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According to the Financial Post, the Ontario Securities Commission says it is unable to account for more than $90-million in the accounts of hedge-fund operator Sextant Capital Management Inc.
In a decision released Tuesday to settle an argument over the OSC’s right to freeze Sextant’s assets, the regulator said “more than $90-million is unaccounted for and a combined total of only about $7.6-million is in the custodial accounts of the Sextant Fund and the Sextant Offshore Funds.” … Driving force of Sextant, Otto Spork, denies the allegations.
Ironically in a Globe & Mail article some months ago titled, “Six things you should know before investing in hedge funds,” Sextant Strategic Opportunities received mention for it’s exceptional 122.9% return.
Uhhh, perhaps the author of the article should have added a 7th thing to consider: That they might be lying to you!
Double-digit GDP growth year in and out? I’ve never met a credible economist who believed that China’s spectacular GDP growth figures could be taken at face value. Simply put, the numbers have never added up. The smart economists tend to look at other indicators to give a a better idea of what is really going on.
On that note, the next time somebody tells you, “Who cares if China GDP growth is slowing, they’re still growing much faster than the west” you should point them to the latest figures on electricity production. Electricity production in in China in November fell 9.5%, more than in October, which had marked the first fall in a decade.
About six months ago a friend of mine in the arts world who knows absolutely nothing about finance inherited eight hundred thousand dollars. To “Steven” (and his new wife) this was a significant amount of money. They could finally afford to buy a house. Steven reckoned he would put $200,000 of the inheritance towards a $700,000 house — mortgaging the remainder. He could then get the remaining $600,000 to “work” for him. He met with three financial planners and then called me up to ask my opinion.
- Financial planner A had told him he could achieve 5% per year.
- Financial planner B had told him he could achieve 8-10% per year.
- Financial planner C had told him he could achieve 12-15% per year.
This is what I told him:
I was skeptical of the property market, but since ownership was their priority and the two of them did not have a consistent income I suggested he put $600,000 to the house. I didn’t want him worrying about the mortgage. I reckoned that if he really felt the need to make the rest of his money “work” for him, he could invest half of the remainder in stocks. I figured it would do him some good to lose some of his money in the markets. That is because it’s better to lose a little bit of it sooner than a lot of it later.
Oh and I also told him that financial planner A sounded sensible, B was exaggerating slightly and C was a liar.
In my years in the industry, I can count on one hand the number of people who have convinced me that they have “it” — “it” being that special gift of timing the market. I don’t include myself in that category. For the 99.999% of investment professionals like me who don’t have ‘it,” we can take solace in the fact that we could still get rich by convincing others that we know what the market will do (as opposed to getting rich from knowing what the market will do).
The discovery that Bernie Madoff’s superior hedge fund “returns” were hocus pocus is a good reminder of this. A lot of retail investors aren’t particularly concerned by this event, because they don’t think it effects them. This is short-sighted. I expect this fraud will accelerate redemptions at hedge funds. This effects all of us because increased redemptions means increased selling of assets by hedge funds which means more market weakness.
It’s time for investors to start using their own heads and to stop caring what others say, whether it’s promises of investment returns or forecasts on the market:
I’ve been pretty nervous these last few months. Fortunately it’s not because I’m losing money — I exited the markets completely about two years ago. No, I’m guilty of avarice. This little piggie wants to make sure he goes to the next bull market.
They say that every trader’s investment style is colored by his or her “first” market. I started in the industry some twenty years ago just as the stock market was peaking. I lost my entire first year’s bonus when the market crashed; I had invested only in three-month options – oops. That experience, coupled with being sired by a risk-loving father who’s gone bankrupt twice, has permanently imprinted me with the risk tolerance of an 88-year-old widow.
Sometimes my bearish disposition is a good thing: I was an analyst living in Asia during the 1997-98 financial crisis. Sometimes it’s a bad thing: I was bearish about internet stocks about a year-and-a half too early.
I tell you all this because I honestly don’t know what to do right now. My gut feeling — which you should consider irrelevant — is that this bear market is not yet over. I base this on three factors:
- A broken US consumer
- A China which I believe will disappoint
- Valuations which are not compelling
I won’t bother to elaborate for the reasons discussed here.
But there is another factor which does bear discussion. AAA-rated debt aside, the fixed income guys aren’t buying. The last few weeks have seen powerful rallies in US equities. This could be a bear-market rally — bear markets are notorious for vicious short-term swings to the upside. Or it could be something more. But if this bear market is over, you’d think junk debt would be rallying at least a little. But as you can see from the chart, HYG has barely budged. The average yield to maturity on this high yield corporate bond fund is currently around 18% per year on a 4 1/2 year duration. Since bond holders rank first in an insolvency, bond investors must be expecting some pretty steep losses at these companies. So why are equity shares rallying? Can the equity guys and the debt guys both be right?
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All that said, with the Canadian political “crisis” causing the TSX to underperform global markets, this little piggie decided to dip his toes back in the water these last few weeks — mainly through XIU and a little HYG. This puts me at just under 4% market exposure, which may not seem like very much — unless you’re an old lady like me.
Economist Stephen Gordon’s economics blog, Worthwhile Canadian Initiative notes that spending may not be the answer when he writes:
The cutbacks in the Harper government’s economic update were clearly wrong-headed, so it’s a good thing that they didn’t pass. But then again, the arguments in favour of the opposition coalition’s rush to spend on infrastructure aren’t particularly compelling: if there’s one sector of the economy that doesn’t need immediate, massive stimulus, it’s the construction sector – employment there actually increased in November.
I agree. Investment stimulus is not the answer. In fact, I think the Conservatives are doing precisely the right thing and — No — I’m not a Harper fan. Stephen Harper looks to me like some toy company’s ill-conceived cross between a cabbage-patch kid and Ken and his government’s lack of stimulus appears to be complacency rather than astute thinking. Still, he’s right not to spend. On that note, I’m pleased by his proroguing of parliament, as it will delay any forthcoming action by his government (or the next one) to “save” the economy through increased spending.
The truth is, the Conservatives are actually one of the only governments — globally — that is doing the right thing. And why is not spending the right thing?* Because, as I’ll explain below, the only cure for economic misery is more economic misery.
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Over the last few months, I’ve been amazed by the failed attempts of politicians to fix the world’s economic problems. Amazed not because the attempts are failing, but because politicians have failed to understand some basic economic concepts that I learned back in Economics 101 and came to appreciate over my career.
What I learned is that the fastest, most surefire way for us — or any country — to get through the bursting of the bubble is to do nothing. That is because the only thing that can cure a boom is a bust.
This way of thinking belongs to the “Austrian school of economics.” According to the Austrians (and, errr … Wikipedia), the business cycle unfolds in the following way:
Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable “monetary boom” during which the “artificially stimulated” borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if the money supply remained stable. A correction or “credit crunch” – commonly called a “recession” or “bust” – occurs when credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally “clear,” causing resources to be reallocated back towards more efficient uses.
What that means in plain English, is that in a period of rising prices, people get greedy and poor investments are made. These investments would not be profitable in a period of “normal” prices. This malinvestment needs to be “unwound” before the economy can move forward.
For example, in a perfect world of continuously rising igloo prices, I wouldn’t hesitate to spend $500,000 on my very own igloo with the certain knowledge that eventually I’ll be able to unload it to somebody else for $600,000. Unfortunately, the world is not perfect and continuously rising igloo prices eventually leads to an increased supply of igloos. Moreover, what with few new buyers and, errr … the hot summer season, I soon learn that my igloo purchase was a bad investment. This is bad news not just for me, but for everybody else who was benefiting from continued investment: lawyers, brokers, bankers and pudgy kids with shovels. The solution to the end of the igloo bubble is not for people to keep buying igloos, but for the igloo industry to adjust to the new paradigm. Until then, how will the economy move forward?
To me, the Austrian school of economics is just common sense. If prices have gone up too much — they then now have to go down. People have lost sight of this simple fact in the face of all the political brouhaha about the need to keep the economy growing. Government bailouts, lower interest rates, saving jobs all sounds good in theory until you realize that they just delay the inevitable.
The problems we are facing today are because of countless bubbles: bubbles in property markets and oil markets and copper markets and potash markets, to name just a few. These bubbles created jobs and perceived higher wealth on the back of rising prices and associated increased expenditure in property, mines, drilling platforms, container ships, and the like. In the face of now lower prices, further investment must be halted — at least until new supply can be absorbed by the system. Moreover, the system needs to prove that it can make money at current prices.
This isn’t easy. Consider zinc, which I wrote about in August:
This article at FP Posted is clickworthy for anybody who needs real-world examples that a bull market in something results in increased supply — which ultimately will end said bull market. At current zinc prices, small zinc miners are in financial trouble. But while prices are down 60% from their peak, they are only back at 2005 levels. Obviously, these companies had established these mines under the premise of high prices. And going forward? Any recovery in prices will ultimately mean the taps get turned back on, putting a drag on price recovery.
If you were in the zinc business, would you invest further in mines? If I was in the industry, I’d be waiting — waiting for blood, waiting for bankruptcies among my competitors, and waiting for signs that new supply is not going to drive down prices further. I’d also want to make damn sure that any future expansion in based on conservative assumptions for prices.
One bubble I am particularly concerned of in respect to Canada is the housing market. I reckon price declines have only just begun. I base that on the simple observation that investment returns (rental yield divided by price) on property ownership are meager — without the assumption of never-ending price rises. I also can’t help but notice how much property prices have risen over the last fifteen years. You can read more about my thoughts on property here and here.
Politicians usually tend to have it wrong when it comes to property prices. They tend to believe that high prices are a good thing. I disagree. Overheated property prices should not be artificially supported.
In my view, the government has made a number of mistakes on this front, particularly in respect of the (now-rescinded) 40-year mortgage. This idiotic product made homes appear “affordable” by allowing people who could not afford homes at current prices to in fact borrow more money. Why couldn’t the politicians understand that what was needed to make property more affordable, was not to cheapen money, but to simply allow home prices to fall? The 40-year mortgage only made the bubble worse. To that extent, I think the government should not get too aggressive on interest rate reduction. These things usually tend to be overshoot on the downside as well as the upside. Better to save its ammunition for when it really needs it.
Barring a miracle in Chinese commodity consumption, I believe Canadian housing prices will see considerable downside. The igloos have started to melt. No longer is there an implicit expectation for prices to always rise. In this current limbo, I’m not going to buy, you’re not going to buy, and developers aren’t going to build. Things will generally suck. They’ll suck for property agents who lose jobs. and mortgage brokers will lose jobs and construction workers who lose jobs. They’ll suck for banks who see loan growth disappear and for investors who see share prices fall. They’ll suck for people who feel poorer and no longer spend and for businesses that depended on their spending.
And when will things stop sucking? Not a moment before they’ve sucked enough.
Japan never understood this simple truth about booms and busts. They tried stimulus plan after stimulus plan as they tried to prop up the share and property markets. And that’s why Japan’s essentially seen no growth for most of the last twenty years. The Nikkei is still down 70% from its 1989 peak. Hong Kong on the other hand did understand this fact, and saw its economy roar post-2003 and its own dramatic 70% property price correction.
The truth is, the solution to our economic malaise is more malaise. We need pain. We need property price declines. We need company closures. We need unemployment. We even need you to lose your savings (sorry). And lastly we need those pudgy kids to put away the shovels and find something else to do. Until then, things will suck. And I’ll continue to rent.
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*Don’t get me wrong. When I say “do nothing,” I am exaggerating. I’ve written before how it’s crucial to keep a banking system functioning. Moreover, there are no doubt some capital expenditure programs that could be brought forward to help the economy — infrastructure that is sorely needed . But what the government should not do is use our capital to prevent the correction that needs to occur in those bubbles that still remain. The government must use its ammunition wisely.
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