TGIF and more

FT: “Hedge Funds Prey on Rivals”

“Hedge funds are embracing trading strategies designed to profit from the unwinding of large positions by their competitors, market participants say. The increasingly cannibalistic activity stems from the wave of redemptions hitting hedge funds. Because so many firms hold similar positions, forced selling by one in response to redemptions can have ripple effects, forcing other funds to sell. More nimble hedge funds have sought to profit from the dynamic by taking short positions in securities known to be widely held by rivals. Goldman Sachs publishes a list of 50 “very important” hedge fund positions. “

Pundits and old fools like Elmer say hedge funds create “liquidity” and “reduce volatility”. That is now proven painfully and clearly wrong. Excessive monies speculating in hedge funds, aggressive mutual funds and aggressive investment advisors – collectively, the “big, evil funds” aka “beefers” – are a serious risk to normal economic activity. These beefers need strict regulations and hard limits on many activities.

FT: Investors Pull Out of US Commercial Paper

“The amount invested in the US commercial paper market fell by $95bn during the past week, increasing concerns about the availability of money for banks and companies from this vital source of short-term funding.”

The problems here arise from a syndrome of CFOs: using commercial paper for long term funding needs instead of funding that via long term bonds. The simple reality is that a company’s outstanding commercial paper should fall to near zero at least some time during a year. Any long term needs should be funded with permanent debt. But corporate CFOs were greedy for short term profits so have taken unnecessary funding risk. And now they will pay for that foolish strategy. GE's stockholders have paid hugely for those errors, having to raise expensive equity to replace commercial paper that is now difficult to sell in large amounts.

So why is not the CFO of GE being fired ? Or even its CEO if he is culpable, too. ?

There is a reason for the old ways of doing business and finance. Those “god-like” markets, assumed to be omnipresent and enduring for all time – are now seen as potentially ephemeral places that can disappear with alacrity.

"There is Nothing New Under the Sun"

A loquacious and frequent poster of comments here used to say often that “creative destruction” was necessary to cleanse the economy occasionally. I guess I’d re-write that: “reactionary destruction” is needed to wipe out the foolish and inane activity of those who say, “it’s different this time”. As a confirmed anachronist, I know it’s an overstatement, but I again say that there is nothing new under the sun for about 100 years. Modern society was mostly created by 1920 and “new” ideas (other than technologies) are mostly foolish and naive or are the tempting promotions of quacksalvers and mountebanks.

World Affairs

This crisis is making obvious serious problems in the EU. The ECB is still delusional and in denial. Today Trichet says rates cuts are possible next month. What a fool ! By fighting a false inflation that was really just an oil & resource bubble caused by beefers and pensions funds, he’s hurting the common man in Europe. Disarray among European states over a European-wide effort to supports its banks show the need for a “United States of Europe” I am teasing a bit, but Europe should mostly just copy the US constitution to create a stronger, unified Europe that can act.

Economics

So we all now know that the “Core” measure of inflation is correct. It wasn’t “different this time”. The recent rise in nominal inflation was a false signal caused by the oil & resource bubble. Inflation hawks were simply wrong. And luckily Battleship Ben was able to defeat them in the FOMC deliberations. The reality is that until the past few weeks, the monetary base was growing at too low a rate. So that has caused the credit crisis to be worse than necessary. The Fed is catching up finally.

Markets

I am still all cash in the Alpha Fund. But if the Troubled Asset Relief Program is approved, I will begin to prepare a list of stocks to buy – or re-buy. Krypto Fund remains on the normal asset allocation program. I mostly check its holdings on weekends.

Word of the Day

"Confute" - verb, transitive [$10]
Confute means 1. prove (a person) to be in error; 2. prove (an argument) to be false.
Sentence: Events of the past few months have confuted claims that "core inflation" excluding food & energy costs were the wrong measure for the Fed to use for monetary policy. But the ECB still clings to its old mistakes.