I would like to introduce a great friend and former colleague, Ken Grant as a contributor to RiskReversal.com. Ken and I worked together at SAC Capital back in the late 1990s and at Exis Capital from 2002 to 2004 where he served as Head of Risk. Additionally Ken ran risk at the fine hedge fund firms Tudor Investments and Cheyne Capital, before starting his own outsourced risk advisory firm Risk Resources back in 2005. Ken is also the author of Trading Risk: Enhanced Profitability through Risk Control, a book that I have read on more than a couple occasions. CC and I welcome Ken and his frequent insight to RiskReversal.com. Below please find some thoughts from Ken’s weekly update to his institutional clients:
Risk Resources Weekly Update 11/20/11 From Ken Grant:
Indisputably, the scope, complexity, and return-impeding nature of the global news flow have seldom, if ever, in my judgment been greater. Right now, the cross winds are blowing so hard, and for that matter, coming from so many directions, that one can easily envision legions of investors getting swept away while virtually standing still. I concur with the current consensus that our eyes should fix their greatest level of attention across the Atlantic, where the drift toward a Pangaea-like fissure of their financial markets looms larger with each tick of the clock. I think they’ve got to go big here, and they show no evidence of doing so – at least in the near term. The continent of Europe is dead, flat, broke, and I doubt the path towards the replenishment of continental wallets efficiently flows through the currently conceived plan of dismantling of a multi-jurisdictional welfare state, 6 decades in the making, and funded by taxes that most of the member treasuries have heretofore had a great deal of difficulty collecting.
I think aggressive monetary policy is the answer, and as time goes by, I believe a little dose of the Bernanke/Paulson elixir of publicly funded bank recapitalization, executed contemporaneously with some good, old-fashion money printing, is their best option. But they have barely taken the first step on this thousand-mile journey, and the longer they wait, the steeper the incline becomes. They’re out of their minds if they think the road away from manifest destitution travels through a path including fiscal austerity, higher bank capital requirements, and monetary discipline. This simply won’t work; not in Spain; not in Italy; not in this world, solar system or galaxy.
But I fear that the markets themselves will have to carry this news to them, in the form of withholding the precious capital which, represents more than anything, the most effective cure for current ills. I won’t rehash the train wreck of failure associated with southern European sovereign funding efforts this week, in Spain, Italy, etc., but any read of the newswires will tell you that not only does no one want to buy the new issues emanating from these treasuries, but that investors are moving heaven and earth to shed what existing assets of this nature that are already on their books. This is a recipe for further impairment of the financing of these governments, which will further damage the health of investors, most notably European banks, who, in turn will further tighten lending spigots (already essentially in the “off” position), which will further induce deflation and attendant economic collapse.
It could almost make one nostalgic for the heady days of the Weimar Republic, when the dollar/mark exchange rate at one point in 1922 reached the hard-to-ignore level of 11 Trillion to 1.
It’s very difficult to justify the assumption of incremental risk with so much going wrong over there, and so much at stake if the tidings take a turn for the worse. I think the ultimate monetization of the debt and investor friendly bank recapitalization is where they’re headed, but I fear that they will execute this strategy only when the market gives them no other alternative, and that, my friends, means more of the same in terms of core sucky investment conditions.
Meanwhile, things, somehow, improbably, are actually looking a bit perkier stateside. The earnings season, now for all intents and purposes complete, was on the whole encouraging. Retail sales, manufacturing indices, and weekly jobs data, while still on the tepid side, shade towards the positive. Meanwhile, the dubiously calculated recent inflation statistics indicate flat price levels, paving the way for an all but certain QE3, to be announced and executed at a politically expedient time.
All of this, along with the ubiquitously mentioned late date on the calendar, points towards a U.S. equity market that is verily jonesing for a rally, but can’t quite generate one with all of the Eurotrash looming on the horizon. Undoubtedly, some additional agita derives from the rapidly approaching Supercommitee deadline, counting down now towards the 100 hour mark. This troubles me not much, because if the fix weren’t substantially in, we’d be in July/August-like breakdown now. That what they will ultimately settle upon will be: a) stupid; and b) ineffectual in terms of intended public policy outcomes is, of course, axiomatic, but at this late date in the year, all investors are asking them to do is not to make a mess of it, and I think they’ll be accommodated, at least from this modest perspective.
So for all of this, it is my hunch that we’re trading towards the lows of the range in terms of what remains to us in 2011 investment calendar. I have no doubt that the myriad power sources that would benefit from a rally will gather themselves for this purpose, and that some green screen days indeed await us. Unfortunately, however, I fear the upward price migrations will be fleeting and difficult to monetize, and on the whole, I’m guessing that in terms of investment conditions, apart from some transitory tape painting tactical actions, the foreseeable future looks depressingly like the recent past.
I’ll be keeping a close eye on all of this, of course, and you will be graced with my latest thoughts, in alarming abundance and frequency, at my new twitter account of @kgrantriskmaven. I don’t expect you to be giddy as to this prospect, but I do expect, after all I’ve done for each and every one of you, your full support.
There’s an old Andy Griffith episode in which Aunt Bea, widely known as the best dang cook round these here parts, overwhelms Ang, Ope and Barney with a mother-load of counterfactually inedible pickles. Rather than hurt the poor old bat’s feelings, the boys chomp them down eagerly, and she responds by making another gonzo batch. I bring this up because in terms of my twitter presence, market conditions, etc., Andy, as always, identifies the appropriate response to this conundrum.
“Learn to love ‘em” he said, and I think he was right.