You don’t see it when you’re in your personal hell, but typically that’s when people find out what they’re made of. I remember when I lost my job back in 2006, then separated from my wife in 2007, and my health was deteriorating fast. I hit a major brick wall. Had it not been for the support of my family and close friends, I would have still been stuck in a rut.

I also remember what Tom Naylor, a professor of economics at McGill and close friend of mine, told me back then: “You lost you job, lost your wife, losing your health, the good news is you hit rock bottom”. Then he gave me some wise advice. “Take out a piece of white paper and start writing down all the worst possible things that come to your mind. Write everything down: you’ll become severely handicapped, you’ll never get another job because the pension pricks are blacklisting you and sending you nasty legal letters, the mob is looking for you, no woman will ever want you and you’ll never get laid again for the rest of your life. Write down every terrible thing that comes to your mind.”

So I did it. Then I asked him what am I suppose to do with this sheet containing all these terrible thoughts of mine? He told me to put it away and look at it after a year has gone by. I asked him “how’s that suppose to help me?” He replied: “Because when you look at it after a year, you’ll laugh at how silly your thoughts were.” And then he told me something else which I’ll never forget: “You don’t see it now, but with this blog, you have tremendous leverage and the pension pricks are scared of you. Use this leverage to your advantage and write your own ticket in life.”And that’s exactly what I’ve been doing ever since. I’ve toned it down, remaining as professional as possible, but I continue to blog on pensions and financial markets.

Now let me get to my topic, the value of losing money. During a recent lunch with my former boss at PSP, Pierre Malo, we talked about what we value most in life. In our previous lunch, Pierre and I discussed process over performance. In a nutshell, we believe that too much attention is being paid to performance and not enough to process. The way investment managers achieve their performance is a lot more important than overall performance and yet very few institutional investors pay close attention to process until it’s too late.

Pierre also talked about luck in investment management. I used to go into his office every morning and ask him “where is the US dollar going today? What about the euro or CAD?”. He would take out a coin from his pocket and say “you tell me”. He doesn’t believe in short-term market predictions. He told me over lunch, “Anyone can be lucky, even over a long period, but that doesn’t make them a good money manager. And the worst thing that can happen to anyone is start making a lot of money off the bat”.

I then shared a personal investing story with him. After I got fired from BCA Research (alas, I’ve been fired a few times but always managed to land on my feet!), I started day trading stocks, focusing on tech stocks (1999). I was also buying out-of-the-money call options on these tech stocks and making good money. I then joined the National Bank Financial as an economist but continued trading options. I wanted to get rich quick and retire early.

I then learned firsthand the value of losing money. I bought cheap out-of-the-money call options on Nortel’s stock the day they were reporting earnings. I laid down $10,000 of my money, which was a substantial amount of my portfolio back then, and waited for the earnings release after the closing bell, confidently predicting that Nortel was going to kill the estimates and the stock would fly higher. I was expecting windfall gains on those call options.

But that earnings release was a disaster and from there on, the rest is history. Nortel took me, and hundred of thousands of other small and large investors to the cleaners. I never forgot the pain of losing that money, essentially gambling it away. I had no clue whatsoever what I was doing. It took me years after that debacle to learn how to trade properly and I’m still learning every single day. I now avoid options preferring to buy and hold a concentrated portfolio of stocks. I prefer focus on a few eggs than a diversified portfolio of eggs (read my comment on the big secret).

In my follow-up comment, I will discuss how I invest my money, using publicly available information on what elite hedge funds are doing and other information. We are all in the information arbitrage business, and it’s how we use this information that will enable us to limit our losses and allow us to make money in these crazy markets dominated by macro events, high frequency trading and large hedge funds.

The point of this comment was to let you know that there is value in losing money. Even the best hedge funds lose money but the top funds will adjust and learn from their mistakes. That’s exactly what each and everyone of us should be doing. Finally, please note I corrected my donation button at the top right hand side of my blog, right under the pig, so it should be easier to donate via your bank or credit card. I appreciate all donations and plan on earning my money one donation at a time.

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Matt Taibbi: Why The Fed Gave $220 Million In Bailout Money To The Wives Of Two Morgan Stanley “Bigwigs”


Tuesday, April 12th, 2011

Matt Taibbi has resurfaced with another stunner of Wall Street impropriety which will lead to merely more silence, even more unanswered questions and be quickly buried by the kleptocratic oligarchy.

The Real Housewives of Wall Street: Look Who’s Cashing In On the Bailout

Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?

From Rolling Stone Magazine

In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting life decision. Despite the fact that he was earning the comparatively low salary of just $800,000, and had refused to give himself a bonus in the midst of the financial crisis, Mack decided to buy himself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper BeerEast Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close the deal, or he got some help from his wife, Christy, who apparently bought the house with him.

The Macks make for an interesting couple. John, a Lebanese-American nicknamed “Mack the Knife” for his legendary passion for firing people, has one of the most recognizable faces on Wall Street, physically resembling a crumpled, half-burned baked potato with a pair of overturned furry horseshoes for eyebrows. Christy is thin, blond and rich — a sort of still-awake Sunny von Bulow with hobbies. Her major philanthropic passion is endowments for alternative medicine, and she has attained the level of master at Reiki, the Japanese practice of “palm healing.” The only other notable fact on her public résumé is that her sister was married to Charlie Rose.

It’s hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that’s exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan’s penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.

So how did the government come to address a financial crisis caused by the collapse of a residential-mortgage bubble by giving the wives of a couple of Morgan Stanley bigwigs free money to make essentially risk-free investments in student loans and commercial real estate? The answer is: by degrees. The history of the bailout era reads like one of those awful stories about what happens when a long-dormant criminal compulsion goes unchecked. The Peeping Tom next door stares through a few bathroom windows, doesn’t get caught, and decides to break in and steal a pair of panties. Next thing you know, he’s upgraded to homemade dungeons, tri-state serial rampages and throwing cheerleaders into a panel truck.

The impetus for this sudden manic expansion of the bailouts was a masterful bluff by Wall Street executives. Once the money started flowing from the Federal Reserve, the executives began moaning to their buddies at the Fed, claiming that they were suddenly afraid of investing in anything — student loans, car notes, you name it — unless their profits were guaranteed by the state. “You ever watch soccer, where the guy rolls six times to get a yellow card?” says William Black, a former federal bank regulator who teaches economics and law at the University of Missouri. “That’s what this is. If you have power and connections, they will give you a freebie deal — if you’re good at whining.”

This is where TALF fits into the bailout picture. Created just after Barack Obama’s election in November 2008, the program’s ostensible justification was to spur more consumer lending, which had dried up in the midst of the financial crisis. But instead of lending directly to car buyers and credit-card holders and students — that would have been socialism! — the Fed handed out a trillion dollars to banks and hedge funds, almost interest-free. In other words, the government lent taxpayer money to the same assholes who caused the crisis, so that they could then lend that money back out on the market virtually risk-free, at an enormous profit.

Cue your Billy Mays voice, because wait, there’s more! A key aspect of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don’t pay the Fed back, it’s no big deal. The mechanism works like this: Hedge Fund Goon borrows, say, $100 million from the Fed to buy crappy loans, which are then transferred to the Fed as collateral. If Hedge Fund Goon decides not to repay that $100 million, the Fed simply keeps its pile of crappy securities and calls everything even.

This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed’s books. If the securities lose money, you leave them on the Fed’s lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. “Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, ‘The government is giving out free money!’ ” says Black. “As crazy as he was, this is making it real.”

read the full article here

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Must Read: Michael Lewis’ Latest Memo To Lloyd Blankfein


Wednesday, May 12th, 2010

Blaming Merrill Might Set Goldman Sachs Free, by Michael Lewis, originally posted in Bloomberg

To: Lloyd Blankfein

Re: Winning at Ethics, the Goldman Way

I have reviewed no less than seven times your entire episode on Charlie Rose.

Your artful simplicity, studied humility and former hairline all positively radiated against the set’s dark background.

As one of my lesser colleagues on the desk marveled, “Lloyd seemed almost human: Why?” To which I replied, evenly: “because he finally read my last memo.”

Of course there was no reason you should look to one of your own traders for advice. But now that you have, we must proceed quickly. American public opinion is volatile; our exposure to it is peaking, and it will be more difficult than usual to create the illusion for American mortals (or as we like to call them, “The Morts”) that our business is in their interest, much less that we share anything in common.

This time, please, do not wait five months to internalize my new action items. They are:

No. 1: Implicate the rest of Wall Street, as quickly as possible.

It’s always unnatural to hear the name of Goldman Sachs in the same sentence as Deutsche Bank, much less Merrill Lynch. We must put aside our revulsion. The American people might enjoy seeing one firm being driven out of business by a criminal investigation. They’re less likely to allow for the destruction of every big Wall Street firm. They just forked over trillions to keep them afloat.

Delicate Decency

This job of putting our behavior in a new context — comparing it not to some broad universal standard of “decency” but to Wall Street standards — must be done delicately.

For example I was once hauled before a second-grade teacher and simply shouted, “You ill-paid, third-rate moron! I did nothing worse than what every other kid was doing! It is illogical not to punish them, too!”

The outburst did nothing to alleviate my situation, and probably made it more difficult than it needed to be for me to gain entry to Princeton. But the episode taught me one of the central tenets of the Goldman Way: far better to rig a system than to fight it.

Helpful Walks

Our public relations staff might quietly and helpfully walk even hostile reporters through some of the deals created by these other firms. Ditto our lawyers in their meetings with the Securities and Exchange Commission.

No. 2: Continue to use Warren Buffett, but don’t forget to pay him.

When Warren said that stuff the other day about wishing you had a twin brother so he could employ you both, he didn’t mean it as a sign of his undying admiration for you.

Remember: He said almost exactly the same sort of things about John Gutfreund, after Gutfreund had given him a sweet deal to rescue Salomon Brothers from oblivion. The moment Warren was forced to choose between Gutfreund and his money, he chose his money.

Don’t force him to make that choice. If you want more loud character references from Warren Buffett (you do) you must insure that he continues to think of you as profitable.

I don’t know if there are ways Goldman Sachs might simply give money to Berkshire Hathaway for free, but we should explore the possibility.

Hide the Props

No. 3: Hide, and hide from, the prop group.

If you must be seen in public with Goldman employees, make sure they are bankers and brokers, and not our proprietary traders. You did an excellent job on Charlie Rose of making it seem the prop group didn’t even exist.

We were mere “market makers” who helped our customers “get the risk they wanted.”

At the same time, but for different reasons, you should limit your private interaction with the prop traders, especially Jonathan Egol.

The SEC’s complaint focused on one of Jonathan’s Abacus deals and yet failed even to mention Jonathan. Instead they fingered the French guy.

At first I took it as just another sign of Mort stupidity. But now that the Justice Department has gotten involved, and is combing through all the Abacus deals, I wonder. Why is no one yet talking about Jonathan? Why is no one making noises about the deals structured for Jonathan — and not John Paulson — to short them? Is it possible that Jonathan has been helping them to understand our business? Just saying…

Our French Problem

No. 4: You need to address our French problem.

In a matter of weeks Fabrice Tourre has gone from non- entity to a potential asset (a “rogue trader” who might have gone quietly so that the firm might survive) to a huge liability (hero on Wall Street, who somehow has managed to portray himself as both a religious martyr and a mere cog in our machine.)

Going forward I suggest that our personnel department reexamine the French male’s ability to subordinate himself. In English there is no “I” in team. It turns out that the French use a different word: equipe.

Our international people should have known this. At the very least they should have been queasy about hiring guys who look as if they’d rather be wearing espadrilles.

‘Things Like Ethics’

No. 5: Be careful not to say or do anything now that will constrain our ability, after this crisis has passed, to do whatever we want.

The other day, on your emergency conference call with our customers, you said that you wanted Goldman to be seen as a “leader in things like ethics.”

I couldn’t have put it better myself. If in the future we fail to be a leader in ethics we can point to your statement as evidence that we never intended to be a leader in ethics, merely in “things like ethics.”

To that end, I intend to compile a list of things like ethics, in which we might strive to be a leader, without risk to our profitability.

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Charlie Rose Interviews Lloyd Blankfein


Monday, May 3rd, 2010

Charlie Rose sits down with Lloyd Blankfein, CEO and Chairman of Goldman Sachs, to discuss the firm’s testimony before lawmakers regarding the SEC’s fraud allegations.

Click here or on the image below to view the video.

Source: Charlie Rose, April 30, 2010.

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Charlie Rose: Analysis of the Goldman Sachs Senate hearings


Thursday, April 29th, 2010

Charlie Rose discusses the Goldman Sachs Senate hearings with Gretchen Morgenson of “The New York Times”. Also weighing in are William Cohan “The New York Times”, Gillian Tett of the “Financial Times” and Evan Thomas of “Newsweek”.

A link to the transcript of the interview follows at the end of the post.

Click here or on the image below to view the discussion.

Click here for a transcript of the interview.

Source: Charlie Rose, April 27, 2010.

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China Interrupted


Tuesday, April 27th, 2010

This article is a guest contribution by Tom Bradley*, President and Co-Founder, Steadyhand Investment Funds

I am not an economist and have never been to China.

But I am an investor and a student of market cycles, and as such, I’m always wary when something that is far from certain starts being assumed as part of the foundation of the capital markets. Today China is one of those ‘uncertain assumptions’. While investors worry about Greece, the housing market and corruption on Wall Street, they are counting on China being immune to an economic downturn – 8-10% growth will continue uninterrupted. This is a particularly important assumption for Canadian investors because our market has so much pinned on the China miracle.

I bring this up again now because I came across a couple of excellent pieces over the last week. While flopped on the couch at the cabin, I watched a Charlie Rose interview with James Chanos, who is a famous and controversial short seller. In the course of making his clients gobs of money on Enron, he built his reputation as a thoughtful and savvy investor. Mr. Chanos is shorting China.

His argument focuses on China’s dependence on construction (56% of GDP) and investment spending. He provides some color on how the property markets work and the degree to which speculators are involved. If you watch it, remember that he is talking his book (i.e. he has a vested interest in viewers turning against China.)

I also read a White Paper by Edward Chancellor from GMO (you have to register on their website to read the article). Mr. Chancellor is a more learned student of cycles and bubbles than I am, and GMO, under the leadership of Jeremy Grantham, has proven in the past to be astute at flagging market extremes.

For those who are keen on China, the GMO piece will provide a dose of reality. It methodically goes through ten aspects of the bubbles of the last three centuries and then discusses how China measures up. Needless to say, Mr. Chancellor scores it high on all ten measures.

The Chanos interview and GMO paper include and add to the concerns that I have about the China assumption. In no particular order they are:

  • Abnormally high rates of capital spending are good at fueling economic booms and setting up subsequent busts. The GMO piece refers to an IMF World Economic Outlook which points out that countries with a high investment share of GDP (China is off the scale on this measure, as was Japan in the 80’s) tend to suffer the steepest and most prolonged economic downturns.
  • Governments are poor capital allocators and China’s central authority is calling all the shots. Both Chanos and Chancellor have some sobering tales about how uneconomic much of the stimulative spending has been.
  • Cheap money and undervalued currencies also lead to poor capital allocation.
  • Aggressive growth targets and poor transparency are a bad combination. I liken China to a company that shows a rapid and consistent rate of growth, even though the underlying business is far from steady and predictable. As Mr. Chancellor points out, “whenever an economic indicator is made a target for conducting policy, then it loses the information content that would qualify it to play such a role.” When non-transparent companies finally miss their target, they always ‘blow up real good’. That’s because we find out that they were stretching and straining to keep up appearances such that by the end the cupboard is bare. In the case of China, we already know what we’ll be reading about when the downturn hits – empty factories, apartment buildings and highways; an over-levered and overbuilt housing market; insolvent banks and a poor demographic profile.

China is going to grow rapidly. It will become an ever increasing force in the world economy. That we can assume. But we have to be less definitive about the path the country will take to get there and how much of that success is factored into asset prices around the world.

Related reading:
China Inc. – Buy, Hold or Sell
China Uninterrupted

*About Tom Bradley

Tom is the President and co-founder of Steadyhand. His education includes a Bachelor of Commerce degree from the University of Manitoba (1979) and an MBA from the Richard Ivey School of Business (1983). Tom has 26 years of experience in the investment industry. He started his career in 1983 as an Equity Analyst at Richardson Greenshields. Tom spent eight years with the firm, the last three as Director of Institutional Sales. In 1991, he joined Phillips, Hager & North as a Research Analyst and Institutional Portfolio Manager. Tom was appointed to the Board of Directors of PH&N in 1996. He took on the role of Chief Operating Officer in 1998, and was appointed President and Chief Executive Officer in 1999, a role that he held until he resigned from the firm in 2005. Tom writes a column every second Saturday in the Globe and Mail. Aside from stocks and (to a lesser extent) bonds, his passions include skiing, golf, music and The Family Guy.

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