Hugh Hendry Sees Opportunities to `Short' Credit in Asia

More brilliance from Hugh Hendry of Eclectica Asset Management:

Eclectica Asset Management, May 2010 Commentary

This is the latest from Eclectica's philosophical and eccentric manager Hugh Hendry. Here is a taste:

Put differently, we believe that central banks in the UK and Europe are likely to keep their monetary tightening powder dry for some time yet. Accordingly, it seems likely that conjecture will remain our preoccupation at least until we receive some resolution to the great speculation of this year. By this we mean an answer to the question of whether we are in the midst of a vigorous yet typical economic recovery, or near the end of an inventory-led and rather short business cycle bearing testimony to an ongoing debt deflation.

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RBS's Janjuah Sees Euro Parity With Dollar `Longer Term'

Bob Janjuah, a voice of reason during a time of insanity. Please click this link to watch the Bloomberg video.

Seth Klarman - Leadership

This video is a guest lecture that was given by Seth Klarman in 2006 to a class at Harvard. The main topic of discussion is leadership. As an investor, there is almost no one that can hold a candle to Seth and Baupost (obviously my opinion). I try to emulate his philosophy of value investing in my own personal investing. I find his views on leadership to be spot-on as well as thought-provoking. This video is definitely worth the 49 minutes. Enjoy!

Bill Gross April 2010 Investment Outlook

The following is the latest Investment Outlook from Bill Gross of PIMCO. I enjoyed this month's letter as it touched on several thematic issues I consider critically important to not only investing but also the overall health and sustainability of the economy.

There once was a family who lived in a fine house on Main Street USA sometime in the 1980s. It was a handsome house with a big yard and a white picket fence, but something always seemed to be missing. There was never enough of this or that – a fancier car, another TV, it didn’t seem to matter – there was never enough. And so, the house came to be haunted by an unspoken phrase, “there must be more money, there must be more money.” The walls seemed to whisper it in the middle of the night, and even during the day everyone heard it although no one dared say it aloud. The chair spoke, the bedroom armoire, and even five-year-old Billie’s toy rocking horse would eerily demand almost in unison, “there must be more money, there must be more money.”

One day, sensing the family’s distress, little Billie asked his father, “What is it that causes you to have money?” “Well, you go to school, get a good job, and get raises,” his Dad said, “but these days there just doesn’t seem to be enough.” But Billie, being just a little boy didn’t understand and so he went off to ride his rocking horse, searching for the “clue” to “more money.” The horse was a special toy because not only did it whisper like the walls and the living room chair, but it seemed to answer questions if you only rode it fast enough. And so Billie would sit on top of his horse when no one was looking, charging madly up and down, back and forth in a frenzied state to a place where only he and his pony could go. “Take me to where there is money,” he would command his steed.

At first, Billie could not make the horse answer the way it had when he asked about Christmas presents or what kind of ice cream Mom would bring home from the store. Finding money seemed too hard of a question for a toy horse, but it made him try even harder. He would mount it again and again, whipping its head with the leather straps, forcing it faster and faster until it seemed its mouth would foam. “Where is the money, where is the money?” Billie would scream, and at last the horse in full gallop cried out, “borrow the money, borrow the money!”

At just that moment Billie’s Mom came around the corner and into his room and his eyes blazed at her as he fell to the floor. She rushed to his side, but he was unconscious now, yet still whispering the horse’s answer. He continued in that condition for the next 25 years, full grown, and confined comatose to his hospital bed. His family would visit, hoping for his revival, and then miraculously one day in 2008 he awoke with his father and mother at his side. “Did I find the money?” he asked, as if it were still the same afternoon. “Did you borrow it?” “We did,” his Dad answered, “but we borrowed too much.” Billie’s eyes seemed to close at that very instant and he died the next night.

Even as he lay dead, his mother heard his father’s voice saying to her, “My God, we became rich – or what we thought was rich – and we thought that was good, yet now we’re poor and a lost soul of a son to the bad. But poor devil, poor devil, he’s best gone out of a life where he rode to his doom in order to find a rocking horse winner.”

Adapted from a short story by D.H. Lawrence
“The Rocking Horse Winner”

For readers lost in the literative metaphor of another of my lengthy introductions to investment markets, let me connect the dots and suggest that it is symbolic of the perversion of American-style capitalism over the past 30 years – a belief that wealth was a function of printing, lending, and of course borrowing money in order to make more money. Our “horse” required more and more money every year in order to feed asset appreciation, its eventual securitisation and the borrowing that both promoted. That horse, like Billie, however, died in 2008 and we face an uncertain and lower growth environment as a result. The uncertainty comes from a number of structural headwinds in PIMCO’s analysis: deleveraging, reregulation, and the forces of deglobalisation – most evident now in the markets’ distrust of marginal sovereign credits such as Iceland, Ireland, Greece and a supporting cast of over-borrowed lookalikes. All of them now force bond and capital market vigilantes to make more measured choices when investing long-term monies. Even though the government’s fist has been successful to date in steadying the destabilising forces of a delevering private market, investors are now questioning the staying power of public monetary and fiscal policies. 2010 promises to be the year of choosing “which government” can most successfully substitute the governments’ fist for Adam Smith’s invisible hand and for how long? Can individual countries escape a debt crisis by creating even more debt and riding another rocking horse winner? Can the global economy?

The answer, from a vigilante’s viewpoint is “yes,” but a conditional “yes.” There are many conditions and they vary from country to country, but basically it comes down to these:

1. Can a country issue its own currency and is it acceptable in global commerce?

2. Are a country’s initial conditions (outstanding debt, structural deficit, growth rate, demographic balance) moderate and can it issue future public debt as a substitute for private credit?

3. Can a country’s central bank be allowed to reflate via low or negative real interest rates without creating a currency crisis?

These three important conditions render an immediate negative answer when viewed from an investor’s lens focused on Greece for instance: 1) Greece can’t issue debt in its own currency, 2) its initial conditions and demographics are abominable, and 3) its central bank – The ECB – believes in positive, not negative, real interest rates. Greece therefore must extend a beggar’s bowl to the European Union or the IMF because the private market vigilantes have simply had enough. Without guarantees or the promise of long-term assistance, Prime Minister Papandreou’s promise of fiscal austerity falls on deaf ears. Similarly, the Southern European PIGS face a difficult future environment as its walls whisper “the house needs more money, the house needs more money.” It will not come easily, and if it does, it will come at increasingly higher cost, either in the form of higher interest rates, fiscal frugality, or both.

Perhaps surprisingly, some of the countries on PIMCO’s “must to avoid” list are decently positioned to escape their individual debt crises. The UK comes immediately to mind. PIMCO would answer “yes” to all of the three primary conditions outlined earlier for the UK in contrast to Greece. We as a firm, however, remain underweight Gilts. The reason is that the debt the UK will increasingly issue in the future should lead to inflationary conditions and a depreciating currency relative to other countries, ultimately lowering the realised return on its bonds. If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap. For now though, “crisis” does not describe their current predicament, yet that bed of nitroglycerine must be delicately handled. Avoid the UK – there are more attractive choices.

Could one of them be the United States? Well, yes, almost by default to use a poor, but somewhat ironic phrase, because a US Treasury investor must satisfactorily answer “yes” to my three conditions as well, and the US has more favourable demographics and a stronger growth potential than the UK – promising a greater chance at escape velocity. But remember – my three conditions just suggest that a country can get out of a debt crisis by creating more debt – they don’t assert that the bonds will be a good investment. Simply comparing Greek or UK debt to US Treasury bonds is not the golden ticket to alpha generation in investment markets. US bonds may simply be a “less poor” choice of alternatives.

The reason is complicated, but at its core very simple. As a November IMF staff position note aptly pointed out, high fiscal deficits and higher outstanding debt lead to higher real interest rates and ultimately higher inflation, both trends which are bond market unfriendly. In the US in addition to the 10% of GDP deficits and a growing stock of outstanding debt, an investor must be concerned with future unfunded entitlement commitments which portfolio managers almost always neglect, viewing them as so far off in the future that they don’t matter. Yet should it concern an investor in 30-year Treasuries that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, a sum four times its current outstanding debt? Of course it should, and that may be a primary reason why 30-year bonds yield 4.6% whereas 2-year debt with the same guarantee yields less than 1%.

The trend promises to get worse, not better. The imminent passage of health care reform represents a continuing litany of entitlement legislation that will add, not subtract, to future deficits and unfunded liabilities. No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and in fact the Congressional Budget Office. Common sense alone would suggest that extending health care benefits to 30 million people will cost a lot of money and that it is being “paid for” in the current bill with standard smoke, and all too familiar mirrors that have characterised such entitlement legislation for decades. An article by an ex-CBO director in The New York Times this past Sunday affirms these suspicions. “Fantasy in, fantasy out,” writes Douglas Holtz-Eakin who held the CBO Chair from 2003–2005. Front-end loaded revenues and back-end loaded expenses promote the fiction that a program that will cost $950 billion over the next 10 years actually reduces the deficit by $138 billion. After all the details are analysed, Mr. Holtz-Eakin’s numbers affirm a vigilante’s suspicion – it will add $562 billion to the deficit over the next decade. Long-term bondholders beware.

So I’m on this rocking horse called PIMCO, a “co”-jockey appropriately named Billie, I suppose, and I’m whipping that horse in a frenzy, “The house needs more money, the house needs more money.” Hopefully my fate is not the same as the one created by D.H. Lawrence, nor is the horse’s answer. Billie’s rocking horse was a toy created in the 1980s and abused for two decades thereafter. Today’s chastened pony cannot cry out “borrow money,” but simply the reverse – “lend prudently.” In today’s marketplace, prudent lending must be directed not only towards sovereigns that can escape a debt trap, but ones that can do so with a minimum of reflationary consequences and currency devaluation – whether it be against other sovereigns or hard assets such as gold. Investment strategies should begin to reflect this preservation of capital principal by positioning bond portfolios on front-ends of selected sovereign yield curve subject to successful reflation (US, Brazil) and longer ends of yield curves that can withstand potential debt deflation (Germany, Core Europe). In addition, as increasing debt loads add impetus to higher real interest rates worldwide, a more “unicredit” bond market argues for high quality corporate spread risk as opposed to duration extension. In plain English, that means that a unit of quality credit spread will do better than a unit of duration. Rates face a future bear market as central banks eventually normalise QE policies and 0% yields if global reflation is successful. Spreads in appropriate sovereign and corporate credits are a better bet as long as global contagion is contained. If not, a rush to the safety of Treasury Bills lies ahead.

Above all, however, lend prudently, lend prudently if you want to be a rocking horse winner. And for you would be jockeys: be careful when you put your foot in the stirrups. Riding a thoroughbred can be a thrilling but risky proposition. Just look what happened to Billie – poor devil.

William H. Gross
Managing Director

Hugh Hendry: "I am subject to the harshest possible critic: the market."

Hugh Hendy never ceases to amaze me. Whether it be his macro viewpoints or specific topics, he usually hits the nail right on the head. From yesterday's FT, he issues an open letter to any and all that are willing to listen. Enjoy:

It's time to call the bankers' bluff and let enterprising people flourish, suggests Hugh Hendry.

You don't know me; we've never met. But I fear you are being encouraged to dislike me. Let me explain: I'm a speculator. I manage a hedge fund. Apparently I profit from your misery. Accordingly, our political leaders are keen to see the back of me.

Only yesterday, Germany and France were calling for the "fastest possible" adoption of new rules to put an end to financial speculation. But before you write me off I ask that you listen to my side of the story.

First, and much like the bogeyman of folklore, the size and significance of the hedge-fund industry is vastly over-stated. The best estimate is that people like me control just 2.5 per cent of total global financial assets under management. The ability to move prices and markets resides more with the managers of pension funds, unit trusts and our banking contemporaries; fortunately, for them, they are on much better terms with our political masters.

Second, and much to my regret, I have to correct another misconception. I am not guaranteed success; far from it. I have no certainty or monopoly on making money; that's the nature of risk taking, there is no free lunch. And believe me, I am subject to the harshest possible critic: the market.

Unlike my political adversaries I can't spin this out. If I am wrong in my deliberations, I have to record a loss immediately. So it should come as no surprise that I give great consideration to what I do.

But what about this short-selling business and the allegation that hedge funds seek to profit from the misery of others; are we simply a scourge on society?

I believe not. Let me explain. In short selling, investors borrow shares and sell them, hoping that the price will fall and they can buy the shares later at a lower price, replace them and thereby turn a profit.

Hedge funds are not seeking to dictate economic affairs. Rather we are preoccupied by price. A market-based economy like ours requires a pricing mechanism to allocate resources and ensure that we all prosper. Get it wrong and we endure the calamity of the technology bubble and the sleazy debacle of the American mortgage crisis.

It's not that hedge fund managers are bitter and seek to wreak havoc. It's just that we believe that recurring and periodic recessions reveal the economy's winners and losers. And through our endeavours, hedge funds attempt to discover the identity and inadequacies of the poor businesses. During hard times, such businesses typically go bust, allowing us to make an investment profit by betting on that eventuality, and ensuring that successful and prudently managed businesses prosper.

Or rather that was how it was supposed to work. But our political leaders have gone to considerable cost to avert this normal business cycle.

Fearing that the huge scale of reckless bets within the banking system threatened another depression, our politicians have used public funds to bail out the economy's losers. And in doing so they run the danger of creating a plutocracy: a society ruled by the wealthy. Consider that fact that in Latvia school teachers have had to take a 35 per cent pay cut so that the Swedish banks who funded the real-estate bubble are repaid their imprudent mortgages.

We need to stop this socialisation of risk taking: heads I win, tails you lose. Consider the American government's enormous bail out of the failed insurer, AIG. According to the world's largest bond fund manager, Bill Gross, it is perfectly acceptable for the taxpayer to subsidise his returns. As he explained it to the investment magazine Barons: "All I'm saying is the government would lose almost $50 billion if it decides AIG no longer is worth supporting. It is a game of chicken. You either call the government's bluff or you don't."

I would recommend a different course of action. It is the same one recommended in 1930 by then US Treasury Secretary Andrew Mellon. I would call the bankers' bluff and seek to purge the rottenness out of the system. All of us will work harder, prices will adjust, and enterprising people will flourish. Of course, this is a minority view. Instead, those in power would rather use the subterfuge of inflation to hide the enormous public subsidy.

The politicians' problem is that free and independent capital markets tend to be anti-inflationary. As we have seen, attempts at quantitative easing immediately depress the value of existing government bonds in addition to the value of sterling. And then you have the problem presented by my little industry. But we are intelligent, well-funded and willing to vociferously challenge public decisions. Most importantly, we are on your side.

Baupost's 20 Investment Lessons of 2008 (and 10 False Lessons)

The following is taken from Baupost's annual investor letter (via Value Investor Insight via My Investing Notebook). Baupost is of course Seth Klarman's shop and what he says, in my eyes, should be taken as near religion. Seth is an investing legend whose track record is rivaled by almost no one. He is one of the greatest value investor's of all-time and has been practicing his craft since co-founding Baupost in 1982. Enjoy!:

One might have expected that the near-death experience of most investors in 2008 would generate valuable lessons for the future. We all know about the “depression mentality” of our parents and grandparents who lived through the Great Depression. Memories of tough times colored their behavior for more than a generation, leading to limited risk taking and a sustainable base for healthy growth. Yet one year after the 2008 collapse, investors have returned to shockingly speculative behavior. One state investment board recently adopted a plan to leverage its portfolio – specifically its government and high-grade bond holdings – in an amount that could grow to 20% of its assets over the next three years. No one who was paying attention in 2008 would possibly think this is a good idea.

Below, we highlight the lessons that we believe could and should have been learned from the turmoil of 2008. Some of them are unique to the 2008 melt- down; others, which could have been drawn from general market observation over the past several decades, were certainly reinforced last year. Shockingly, virtually all of these lessons were either never learned or else were immediately forgotten by most market participants.

Twenty Investment Lessons of 2008

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.

2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.

3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.

4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.

5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.

6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.

7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.

8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.

9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.

10. Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.

11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.

12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.

13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.

14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.

15. Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.

16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major fin-ancial institution even to have a ROE goal is to court disaster.

17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.

18. When a government official says a problem has been “contained,” pay no attention.

19. The government – the ultimate short- term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.

20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

Below, we itemize some of the quite different lessons investors seem to have learned as of late 2009 – false lessons, we believe. To not only learn but also effectively implement investment lessons requires a disciplined, often contrary, and long-term-oriented investment approach. It requires a resolute focus on risk aversion rather than maximizing immediate returns, as well as an understanding of history, a sense of financial market cycles, and, at times, extraordinary patience.

False Lessons

1. There are no long-term lessons – ever.

2. Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed.

3. There is no amount of bad news that the markets cannot see past.

4. If you’ve just stared into the abyss, quickly forget it: the lessons of history can only hold you back.

5. Excess capacity in people, machines, or property will be quickly absorbed.

6. Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.

7. In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come.

8. The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments.

9. The government can indefinitely control both short-term and long-term interest rates.

10. The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”)

The Big Short

This is an excerpt from Michael Lewis' upcoming book, The Big Short: Inside the Doomsday Machine. It is from Vanity Fair's April issue. The entire piece is worth the read but I want to highlight a small part that details the ridiculousness of the sell-side, especially when it comes to marking positions for month-end (from personal experience, this is one of the most frustrating things to deal with when you are on the other side of the trade and you have a know-nothing sell-side trader trying to make his monthly P&L look better for his boss):

In the spring of 2007, something changed—though at first it was hard to see what it was. On June 14, the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime-mortgage bonds fell by nearly 20 percent. Just then Goldman Sachs appeared to Burry to be experiencing a nervous breakdown. His biggest positions were with Goldman, and Goldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted back and forth. On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday—to tell him that she was “out for the day.”

“This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.”

On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”

That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”

“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime-mortgage bonds collapsed, the market for insuring them hadn’t budged. But she did it from her cell phone, rather than the office line. (Grinstein didn’t respond to e-mail and phone requests for comment.)

They were caving. All of them. At the end of every month, for nearly two years, Burry had watched Wall Street traders mark his positions against him. That is, at the end of every month his bets against subprime bonds were mysteriously less valuable. The end of every month also happened to be when Wall Street traders sent their profit-and-loss statements to their managers and risk managers. On June 29, Burry received a note from his Morgan Stanley salesman, Art Ringness, saying that Morgan Stanley now wanted to make sure that “the marks are fair.” The next day, Goldman followed suit. It was the first time in two years that Goldman Sachs had not moved the trade against him at the end of the month. “That was the first time they moved our marks accurately,” he notes, “because they were getting in on the trade themselves.” The market was finally accepting the diagnosis of its own disorder.

It was precisely the moment he had told his investors, back in the summer of 2005, that they only needed to wait for. Crappy mortgages worth nearly $400 billion were resetting from their teaser rates to new, higher rates. By the end of July his marks were moving rapidly in his favor—and he was reading about the genius of people like John Paulson, who had come to the trade a year after he had. The Bloomberg News service ran an article about the few people who appeared to have seen the catastrophe coming. Only one worked as a bond trader inside a big Wall Street firm: a formerly obscure asset-backed-bond trader at Deutsche Bank named Greg Lippmann. The investor most conspicuously absent from the Bloomberg News article—one who had made $100 million for himself and $725 million for his investors—sat alone in his office, in Cupertino, California. By June 30, 2008, any investor who had stuck with Scion Capital from its beginning, on November 1, 2000, had a gain, after fees and expenses, of 489.34 percent. (The gross gain of the fund had been 726 percent.) Over the same period the S&P 500 returned just a bit more than 2 percent.

Michael Burry clipped the Bloomberg article and e-mailed it around the office with a note: “Lippmann is the guy that essentially took my idea and ran with it. To his credit.” His own investors, whose money he was doubling and more, said little. There came no apologies, and no gratitude. “Nobody came back and said, ‘Yeah, you were right,’” he said. “It was very quiet. It was extremely quiet.”

A New Start

Almost 5 months to the day since my last post. Obviously I have failed in staying up-to-date with posts. I have been busy with life, busy with investing, and the all the other usual excuses for being absent. I will be jumping ship from my current hedge fund and this will most likely allow me to post more frequently. Hopefully the best is yet to come.