"When you were young
And your heart was an open book
You used to say live and let live
(You know you did, you know you did, you know you did)
And your heart was an open book
You used to say live and let live
(You know you did, you know you did, you know you did)
But if this ever changin' world
In which we live in
Makes you give in and cry
Say live and let die"
"Live And Let Die" by Paul McCartney & Wings
I was so fortunate to join a friend this week for the Paul McCartney concert at the new Consol Energy Center (The Coal Barn). This was the first time I had ever seen Sir Paul and it was really surreal. It was like watching history, live. The show and the Center were fabulous, but this trip down memory lane really got me thinking about how things have progressed from the '60's to today. In the '60's we had race riots, and Vietnam, but there was also a pervasive feeling that we could overcome these issues. In the '70's Nixon abolished the gold standard, we had some serious inflation and a couple of brutal recessions, but again there was that sense that eventually things would get better. Finally the '80's came and ushered in a couple of decades of prosperity. Inflation was broken (thanks Paul Volcker), technology lead to a boom in productivity, and the government piled on the debt to make sure that the "American Dream" would live on.
You know the "American Dream" right? That's the dream that even though times may be tough, if you work hard, at least your children will have a better life than you.
I'm not sure exactly how this changed, but somewhere in the last couple of decades, the belief in hard work to better your future was supplanted by the belief that the government will take care of our future. And I give our friends in Washington credit, they tried. They borrowed and promised, and borrowed and promised, and for a while we all felt pretty good.
I can't help thinking of this Baby Boom generation, going through the decades; living, loving, fighting, working, saving, growing a little heavier and more than a bit worried. Have we moved from "live and let live" to "live and let die?" In some ways I think we have. Many of us realize that our prolific past, like our waste lines, needs to be cut. We're doing it personally, and we're starting a movement to see that our elected officials do it too.
It's fascinating to watch governments around the developed world attack their weight (debt) problems. In Europe we see varying degrees of dieting going on (also known as austerity). Some countries just need to lose a few pounds (France), while others are clearly obese (Greece). Some countries just need to make a few lifestyle changes, while others may need more drastic measures, such as gastric bypass surgery (default and debt restructuring).
In the US we are stuck in the middle, while some of us clearly recognize our weight problem, many of us still think that it's OK to be pleasingly plump. There is clearly a large contingent in DC that believes that we can continue our prolific ways, but I believe that their days are numbered. That's the beauty of this country, as Sir John said, "What does it matter to ya, when ya got a job to do. Ya got to do it well, you got to give the other fella hell."
Investment Implications:
We did a few trades this week, that were surprisingly all buys. The reason I say surprisingly is that the general mood out there is definitely bearish. But, in the past couple of weeks we've had the Fed come out and state as plainly as possible that they will have a Zero Interest Rate Policy for as long as they can see. And since the economy is not showing much in the way of improvement they will soon begin QEII (Quantitative Easing II), in which they will purchase Treasury securities. In other words they are very concerned that we are slipping into a double dip recession (maybe we never really got out of the first one) and potential deflation. This caused a significant rally in Treasuries and just about every other interest paying security. Ten year Treasuries are at 2.6% and two year Treasuries are at 0.50%. Mortgage rates are also at record lows. So just about every fixed income security we own has moved to bullish territory and we are nearly at maximum weight in fixed income.
This caused us to add to WIP (SPDR Int'l Government Bond TIPS).We also added to both US REIT's (VNQ Vanguard MSCI REIT Index) and International REIT's (IFGL iShares FTSE/NAREIT Global-ex US), which are sought after for their high yields.
The other event that has been taking place of late has been the run-up in most agriculture commodities. You're probably aware of the draught and fires in Russia, and the massive flooding in Pakistan. These events as well as continued demand growth from emerging markets has caused some severe price shocks in wheat, corn and soy. On top of this fundamental demand we also have the hostile takeover attempt of Potash that is causing all fertilizer stocks to appreciate.
This has triggered buying in DBC (PowerShares DB Commodity Index), MOO (Market Vectors Agribusiness ETF), and CRBQ (TR/J CRB Global Commodity Index).
Last but not least we have had EFA (iShares MSCI EAFE Index), our core international equity holding, move from bearish to neutral.
Overall our cash equivalents dropped from 27.5% to 16.5%.
Longer term I remain generally bearish, but I remember the old saying, "Don't fight the Fed, and don't fight the tape."
Kyle Bass Interview:
This is an excellent two part video interview with Hayman Capital's Kyle Bass, who called and profited handsomely from the subprime implosion.
His main thrust is that he expects several sovereign nation defaults (and highlights Japan), basically when a nations debt service exceeds its revenue...game over.
It is not bullish, but it is definitely worth listening too.
Hedge Fund Manager Pops a Brewski, Hits the Emergency Exit Button, and Goes Down the Slide:
Steeler fan, and hedge fund manager Stanley Druckenmiller has decided to retire after a 30 year career of managing other peoples money. To say his career was successful would be a gross understatement. After working here in Pittsburgh at PNC, he borrowed $75,000 to start a hedge fund, and is now retiring with a fortune of about $2.8 billion. His 100 investors did nearly as well since Duquesne Capital Management averaged 30% annually since 1986.
I've met Stan at a couple of his awesome Steeler tailgate parties over the years, we weren't close, but he was always a very welcoming and gracious host.
This business takes a toll on you and it's not surprising to see someone as driven as Stan take a step back. Early word is that most of his employees here in Upper St. Clair, as well as in NYC, will either work for his new family office (they still have Stan's $2.8 billion to run), or continue managing client assets in their new hedge funds.
Cheers to you Stan, can't wait to catchup at the Steelers opener. Here's his exit letter to clients:
"As many of you may be aware, this is Duquesne Capital Management’s 30th year of doing business. During that time, I have often marveled that there can hardly have been a luckier person in the world: I have gotten to do what I love, I have had the pleasure of delivering favorable results to clients (who have become dear friends) which has helped them to achieve their goals, and both Duquesne and its clients have been well rewarded in the process.
While I knew from the outset how much I enjoyed what I was doing, I had no idea that the biggest reward for me would come from the experience of meeting and getting to know so many wonderful people who became clients and friends. The biggest surprise was that I would be well compensated for doing something that has been so rewarding in other respects. I need to express to you my gratitude for the trust you placed in me, and for the joy and satisfaction I have had from helping so many clients achieve their aspirations – this has simply yielded a pleasure for me that I am not sure any person deserves, and which easily transcends monetary compensation.
After much self reflection, I have decided to retire from managing client funds and I wanted to give you prompt notice of my intentions and explain the reasons for this. I have had to recognize that competing in the markets over such a long timeframe imposes heavy personal costs. While the joy of winning for clients is immense, for me the disappointment of each interim drawdown over the years has taken a cumulative toll that I cannot continue to sustain. This is true even though to date we have delivered an unbroken record of positive annual performance which I hope will continue for 2010 as well. And while our clients were certainly pleased that we achieved positive results for 2008 and 2009 in a challenging environment, as you may have surmised I was dissatisfied with those results because they did not match my own, internal long-term standard.
You may remember that I chose to leave Soros Fund Management ten years ago because the challenge of managing an enormous amount of capital was having a clear impact on my ability to perform, as well as my state of being. Unfortunately, as Duquesne has grown, these factors have again emerged. I continue to care deeply about performing for our clients, and the stress of performing in a way that I consider to be disappointing – even if you do not share that view – persists in exacting a high emotional toll, with the result that I have concluded that this change is necessary.
We will be providing you with further information as to the timing and other details of this process. I will also be hosting meetings in Pittsburgh and New York in the upcoming weeks to express my gratitude to you face to face, and to answer any questions you may have, and I will be forwarding to you shortly the schedule for those meetings.
It has been a wonderful experience and I am deeply grateful for your trust over the years. I look forward to this change in my activities with excitement and anticipation and to continuing our relationship in a more personal way."
With very warm regards,
Stanley F. Druckenmiller
China Overtakes Japan As Worlds 2nd Largest Economy:
There has been some news this week about China overtaking Japan as the worlds second largest economy, and it is only a matter of time before they supplant the US.
The reason for this is quite evident in this excellent chart from the Economist.
For centuries China and India had the worlds largest economies because they had the worlds largest populations and economies were largely agrarian.
The industrial revolution turned that math on its head, with the US and Europe taking the lead. But now that China and India are becoming more industrialized they will again become the worlds largest economies.
Simple math.
Keep the faith and remember what John Wayne so famously stated, "Well Pilgrim, you gonna just lie there and bleed, or you going to get up?"
Be careful out there,
Chris Wiles
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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