http://www.arrow-capital.com RSS feeds for Arrow Capital Management Inc: Canadian based investment management 60 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/217/May-23-2013--Pile-On-Canada.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=217 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=217&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/217/May-23-2013--Pile-On-Canada.aspx It would appear that Canada is moving from being on top of the world in terms of economic performance and organization to one full of problems. It is a veritable "pile on" in wrestling terms with think tanks, hedge funds, money managers and investment research houses postulating that Canada is in for a rough ride. Seem a bit unfair? Certainly leading up to the 2008 crisis one could easily argue that Canada was the model country - fiscally conservative in both our individual and government accounts. Unfortunately, the fact set that supported this correct view has changed considerably – and not for the better. What has changed? Three things (a) Home prices continued to surge and are now a big cause for worry. Many forecasters believe prices are 20% to 30% overvalued. The Bank of Canada has been forced in many respects to import U.S. monetary policy. Low rates post-2008 have provided a lot of the fuel for the rally. Relative to disposable income, house prices in Canada have deviated substantially from the U.S. (see Chart 1 below - click to expand) and other markets globally (see Chart 2 below - click to expand).   Chart 1: Source BCA 2013 Chart 2: Source BCA 2013 As a percentage of GDP, residential investment has soared (See Chart 3 below - click to expand). Chart 3: Source BCA 2013 These factors have not been lost on the government (like it was in the U.S.!!) who have adopted policies to curtail speculation but clearly we may be at a tipping point. An uptick in rates may be the trigger. (b) Domestic consumption has likely peaked as well. BCA notes that our savings rate is at multi- decade lows and household debt as a % of GDP continues to climb. Assuming house prices fall by 20%, the hit to consumption is likely to be in the order of 2% of GDP along with residential construction at 2%.1 (c) As noted by many financial forecasters, key Canadian exports such as natural gas and oil have suffered due to falling prices, spreads and bottlenecked infrastructure. Given the abundant energy supplies in the US and the relatively high C$, Canadian exports are not likely to save our Canadian bacon in the short run. You can add the voices of hedge fund stars on Canada: (a) The commodity "super cycle" is over according to Stan Druckenmiller (b) Steve Eisman, who successfully shorted U.S. real estate, is worried about Canada’s bubbly housing market. All of this implies that we likely have a made in Canada slow down/recession despite an uptick in U.S. growth. Canadian policy makers - on both the monetary and fiscal fronts have few options to prevent the slowdown, especially if the Feds keep their pledge to balance the budget by 2015. All of this paints I think a realistic view of the next 18 months or so. In my book, being short the C$, AUD$ and Norwegian Krone makes sense versus the US$. This view is not contrarian as CFTC data shows a growing bet against the C$ too. My view is the long bull run in C$ is over so this is an 18 month trade with a target of 90 cents. Now enter a hedge fund manager based in San Francisco named Vijai Mohan. While he runs a small fund, he was the CIO of a former Soros protégé so he has credibility. The Globe and Mail featured him in a story on April 27th (Click here to read). In the article, it mentions that he has positioned his hedge fund as combined 95% short the C$ and Canadian banks. The well written article discussed why Vijai has these positions on but the thought process might have been articulated a bit better. I had a chance to speak with Vijai (before his G&M interview through a mutual friend in the VC business) about his Fund. I am always intrigued by 'out of the box' thinking. His thesis really is about a potential emerging markets crisis and connecting the dots (implications) back to Canada. There is a whole lot of EM debt out there denominated in USD. Rising rates and a rising USD will make these bonds tougher to finance and pay off. Undoubtedly, many readers are aware of extraordinarily low yields offered on recent deals from 'frontier' economies like Zambia, Mongolia and Bolivia. He notes, as well, that the terms of trade continue to deteriorate in EM land largely the result of rising wages, that in turn, has led to falling ROE's and corporate profitability. Very importantly, the way he has crafted this trade, he feels he will not be "squeezed out" (or experience a large drawdown), while waiting for the EM crisis. Plus he gets a kind of free put option should Canada suffer a real estate crisis independent of an EM crisis. On his C$ short, I whole heartedly agree. On shorting Canadian banks, I am not so sure. Yes they will experience pain as retail mortgages make up a good portion of their profits. Yes they are expensive – but you never, ever short valuation solely. And yes, maybe they will need to raise equity in the future if regulations change. On whether we get an EM crisis in the next few years, who knows? Canadian investors might be better off buying Bank of America (BAC) common stock in US dollars so that you get a "cheap" bank, a rising U.S. real estate market and a stronger currency. As for Vijai's Fund, there is a lot more to it than is reported – the performance is solid and the idea generation seems logical and well constructed. We are going to do some more investigating – clearly many readers of the G&M cannot or won't bother with that. I was surprised by the number and type of comments on line – it ranged from misplaced patriotism (eg. "The Globe and Mail will search the world to find someone to rain on Canada's economic parade") to incompetent money management ("The very fact that this guy has all of his customers money on a single bet shows he's incompetent"), to a lack of understanding about the hedge fund industry ("I can say from experience that the very successful hedge funds almost never go on record about their positions"). Many comments were comical and many were just plain stupid. Maybe Vijai is on to something after all?? Jim McGovern Footnotes: 1. The Bank Credit Analyst, May 2013, Vol. 64 - No. 11 Jim McGovern Wed, 22 May 2013 17:11:00 GMT f1397696-738c-4295-afcd-943feb885714:217 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/215/May-7-2013--Battle-of-the-Professors.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=215 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=215&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/215/May-7-2013--Battle-of-the-Professors.aspx Without a doubt everyone in the investment business has a copy of the 2009 best seller “This Time is Different:  Eight Centuries of Financial Folly.”  In 2010, the authors, Harvard professors Ken Rogoff and Carmen Reinhart (“RR”), published a study entitled “Growth in a Time of Debt”1. It was this study however that proved to be a major influence on public policy in the US and Europe. The conclusion of the paper was rather unambiguous in that GDP growth slowed as the level of debt rose.  However, if you took the mean, instead of the median, you actually had a negative GDP result when debt to GDP levels reached 90%. RR was careful to point out that the median was a much better statistic and a more conservative interpretation of the data. Unfortunately, many on the conservative right side (both political and media) used the study to promote their views that austerity was crucial, and took the outrageous position that 90% was a kind of Maginot line or fiscal cliff level not to be crossed or the national economy would collapse – pure sensationalism that was never espoused by RR. The summary below shows how RR’s study is presented across different sample periods and analysis to demonstrate the correlation between growth and debt levels. Source: Bloomberg   The paper, which was not peer reviewed,came under severe scrutiny in April when a UMass grad student Thomas Herndon and two UMass professors, Ash and Pollin, (collectively “HAP”) released a paper2 that found a coding error in the excel spreadsheet provided to them by RR.  Instead of averaging across 20 countries they only used 15; after adjusting the data the result was virtually the same.  HAP also stated that data from Canada,Australia and New Zealand (all have had relatively high debt and high growth experiences) should have been included. Fair point, but the data was not available at the time of the study.  After including this new data,the growth rate improves by about 1% as shown in the table above.  Finally, HAP thought that the methodological approach was incorrect - but we can leave that issue for now. The uproar caused by the HAP paper was embraced by those on the left (both political and media) as a refutation of austerity policies around the world. Again, this too is a nonsensical position. It should be noted though that the left does have better comedic prowess - if you have not seen the Colbert Report's take on the issue you have to watch this video (click here to view now) - extremely funny! So what have we learned from all of this messy debate? “There are lies, damn lies and statistics.”3  Since the dawn of statistical analysis, people have used stats to reinforce their claims often with little regard to the appropriateness of their application to an issue.  A corollary is “liars figure and figures lie.”  One has to be on guard and thoroughly review the statistical analysis before accepting anything in social/economic/political sciences as proof positive.  Even then, empirical findings are better thought of as guides and not ‘right’ or ‘wrong.’ Heuristics and biases are everywhere in this debate. As a huge fan of Kahneman’s behavioural economics work, it is not surprising to find many commentators using the mental short cuts; including confirmation bias i.e. using information that conveniently conforms to a predisposed viewpoint.  In the RR case, we have to get rid of the idea that the 90% ratio of debt to GDP is of any material consequence because it is not!  It is far too complicated an issue to be reduced to one single number but that is exactly what people have done.  As Lawrence Summers penned in a recent Op-Ed in the FT;  “Even if a threshold existed, why should it be the same in countries with and without their own currency, with very different financial systems, cultures, degrees of opinion....” 4 Correlation does not mean causation. It is safe to say that there is a negative correlation between GDP growth and the level of debt to GDP. But the more important issue is whether high debt levels cause slower growth or whether slow growth cause higher debt levels? The evidence here can support both sides of the argument. Confusing correlation with causation is a classic behavioural bias.  It should be noted that RR went out of their way to not imply causation. As a side note, I find it interesting that the Maastricht Treaty of 1992 imposed debt to GDP levels of 60% on each European country - either that was fatally flawed from the outset or the number needs to be revised to reflect the new information. So what should we make of all this debate?  Clearly the quality of the debate is guttural but then that makes for good media and politics. I do not think it takes a PhD in economics to understand that no government can spend beyond their means forever. Taking the high road, it does seem that programs on both side of the debate should be implemented in an effective and efficient way in order to be pro growth and fiscally responsible. In fact RR wrote on FT Op-Ed on May 1 entitled “Austerity is not the only answer to a debt problem.” 5   On the government spending/pump priming side, programs need to create both employment but also high value infrastructure assets that have long term benefits for economic activity.  The CBO notes that the “multiplier” on the 2009 Obama fiscal program was 1  i.e. it was just a transfer of wealth;governments have to do a better job of issuing ‘good’ debt and not wasting taxpayer contributions on ‘pork’.  RR also believe that certain ‘non transparent’ forms of financial repression will emerge, such as, governments cramming debt into “domestic pension funds, insurance companies and banks.” 6  Sound familiar?  On the structural side, the government needs to put in more programs to encourage investment and innovation.  They critically need to reduce the tax on labour not to mention simplifying the tax code itself.  I am not holding my breath – it would appear that the politicians will continue to rely on the central banks to “kick the can” a bit farther down the road before the important but difficult decisions are made. Jim McGovern 1 NBER Working Paper Series, “Growth in aTime of Debt”, Working Paper 15639, Carmen M. Reinhart, Kenneth S. Rogoff, January 2010 www.nber.orp/papers/w15639 2 PERI University of Massachusetts Amherst,“Does High Public Debt Consistently Stiffle Economic Growth? A Critique of Reinhart and Rogoff”, Thomas Herndon, Michael Ash, Robert Pollin, April 15,2013, Working Paper Number 322 3 Quote attributed to Mark Twain 4 “The buck does not stop with Reinhart and Rogoff”, Financial Times, Lawrence Summers, May 5, 2013 5“Austerity is not the only answer to a debt problem”, Financial Times op-ed, Carmen Reinhart and Ken Rogoff, May 1, 2013 6 Ibid Jim McGovern Tue, 07 May 2013 15:13:00 GMT f1397696-738c-4295-afcd-943feb885714:215 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/214/May-3-2013--Japan-Land-of-the-Rising-Sun.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=214 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=214&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/214/May-3-2013--Japan-Land-of-the-Rising-Sun.aspx Happy Friday everyone, While reflecting upon the first quarter of 2013, three prominent themes which really stood out to me were: the global growth pick-up associated with developments in Japan, slowly stabilizing financial conditions in Europe and the continuing economic unpredictability of China. If you are looking for some weekend reading material, please click below to read my quarterly letter where I discuss these topics in greater depth. I also recommend you check out Micheal Yhip’s quarterly commentary as well. Have a great weekend, Jim McGovern Jim McGovern Fri, 03 May 2013 18:17:00 GMT f1397696-738c-4295-afcd-943feb885714:214 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/211/April-18-2013--Thinking-Fast-Slow.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=211 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=211&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/211/April-18-2013--Thinking-Fast-Slow.aspx The following is a brief talk I gave this morning at the 2013 3rd Annual Canadian Investment Forum hosted by my good friend Karen Azlen and her team at Introduction Capital here in Toronto. A few people enjoyed the comments so please feel free to read on. Have a great day, Jim Good morning everyone. Thank you Karen for the kind introduction.  It is a real pleasure to help kick off your annual alternatives conference for a second year.  In terms of setting the tone for this conference that brings so many different managers and investors together, I thought about tying in one of my favourite economists and authors to provide an entertaining and interesting way for people to frame the day.  I am referring to 2002 Nobel Laureate Dr.Daniel Kahneman, author of the bestselling book “Thinking, Fast & Slow.”1 For those of you who are not familiar with Kahneman or this book, let me give you a brief introduction. Kahneman and the late Amos Tversky postulated that the human mind can be divided into two systems; System 1 and System 2.  System 1 handles your automatic,rapid and intuitive mental activity while System 2 handles challenging and effortful mental activities.  In our daily lives, our System 1 is generally the “go to” for much of our decision-making efforts. However, those decisions that require more consideration and thought are also often handled by System 1 as well.  Why? Because our System 2 is naturally lazy –it takes too much effort.  System 1 follows the WYSIATI principle – “What You See Is All There Is” allowing us to simplify and move on. Kahneman wants us to be aware of the biases created by this so that we will be on guard to minimize the potential negative consequences.  His book outlines ways to force System 2 into action – to learn these you will have to read the book! Fast thinking, or System 1, involves two types of intuitive thought – the ‘expert’ and the ‘heuristic’. You will likely know the expert from work done by Malcolm Gladwell and the celebrated 10,000 hour rule to master certain activities – like the chess master who has studied and committed to memory every great match in history.  I am more interested in the heuristic.  A heuristic is a shortcut used when we are faced with a difficult question – in its place we simply answer an easier question; i.e. we substitute rather than concentrate or think hard for the “real answer.”  We do this naturally;we are not the Vulcans assumed in much of classical economic and Rational Expectations theory.  This has been the triumph of behavioural economics.  So for example, the question “How successful will this hedge fund manager be in 5years?” is replaced with the easier “How successful has this hedge fund manager been in the past 6 months?”  WYSIATI –you only see the short term track record. As you can imagine, there are all kinds of ways that we make decision making easier in our daily lives through the introduction of heuristics that create cognitive biases and illusions.  Applying a few of these to the investment industry in general can be helpful to both mangers and investors.  The Availability heuristic refers to the general condition that people are biased by information that is easy to recall.  In the hedge fund world, which has had its share of high profile frauds, investors are likely to recall many negative headlines and draw conclusions that do not correspond with statistical reality– the consequence is they decide not to invest in alternatives.  The media and most political and regulatory bodies are impacted by this bias.  It is not a surprise that exhaustive regulations are typically introduced following a crisis – not before one.  As others have pointed out, this heuristic could also be applied to the reality that most investors select managers based on recent performance. One could also look at the Representative heuristic in which a mental shortcut is taken when making judgments about the probability of an uncertain event. This heuristic was made famous in Michael Lewis’s “Moneyball” when Billy Beane decided to ignore his scout’s advice on ranking player’s physical attributes first to focus on their past statistics and how they might fit into the Oakland A’s ball club.2  In the hedge fund world, the Tiger Cubs come to mind as an example– plenty of cubs with amazing resumes and tutelage failed when they left out on their own.  While Julian Robertson may be a tremendous investor it does not necessarily follow that his protégés will be.  Here, the start-up managers all looked like no brainers, but we know the base rate of success for hedge fund start-ups is more akin to that of the restaurant industry – this is the sin of representativeness.  Examples also abound in the experiences of investors.  For example, many investors invested in fraudulent funds like the Petters, Norshield or Portus because a major institutional investor had allocated capital.  The stereotype of a well-respected anchor institutional investor often causes investors to neglect the base rate of success and become overconfident in their allocation. The other bias worth mentioning is the hindsight biases. Kahneman notes a “puzzling limitation of our mind:  our excessive confidence in what we believe we know, and our apparent inability to acknowledge the full extent of our ignorance and the uncertainty of the world we live in…Overconfidence is fed by the illusory certainty of hindsight.”3  We confuse correlation with causation.  We have an “unlimited ability to ignore our ignorance.”  Hindsight bias is particularly difficult for investors because it confuses the quality of the decision-making process of a manager by only using the outcome as proof.4  For example, we allocated to a manager that had a merger arb. position that went against him – he closed the position (at a loss) and gave his reasons, all of which made sense at the time.  Another manager did not close out the same trade and claimed with certainty that the deal would close; he even added to it.  I can tell you we allocated to the former manager.  The other one went out of business.  You need to dig into the manager’s rationale to determine luck versus skill.  Which brings up my last set of thoughts –distinguishing luck from skill in the investment business.  Kahneman describes his favourite equation as follows: success = talent + luck great success = a little more talent+ a lot of luck Clearly, we all want great success and we want to invest with managers who will be a great success.  In the investment industry talent may be seen as the equivalent of alpha, and luck could be considered beta.  So I can now have the following set of equations for our industry:           return = alpha + beta             great return = a bit more alpha + a lot of beta In terms of beta, I am referring to a broad based definition of “luck.”  For example, you may be a manager trading credit – if so, it is highly likely you have produced better returns and raised more capital than say a long/short equity manager since the2008 crisis.  Today, many investors will tell you that the credit trade is largely played out and that they are now rotating to long/short equity – why?  They expect returns to be better there as correlations have been falling and equities appear relatively “cheap” in the capital structure.  As a credit manager, you may have a lot of talent and thus keep your allocation even if the beta is against you; if not,the capital will flow elsewhere.  As managers then, your job is to prove (with more than just performance data) that you have a repeatable and sustainable investment process.  As Michael Mauboussin notes, “where luck is rampant we must think of skill in terms of process, because the results don’t provide clear feedback.”5 You must also prove your funds are scalable from an investment and operational standpoint.  But back to that concept of “a lot of beta,” or luck. Kahneman would suggest that this luck will eventually “regress to the mean,”i.e. the hot streak will eventually end. Examples that might fit this view are Bill Miller or John Paulson. Bill Gross penned a really interesting recent monthly entitled “A Man in the Mirror,” where he tries to determine what constitutes a great investor.6  He believes that managers should be judged on their ability to adapt to different epochs,not cycles – with an epoch being 40-50 years. WOW.  This seems a bit too long to wait for most of the folks in this room but he does bring up the possibility that perhaps we are on the cusp of an epochal change.  He notes that, himself included, all the great investors have been nurtured within an epoch of credit expansion in which they all played the carry trade, sold vol., took on credit risk, etc. – but what if that all changes now?  If this is indeed the case, then I would argue that alternative strategies are potentially much better equipped – maybe the next epoch will be the rise of alternative funds?  Stay tuned! So my advice to managers here today is to demonstrate your edge and show that it is repeatable for the next 40 years – OK how about 5years!  For investors, put aside your stereotypes and use your System 2 to find the gems from those presenting today.  Enjoy the conference and I hope someone really enjoys the beautiful wine to be drawn at the end of the day – it will really help your System 1! Thank you. Footnotes: 1. Thinking, Fast & Slow, Daniel Kahneman, 2011 2. IBID, page 381 (iPad edition) 3. IBID, page 42 (iPad edition) 4. IBID, page 511 (iPad edition) 5.The Success Equation: Untangling Skill and Luck in Business, Sports and Investing, Michael J. Mauboussin, page 34 (iPad edition) 6. A Man in the Mirror, Investment Outlook, April 2013, Bill Gross Jim McGovern Thu, 18 Apr 2013 17:50:00 GMT f1397696-738c-4295-afcd-943feb885714:211 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/206/March-14-2013--When-Irish-Eyes-are-Smiling.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=206 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=206&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/206/March-14-2013--When-Irish-Eyes-are-Smiling.aspx With St. Patrick's Day right around the corner it is a pity the Irish have not had much luck the past few years. The Celtic tiger turned into a pussycat post the 2008 financial crisis. The Emerald Isle has been mirrored in an economic slump as property prices crashed, unemployment rocketed and austerity conspired to bring the economy to its knees. That being said, the Irish recently decided to finally have a proper burial and wake for two of its now zombie banks who were responsible for a large part of the crisis. Anglo Irish Bank (AIB) and Irish Permanent (IP) were purveyors of ungodly amounts of lending to local real estate tycoons/zealots who in turn created one amazing property bubble and bust. Of course to get the money to lend, these banks had to heap plenty of blarney on unsuspecting and daft bankers in Germany, France and other sophisticated countries. When the 2008 crisis hit, the big Irish banks were essentially bust. Rather than do the Icelandic shuffle and tell creditors to stuff it, the Central Bank of Ireland (CBI) was forced by the Irish government, via the EU, to take on the bad debts. The public bailout was facilitated by the Emergency Liquidity Assistance (ELA) program set up by the ECB. The Irish got €67.5 billion and pledged a further €17.5 billion from their government pension accounts (nice) for a cool €85 billion. The Irish government issued a promissory note ("pnote") back to the ECB that had an interest rate of 8% and a short pay back period. And to pay back the pnote, the government put a nasty austerity program in place — pay cuts for the civil service, cut backs on services, etc. However, like all the other PIIGS, there was virtually no chance of actually paying back the debt... and everyone knew it! The Irish were paying €3.1 billion in interest and principal, while austerity was saving roughly the same amount — a Mexican standoff. So enter a little Irish magic! The government this past February announced, with the tacit support of the ECB, that they were taking AIB and IP off life support and restructuring a large portion of the pnote into a series of long-term bond obligations. The Irish Taoiseach (Prime Minister) stated, "Today's outcome is a historic step on the road to recovery."1 Indeed! The Irish get a lower interest rate (3%) and more critically they extend the term of the debt to over 30 years. In the parlance of economics this is debt monetization. Irish economist Karl Whelan commented that this reduces the NPV of their debt by over 40%1! Add in the fact that the government may still choose to not pay back all the debt or extend it even further down the road, means you could move the reduction in NPV to close to 100%!! Of course there is a loser in all of this — yes, it is the Germans, French et al. The gory details of this arrangement were shrouded in a thoroughly confusing and detailed design intended to take advantage of the "mushroom principle" on its unsuspecting citizens. They won't see or understand that this is just monetizing bad debt. While this agreement will help, Ireland is still not yet out of the woods. Its debt to GDP ratio of 120%2 (up from just 20% pre-crisis) and household debt per capita are amongst the highest in Europe. Still, this arrangement offers real breathing room for the government to redirect its revenues towards policies to get it back on its feet. S&P recently revised Ireland's outlook from "negative" to "stable" which will help allow it to exit the bailout program this year. Ireland is also tapping the 10-year debt market for the first time since the crisis. The markets are all aware of this — check out the performance of the Bank of Ireland (IRE:NYS) or the terrific deal that Great West Life of Canada secured in buying Irish Like (subject to regulatory approvals). Some in German circles are crying foul but not very loudly. If Ireland had done what Iceland did and protect its depositors and taxpayers (rather than creditors), the Germans et al. would have been hurt badly. So at the end of the day, this 'settlement' seems to make sense. The real brunt though is felt by the Irish citizenry. Economists devoted to the Austrian school point out that the common man should not pay for the sins of the elite classes that caused the excessive speculation — fair enough, but this settlement at least ensures that both creditors and debtors take haircuts. And bankers and real estate moguls are targets for public scorn and prosecution in Dublin — unlike the United States and the UK. This arrangement is being touted as a way out for Europe at large. The democracies in Greece, Spain and Italy (as shown in the recent election) will not stand for more austerity. The only real way out is to partially monetize the debt and while the Germans and Mario Draghi are presently not in favour of this, it is hard not see this eventuality. To me this story is analogous to a fabulous gem of an Irish movie called "Waking Ned Devine". It is the story of an elderly Irish sweepstakes winner living on the west coast who dies of a heart attack upon finding out he has won. With no next of kin, the townsfolk have to come together and create their own Ned Divine to claim the prize and share the winnings. Speaking of Irish movies, to get you in the mood for the big weekend ahead, why not consider watching some of my favourites with a few pints of your mother's milk (aka Guiness). Irish eyes will be smiling a bit brighter this year with the news of this arrangement. Just as St. Patrick drove all the snakes from Ireland, so to has the Irish government driven those nasty continental creditors away — at least for now! Let's toast to your good health — Sláinte! Jim McGovern The Top Irish Movies Drama: The Quiet Man (Classic set in breath taking Connemara featuring John Wayne) In the Name of the Father / My Left Foot (Both masterpieces of acting with Daniel Day-Lewis) The Commitments / The Snapper / The Van (The Barrytown trilogy written by Roddy Doyle — amazing, especially the first two) The Crying Game (The coming out movie for Jordan if you get it!) Cal (if only for the music of Mark Knopfler) The Field (to understand what life is like in rural Ireland) Bloody Sunday Intermission Comedy: Waking Ned Devine (ok so it was shot on the Isle of Man — still great!) When Brendan Met Trudy Once (great musical) Children: The Secret of Kells (extraordinary animation and wonderful story) Source: 1.    Financial Times, Wolfgang Manchau, "Ireland Shows the Way with its Debt Deal", February 10, 2013 2.    Financial Times, FT Long Short, Ireland: Poster Child for Austerity, March 4, 2013 Jim McGovern Wed, 13 Mar 2013 19:21:00 GMT f1397696-738c-4295-afcd-943feb885714:206 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/205/March-12-2013--Measuring-Economic-Policy-Uncertainty.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=205 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=205&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/205/March-12-2013--Measuring-Economic-Policy-Uncertainty.aspx We all know that the democratic process that we cherish can create less than optimal economic growth. Politicians can be counted on to manufacture policy uncertainty and for the first time a group of economists have devised an index (www.policyuncertainty.com) to measure the levels of that uncertainty. Yesterday, the Fraser Institute awarded the annual Addington Prize in Measurement to a trio of economists from Stanford University and the University of Chicago for their groundbreaking research measuring economic policy uncertainty. In honour of Raymond Addington, former chairman of the Fraser Institute Board of Trustees, the Addington Prize in Measurement recognizes a person or team who has developed a new, interesting, and important concept in public policy, exemplifying the Institute’s motto: If it matters, measure it. Nicholas A. Bloom (Professor of Economics, Stanford University), Steven J. Davis (William H. Abbott Professor of International Business and Economics, University of Chicago Booth School of Business) and Scott R. Baker (Ph.D. candidate, Stanford University) received the award, which comes with a $10,000 prize, for their paper Measuring Economic Policy Uncertainty. Co-published through the National Bureau of Economic Research, this report develops the first rigorous analytical framework for measuring the extent and impact of economic policy uncertainty in the United States. The authors have since expanded their work to include Canada, Europe, China and India. Professor Bloom explains their research in the fully video: http://www.youtube.com/watch?v=o4ERGDcv0F4 “Baker, Bloom, and Davis conclude that U.S.-based economic policy uncertainty surged upward since 2008 and remains extremely high today, hindering recovery from the recession,” said Stephen Easton, chair of the Fraser Institute’s Addington Centre for the Study of Measurement.“Their research serves as a sober warning about the short- and long-term consequences of economic policy uncertainty, which foreshadows declines in economic growth and employment.” I am going to add this index to my list of favorite behavioral and sentiment indices in order to better manage money. Please Click Here to get a better idea about how one can incorporate this useful information into your thinking. Jim McGovern P.S. As a Trustee of the Fraser Institute, please check out the great work this world class think tank produces at www.fraserinstitute.org. Jim McGovern Mon, 11 Mar 2013 19:47:00 GMT f1397696-738c-4295-afcd-943feb885714:205 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/204/February-7-2013--The-Circle-of-Life.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=204 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=204&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/204/February-7-2013--The-Circle-of-Life.aspx There is an old adage in the investment business that you ride your winners and sell your losers. That adage applies equally well to the hedge fund industry. One of Arrow’s winning managers in our Diversified Fund has been Rose Grove Capital Management LLC based in Boston. Their expertise is in US and global financials – particularly preferred shares. We have been invested with them for over four years now and their most recent investment letter is such a good read that I thought I would select a few choice bits for you. "We opened for business here in December of 2006. Amongst other trade ideas, we were constantly pitched by our counterparties to get short mortgage insurers via the CDS market. The names were MBIA , MGIC (MTG), PMI and Radian (RDN). They were all trading below 100 basis points in yield, and over the course of the next few years, they all ballooned out by thousands of basis points. PMI went out of business. As we know, bank stocks also got decimated during that time period, and the ones with the highest mortgage exposure got hurt the most. Hence the fate of mortgage insurers and many large financial institutions seem to be tied, particularly the banks that received the most TARP (BAC and C). Why do we bring this up? It is called the circle of life. As you know we try to keep things simple at Rose Grove. In the last two weeks there has been a resurgence in the stocks of the surviving mortgage insurers. MBIA, MTG and RDN are up approximately 70%, 110% and 65% respectively YTD. The CDS of all three names has rallied significantly (MTG 25 upfront points in a week), and both RDN and MTG have raised equity. The amazing thing about MTG (in our opinion) is that these events have happened on no news, but rather on the desire of secondary investors to recapitalize the company in an equity and convertible offering. A few positive opinions on the MTG equity seriously changed the financial lives of CDS trading desks, the dreaded correlation world, and some happy stockholders. We still do not trade mortgage insurers, but we do trade the large financial institutions that were hugely affected by the former’s demise. Will the largest financial institutions subsequently benefit from the MI's rise from the ashes? Could their suspected maladies be as over-hyped as the seemingly incorrect CDS and stock levels of MIs two short weeks ago? We think so. We like BAC, Citi, JPM, WFC, GS and MS a lot at Rose Grove." Could it be that Ben Bernanke and Co. are winning the war of confidence and that the "animal spirits" are finally awakening? We are seeing M&A starting to accelerate along with equity financings (no longer just in the credit markets). VZ/VOD, DELL, HTZ, BRY, CPNO etc. etc. The bankers look set to coin it again albeit without all the leverage of the glory years. Let's hope so – we need the growth to offset the fiscal drag that is inevitably on its way. As Rose Grove concludes, "being short ideas, stocks and credit does not make sense here." Jim McGovern Jim McGovern Thu, 07 Mar 2013 18:39:00 GMT f1397696-738c-4295-afcd-943feb885714:204 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/192/February-6-2012--Year-End-Market-Review-Outlook.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=192 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=192&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/192/February-6-2012--Year-End-Market-Review-Outlook.aspx This is the time of year where we get to reflect on the past year and forecast or better “guess” what is to be expected for the road ahead. For those of you who have not yet read my year-end commentary, please click below for my thoughts on major macro issues that shaped 2012 and what we may expect to see in 2013. Cheers. James McGovern Jim McGovern Wed, 06 Feb 2013 19:01:00 GMT f1397696-738c-4295-afcd-943feb885714:192 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/189/January-30-2013--John-Wood--RIP.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=189 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=189&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/189/January-30-2013--John-Wood--RIP.aspx The Canadian investment fund industry lost one of its most successful pioneers with the passing of John Wood.  John was the inspirational leader and CEO of the highly successful 20/20 group of funds. 20/20 Group Financial was a subsidiary of Connor, Clark & Lunn that was started in 1986 – the same year I helped start BPI Financial.  He grew the firm from $0 in AUM to over $4billion before eventually selling it to AGF in 1995.  After establishing and selling another startup-firm, John went on to become CEO of Financial Concepts Group.  He grew that investment planning firm from$3.9 to $6.8 billion in just three years before it was sold to Assante Financial, now a division of CI Financial.  John is well known for winning the silver medal in canoeing at the 1976 Olympic Games in Montreal.  His drive and determination clearly set him apart from an early age and was evident his entire life. John had an incredibly loyal group of executives and staff and was a born leader. Like all good leaders, he translated that success into foundation and charity work later in his life.  All of he folks I know remember him as a wonderful person with a great temperament and as a wonderful role model. John will be missed! For further information please click here. Jim McGovern Jim McGovern Wed, 30 Jan 2013 15:13:00 GMT f1397696-738c-4295-afcd-943feb885714:189 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/185/January-4-2013--Top-10-Surprise-List-of-2013.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=185 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=185&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/185/January-4-2013--Top-10-Surprise-List-of-2013.aspx Last year at this time I posted my less than serious Top 10 Surprise List for 2012 (Click here to review). As I went 1 for 10, I thought perhaps the statistical sample was not large enough to truly assess my skill as a forecaster. I must say that my prediction of no election in Japan or Italy was a close one, and my guess that at least one banker would go to jail for almost bringing down the world was highly probable but just my bad luck! Of course,  I went against the Mayans, but my corollaries of a better holiday shopping and performance fees for hedge fund managers were way off. So here goes another round of my not so serious forecasts. Celebrated banker Mark Carney begins circulating Bank of England policy statements in 3D, 48 frame/second format. With the much needed clarity, the UK economy surges. Apple stumbles again after releasing the much hyped iCar – Tim Cook promises to re-install Google Maps after serious traffic mishaps. In their last attempt to regain popularity in the super-phone game, RIM invests what they have left into an endorsement deal for their latest platform (Blackberry 10) with Austrian daredevil Felix Baumgartner free-falling from a new outrageous record-breaking distance. Unfortunately, a mechanical malfunction occurs and the whole operation ends in disaster, as RIM’s stock also flames out! Marijuana legalization goes mainstream as another 10 states and Canada join. Pepsico outperforms Coke as Frito Lay sales explode. Lemmings refuse to go over the cliff in a show of solidarity with their rodent brethren in the U.S. Congress. Obamacare hits roadblock as people realize someone has to pay for it. The President switches tack and offers Shaun T’s “Insanity” program for free in an effort to battle the real American healthcare issue – obesity Justin Trudeau, in a fit of rage after not being selected as the leader of the Liberal Party, quits politics to become an oil and gas analyst in Calgary. After hiring Mitt Romney, Istanbul defies odds makers and wins the right to host the next summer Olympics over Tokyo and Madrid. Cliff jumping introduced as demonstration sport – USA wins. Lance Armstrong takes his performance enhancing skills and joins the Advisory Board of SAC. The Canadian Housing Market finally shows signs of cooling as debt laden Canadians refuse to use the new ESLOC (Eternal Serfdom Line of Credit) which allows borrowers to pledge their children’s income against increased borrowing. Mark Carney warns against ‘exuberance in the housing market yet again before he leaves. * *Hat tip to Michael Yhip at Garrison Hill.  Jim McGovern Jim McGovern Thu, 03 Jan 2013 15:27:00 GMT f1397696-738c-4295-afcd-943feb885714:185 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/182/January-2-2013--More-Meaningless-Predictions-for-2013.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=182 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=182&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/182/January-2-2013--More-Meaningless-Predictions-for-2013.aspx As we finish another year, lovers of all social sciences gather round the tree of life to prognosticate on what is in store for 2013. Have you ever asked yourself why we find these predictions so popular? As always, I turn to my favourite economist of all time, Daniel Kahneman. He says blame your mind's System 1 or that part of your brain that operates automatically and quickly with little or no effort. Your analytic System 2 requires effort, self control and concentration to make decisions. Unfortunately, by nature, it is lazy! Forecasts are easy to enjoy—they "compress a vast amount of expertise and analysis into a few words",1 and since they come from an 'expert' we can skip intense thought and just take in the profound meaning. Of course, there are no shortage of experts making a living offering up their profoundness. This fact stems from what Kahneman calls the illusion of validity—"the illusion that we understand the past fosters over confidence in our ability to predict the future";2 everything in hindsight makes perfect sense. Using the tale of "The Hedgehog and the Fox", he describes hedgehogs as those with a sophisticated explanatory framework or model that spits out forecasts (like the FED's FRB U.S. model I mentioned in my last post — Click here to read). Of course, when it is wrong, they will not admit to it—maybe they were just early or maybe some 1 in a billion thing came along to upset things. The fox, on the other hand, recognizes that "reality emerges from the interactions of many different agents and forces, including blind luck, often producing large and unpredictable outcomes".3 Guess which persona the media loves? Especially when you can get 2 'experts' together with completely different forecasts—in CNBC terms, this is like Peter Schiff versus James Paulson or better yet Rick Santelli versus Steve Liesman. Voila—you have great TV, which is both profound and quick and easy, so they get to another commercial. Needless to say, the poor fox types make for horrible TV, but they are people you most likely will want to invest with or follow. Looking at Wall Street strategists today they remain quite bearish; for all the known reasons as they did in 2012. Contrarians will delight in this as the direction for equities is then likely up. Most strategists tend to just follow the trend—so because equities were higher in 2012, they were less bearish than previously. This analysis is not worth much. I prefer and do enjoy reading the more outrageous investment predictions based on supposedly improbable scenarios. I have mentioned previously Saxo Bank's list as a good example (Click here for their latest), and now the folks at DB, Morgan Stanley and others have gotten into the game. And of course, you cannot forget to check out Blackstone's Byron Wein's Ten Surprises (Click here to view). The world appears to be one screwed up place right now so many of the outliers mentioned in these reports are worth more than a passing thought. These all deal with 'known unknowns' but not Taleb's Black Swans. Still, reviewing the 'what ifs' and non-consensus views helps in mitigating risk to some extent by refining our probabilities when investing and trading. From a more micro standpoint, I also enjoy reading the top 10 lists put out by the World Future Society and other technology related pundits—but even here it is really difficult; for example, nobody truly predicted the meteoric rise of tablets (save for one). But still there are plenty of interesting ideas and trends to watch for in an attempt to earn a return. On behalf of everyone at Arrow Capital, best wishes for a happy, healthy and prosperous New Year. And may the 'unknown unknowns' go your way! I will post my less-than serious forecasts for 2013 shortly. Jim McGovern Source: 1. Financial Times, December 28, 2012, "An insatiable desire to read into the future", Tim Harford 2. Kahneman, Daniel; "Thinking, Fast and Slow", page 218 3. Ibid, page 220 Jim McGovern Wed, 02 Jan 2013 15:38:00 GMT f1397696-738c-4295-afcd-943feb885714:182 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/181/December-19-2012--Rock-star-Central-Banker.aspx#Comments 1 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=181 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=181&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/181/December-19-2012--Rock-star-Central-Banker.aspx Last week I had the pleasure of attending a sold-out (1500+ people) luncheon speech delivered by Bank of Canada Governor Mark Carney (Click here to view remarks). Ironically, we were offered the chance to buy a table a while back but passed - I mean how interesting could a dry speech on Canadian monetary policy possibly be? Well little did we know! Yes, we did get the standard dry central bank talk but there was a noticeable buzz, undoubtedly due to the surprise announcement that the dashing 47-year-old Canadian central banker has been tapped as the next Governor of the Bank of England ("BoE"). I overhead a few women in the audience comparing Mark Carney with George Clooney and not in an academic context - thankfully. Suddenly, the 2012 Central Banker of the Year Award winner (I am not sure if they have a Hall of Fame yet but he is on his way) has achieved rock star-status in the world of finance. How many central bankers do you know who could both receive a standing ovation from the UAW at a summer union meeting and be selected to one of most important financial posts globally - in the same year!? Part of Carney's appeal is that he is personable and engaging - very different from say Ben Bernanke or BoE's Governor Mervyn King who insists on being addressed as Mr. Governor. Born in Fort Simpson, Northwest Territories (that is a long way from Toronto for international readers!), Carney won a scholarship to Harvard to play in net for the hockey team while earning a degree in economics. Carney then spent 6 years at Goldman Sachs in New York, London, Tokyo and Toronto before moving into the public sphere. His pristine reputation and Canada's banking and regulatory system's performance post-2008 financial crisis, are Saville Row-tailored to fit the needs of a UK banking system in dire need of a fresh start (click here to read more on this). His understated approach can mask the fact that he is happy to use his stick - remember his duel with Jamie Dimon of JP Morgan over Basel III capital requirements? (Click here for a recap) Mr. Carney's new role in London will throw him right into the teeth of tabloid journalism at its very worst -the British are the world's best in this regard. From the heckling he will take if things are slow to turnaround in the UK economy (as any foreign coach of the England footie team would tell him) to the views his wife may have on bankers and the environment, it is no wonder he has opted for a shorter, 5-year term. One can look at this development in a hedge fund context (as all things in life). Carney has traded high and bought low... maybe. That is, Canada is currently the poster child of financial sobriety and economic health whereas England is anything but. He has nothing but upside economically speaking with little reputational downside risk and he gets a bump in pay. Pretty good! On Mr. Carney's talk, I was very impressed by his comments on guidance and its role in monetary policy, especially given the extraordinary circumstances of the global economy. He noted that when nominal rates are at the zero lower bound, forward guidance can be used as an unconventional policy tool in the same manner as quantitative easing and twisting. His speech went on to look at targeting nominal GDP levels in an effort to gain the necessary traction for the economy (rather than inflation rates). This strategy introduces "history dependency". This caused a stir in UK financial circles as Carney could look to do this in his new role, even though he explicitly stated his comments were hypothectical. Hypothectical or not, the Fed has seen fit to adopt a change to its' policy mandate by introducing a formal level of employment targeting (the so-called Evans Model named after the Chicago Fed President). This decision simply added further detail to the September policy decision to be ultra accommodative until the recovery was well underway (i.e. inflation was potentially above the 2% target). There was little in the way of a big market moves as most market watchers are fixated on the Fiscal Cliff and Chinese economic policy. Nevertheless, the idea that the Fed or any other central bank will be able to put the inflation genie back in the bottle in the nick of time seems to me far too good to be true. Fed Vice-Chair Janet Yellen gave a speech in November revealing that this genie management could be done via the Fed's "realistic, quantitative model of the economy ...the FRB/US model; one of the economic models commonly used by the Board". As Jim Grant has pointed out, it is hard to take anyone seriously who says, no matter how soothing the words, they will have the ability to exit from QE without market disruption or control the rate of inflation or forecast GDP accurately. After all, I think they missed one of the biggest bubbles in history. Jim McGovern Source: Speech, November 13th, 2012, Vice Chair Janet L. Yellen, At the Haas School of Business, University of California, Berkeley, California Grant's Interest Rate Observer, Jime Grant, November 16th, 2012, page 10 Jim McGovern Tue, 18 Dec 2012 20:49:00 GMT f1397696-738c-4295-afcd-943feb885714:181 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/178/November-27-2012--A-Thanksgiving-Turkey-Post-Mortem.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=178 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=178&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/178/November-27-2012--A-Thanksgiving-Turkey-Post-Mortem.aspx I recently had a chance to re-read the updated version of The Black Swan by Nassim Taleb and I was reminded of the problem with induction. Taleb gives us his turkey analogy; for the first 1000 days, Mr. Turkey is really enjoying his life. He has a regular routine – fresh air, good food and maybe free range. Then, boom – it is all over. The point is that drawing conclusions exclusively from past data can be hazardous to one’s health. Taleb notes that “Mistaking a naive observation of the past as something definitive or representative of the future is the one and only cause of our inability to understand the Black Swan.” Clearly, a market riot due to the “fiscal cliff” cannot be classified as a Black Swan as everyone is aware of the problem. The turkeys in Washington will likely announce, before year-end, some agreement that kicks the can down the road. The agreement will be short on details but long on avoiding the debate in favour of more "thorough" analysis. That may be all the market needs for a Santa Claus rally. Once the real debate starts, I expect we will get the proverbial stuffing kicked out of us. Of course you cannot have U.S. Thanksgiving without a Black Friday retail orgy. Whether it is a mad rush to save a few bucks on a smart phone or a Victoria’s Secret deal on thong underwear, these displays of madness are plain creepy. A recent article by Kevin Roose tried to explain this behaviour and offered up some thoughts (click here for details). What is incredible is that Black Friday online sales exceeded $1BN for the first time – a jump of over 25% from last year. That is the kind of stampede where at least nobody is trampled. James McGovern Source: Taleb, Nassim Nicholas (2007), The Black Swan: The Impact of the Highly Improbable, Random House, Jim McGovern Tue, 27 Nov 2012 14:02:00 GMT f1397696-738c-4295-afcd-943feb885714:178 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/177/November-20-2012--The-Twinkie-Debacle.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=177 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=177&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/177/November-20-2012--The-Twinkie-Debacle.aspx With the election over, everyone can go back to work – well, not everyone. The news of the demise of Hostess Inc. may potentially increase the ranks of unemployed workers in the U.S. by 18,000. Last-ditch mediation is underway today to stave off a sale of assets. Hostess is the manufacturer and distributor of popular brands like Twinkies, Ding Dongs, Sno Balls and Wonder Bread. The news of its demise has sent America’s Boomer generation into deep soul-searching and longing for its fix of the good old days. This bankruptcy in many ways would serve as a good Harvard Business School case study. Daft management, union brinksmanship, heavy debt loads and poor government policy have all conspired to sink these “iconic” American brands. Management blames intransigent unions for uncompetitive wages and impossible work place rules (e.g. different truck drivers for different brands). This is true for many unionized bakery firms and it has resulted in increasing consolidation in the business (e.g. Weston and Sara Lee’s sales to Groupo Bimbo of Mexico). The unions blame the last six management teams (including the one that presided over the bankruptcy of Interstate Bakery (predecessor company to Hostess in 2004)) with incompetence and failing to introduce any new products to better suit the changing tastes of America. Sure, some new product lines like Nature’s Pride were introduced and other products reformulated so as to reduce artificial ingredients and fat content but seriously, could you market a light version of Ho Hos or Ding Dongs? Maybe the unions are referring to “The Twinkies Cookbook” which introduced (soon-to-be-forgotten) recipes like Twinkie Sushi and Pigs in a Twinkie – you cannot make this stuff up! Others blame the ‘vulture’ private equity and hedge fund companies. But these guys had invested and loaned over $950 million to the company and if the assets/brands etc. are sold today they will be lucky to get 50¢ on the dollar. An excellent summary of the timeline to bankruptcy can be found here (Click here to read). Click on the graphic below for a more in depth look at the players involved, taken from the same article. Finally, some also blame government policy, such as import barriers on sugar, that forced up key input prices. Like the 2008 subprime and banking crisis, there is plenty of blame to go around. And like any crisis, both the right and the left will battle it out to “prove” their case much to everyone else’s embarrassment. Take for example the November 18th Op Ed by Paul Krugman in the New York Times entitled “The Twinkie Manifesto” (Click here to read). Krugman equates the Twinkie with the golden age of the 50s, a time when “you could have prosperity without demeaning workers and coddling the rich.... the top bracket faced a marginal tax rate of 91%.... roughly a third of Americans workers were union workers.... and (where) the typical executive, Fortune claimed, lived in a smallish suburban house”. He goes on to state that between then and now “we’ve forgotten something important – namely that economic justice and economic growth aren’t incompatible.” Wow – what a Ho Ho. Daniel Kahneman, a deserving Nobel Laureate, noted that “When our attention is called to an event, associative memory will look for its cause – more precisely, activation will automatically spread to any cause that is already stored in memory.”1 In other words, correlation does not mean causation. While apparent to anyone that the 1950s and 2000s are highly different times, Krugman tugs on our memories rather than our brains to make his point. In the opposite version, from the right’s perspective it is all the fault of greedy unions. But how does a company in bankruptcy petition a bankruptcy judge to approve and guarantee then-CEO’s Brian Driscoll’s “base annual salary of $1.5 million, plus cash incentives and "long-term incentive" compensation of up to $2 million? If Hostess liquidated or Driscoll were fired without cause, he'd still get severance pay of $1.95 million as long as he honored a noncompete agreement.”2 This is just wrong on so many fronts. It seems like Mr. Driscoll is incented to make some serious money by avoiding a merger. Oh, and the idea of offering more money for a no-results Ding Dong executive makes a mockery of executive compensation. Interestingly, there is a Canadian twist to this story. The Hostess “Twinkie” brand has been owned for decades by Saputo Inc. based in Montreal (through its Vachon subsidiary – a venerable Quebec-based baking company they bought in 1999). However, Canadian Twinkie sales are dwarfed by Vachon classics such as Jos Louis (my favourite), Ah Caramel, Half Moon (Lune Moon for us veterans) and other delicious chemically-based treats. For our American friends, there is no need to pay $50 a box for Twinkies on eBay – just cross the border and get your fix here! Or better yet, try a Jos Louis! The Hostess situation, at the end of the day, is a toxic mix of bad decisions and a changing consumer. Assuming the bankruptcy laws are applied, the brands will be saved and likely some portion of the workforce will find employment. Neither nostalgia nor CEO payoffs fix the problems at Hostess. I will sign off with the funny parody of Bruno Mars hit song on the fate of Hostess. Enjoy! James McGovern 1. “Thinking Fast & Slow”, Daniel Kahenman, page 182 2. Mathew Yglesias, MoneyBox blog post, Slate.com on Nov. 19, 2012 Jim McGovern Tue, 20 Nov 2012 20:44:00 GMT f1397696-738c-4295-afcd-943feb885714:177 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/171/November-9-2012--A-few-additions-to-your-weekend-reading-list.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=171 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=171&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/171/November-9-2012--A-few-additions-to-your-weekend-reading-list.aspx Happy Friday! Here are some commentaries for your weekend reading fix. Michael Yhip (President & CIO, Garrison Hill Capital Management) has put together a special letter in which he gives a brief overview of the recent U.S. election and examines how it may impact the market. I found this letter quite interesting and I encourage you to read it. In addition, I have included our Q3 commentary below in which we discuss some misplaced economic ideas to examine the macro environment facing our global economy today. Have a great weekend. Jim McGovern Jim McGovern Fri, 09 Nov 2012 15:07:00 GMT f1397696-738c-4295-afcd-943feb885714:171 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/169/November-6-2012--Thank-You-Don-Coxe.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=169 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=169&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/169/November-6-2012--Thank-You-Don-Coxe.aspx Donald G. M. Coxe Last week, Don Coxe announced that the December issue of “Basic Points” will be his last after 20 great years. While I have never personally met with Mr. Coxe in my years in the business, I have been a faithful reader of “Basic Points” and have heard him publicly speak on many occasions. I guess we should have done more business with Nesbitt! There is so much noise, data and algos out there that it was wonderful to have a strategist actually remind us of where we have been and to “frame” our current reality within a historical context. That context was a cocktail of politics, philosophy, arts, history and economics. It made Basic Points one of the most entertaining and thought-provoking reads for people in our industry regardless of whether you agreed or not. One metaphor that stands out for me was his reference to heroin addiction (the result of pain management for injured soldiers) and today’s monetary policies. He was also never shy about voicing his views on those who have abused their position of power – especially U.S. bankers. From his most recent Journal he comments on the U.S. elections with this observation: “The best outcome would be a clean sweep –the White House and both houses of Congress – by one party or another.  The winner would have no choice but to face the music.”1 I could not agree more.  We need to face the music.  Over the past 20 years, investment professionals have always hoped for political gridlock so nothing gets done.  But the time for wasting time, and politics for political sake, is over.  But Idigress – “May the best man win”!! I will miss you Don! Jim McGovern Sources:    1. The Coxe Strategy Journal, October 2012, page 28 Jim McGovern Tue, 06 Nov 2012 15:20:00 GMT f1397696-738c-4295-afcd-943feb885714:169 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/165/October-23-2012--European-Update.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=165 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=165&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/165/October-23-2012--European-Update.aspx I am as sick as you about the continual EU updates and meetings and dinners and visits and yada yada...so when I saw this note from a good friend (hat tip to Tye!) I had to pass it along. From the guy who brought you the Ministry of Silly Walks and the Lumberjack Song, here is John Cleese on the different European perspectives to the rising terrorist threats across the continent: The English are feeling the pinch in relation to recent events in Syria and have therefore raised their security level from "Miffed" to "Peeved." Soon, though, security levels may be raised yet again to "Irritated" or even "A Bit Cross." The English have not been "A Bit Cross" since the blitz in 1940 when tea supplies nearly ran out. Terrorists have been re-categorized from "Tiresome" to "A Bloody Nuisance." The last time the British issued a "Bloody Nuisance" warning level was in 1588, when threatened by the Spanish Armada. The Scots have raised their threat level from "Pissed Off" to "Let's get the Bastards." They don't have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years. The French government announced yesterday that it has raised its terror alert level from "Run" to "Hide." The only two higher levels in France are "Collaborate" and "Surrender." The rise was precipitated by a recent fire that destroyed France''s white flag factory, effectively paralysing the country's military capability. Italy has increased the alert level from "Shout Loudly and Excitedly" to "Elaborate Military Posturing." Two more levels remain: "Ineffective Combat Operations" and "Change Sides." The Germans have increased their alert state from "Disdainful Arrogance" to "Dress in Uniform and Sing Marching Songs." They also have two higher levels: "Invade a Neighbour" and "Lose." Belgians, on the other hand, are all on holiday as usual; the only threat they are worried about is NATO pulling out of Brussels. The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy. Australia, meanwhile, has raised its security level from "No worries" to "She'll be alright, Mate." Two more escalation levels remain: "Crikey! I think we'll need to cancel the barbie this weekend!" and "The barbie is cancelled." So far no situation has ever warranted use of the last final escalation level. —John Cleese—British writer, actor and tall person A final thought—"Greece is collapsing, the Iranians are getting aggressive, and Rome is in disarray. Welcome back to 430 BC." Jim McGovern Jim McGovern Tue, 23 Oct 2012 13:49:00 GMT f1397696-738c-4295-afcd-943feb885714:165 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/163/October-11-2012--Well-here-is-a-surprise.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=163 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=163&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/163/October-11-2012--Well-here-is-a-surprise.aspx As you know, nothing in life is certain, save for death and taxes. This little anecdote has gone viral again (it has been around since 2001) and so I thought I would share it.* It is a simple explanation of how our tax system works. Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: The first four men (the poorest) would pay nothing. The fifth would pay $1. The sixth would pay $3. The seventh would pay $7. The eighth would pay $12. The ninth would pay $18. The tenth man (the richest) would pay $59. So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."Drinks for the ten now cost just $80. The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so: The fifth man, like the first four, now paid nothing (100% savings). The sixth now paid $2 instead of $3 (33%savings). The seventh now pay $5 instead of $7 (28%savings). The eighth now paid $9 instead of $12 (25% savings). The ninth now paid $14 instead of $18 (22% savings). The tenth now paid $49 instead of $59 (16% savings). Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!" "That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill! And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier. For those who understand, no explanation is needed. For those who do not understand, no explanation is possible Of course when it goes the other way (i.e. taxes get raised), the 10th man will necessarily try to stop going to the bar altogether (velocity of money falls) or try to go to a bar in another country and get new “friends”. I am sure Monsieur Bernard Arnault, CEO of LVMH, would much rather drink Cheval Blanc in Brussels than in Paris, hence his application for citizenship in Belgium – Sacre-Blue! *This little anecdote has been sourced to various professors of economics who all deny they wrote it! I am going to guess it is not Obama. Jim McGovern Jim McGovern Thu, 11 Oct 2012 20:41:00 GMT f1397696-738c-4295-afcd-943feb885714:163 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/161/October-1-2012--Fine-Wine-Funds-Caveat-Emptor.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=161 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=161&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/161/October-1-2012--Fine-Wine-Funds-Caveat-Emptor.aspx I am a big fan of wine and, as my friends know, my passion are the wines of Burgundy.  I have many friends who also love wine and some who also distribute or produce fine wine –it is a wonderfully social and pleasurable hobby! Over the years, I have had numerous people approach Arrow about distributing or investing in a wine fund.  I have always said that sounds like fun but no thanks.  I believe that there are four reasons to just say ‘no’. Firstly, size matters.  There is only so much “investment grade” wine in the marketplace –the competition from existing long time ‘non-financial’ buyers with strong relationships across the distribution chain can make it very challenging to secure a significant allocation of the best wines.  In my opinion, you would likely max out a wine fund’s capacity at about $75 to $100 million.  So from a business perspective this is not a very scalable strategy. Secondly, the costs of managing such a fund would be high. Storage, insurance, valuators and the cost of buying/selling (bid/ask & VIG at auctions etc.) make this a real challenge. Thirdly, liquidity (no pun intended) would be a challenge.  There are some wine funds offering monthly liquidity to investors which makes little sense to me. Finally, and most importantly, pricing is a real challenge.  An article that appeared in the FT over the weekend highlights this issue very clearly. Nobles Crus, one of the larger of the dozen or so funds out there, appears to have a major pricing discrepancy versus its peer group. The Fund’s performance versus the Liv-ex index of fine wine prices (www.liv-ex.com) has been nothing short of spectacular as shown in this graphic. If you simply showed me this graph AND you said it was not fraud, then I would say this guy has either a great short book or is an incredible wine picker. Alas, you can’t short wine and the downside correlation between collectable wines is virtually 1 –with only a few exceptions. As the FT reports, “Nobles Crus’s 50 largest holdings of Bordeaux, which represented a third of its portfolio, were worth €26m, according to Liv-ex. Nobles Crus had valued the same bottles at €36m –37% higher”. Regardless of whether there is something sinister or not, pricing is usually done at the mid price of the bid/ask spread based on Liv-ex quotes. That makes no sense to me –it should be done at the bid –especially if you are offering monthly liquidity. Otherwise these funds are better suited to a private equity structure whereby fees are charged on a “when sold” basis to avoid any discrepancies. Apparently the FSA is now looking into banning these types of funds from being sold to retail investors. A good idea! With the global slowdown in full effect, the wine market looks vulnerable. The ultra high net worth in markets like Asia which have fuelled huge demand for the best of Bordeaux and Burgundy are likely to take a pause. This is good news for most collectors but for investors may I suggest you sell and take your redemption proceeds “in kind” –drink up all that excess liquidity!! Jim McGovern Jim McGovern Mon, 01 Oct 2012 15:47:00 GMT f1397696-738c-4295-afcd-943feb885714:161 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/160/September-26-2012--VIX-and-Monetary-Policy.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=160 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=160&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/160/September-26-2012--VIX-and-Monetary-Policy.aspx I have discussed in the past using the VIX as a hedge for equity portfolios. In the past few weeks, I have received quite a few inquires about why the VIX is so low given all the macro issues facing the global economy. As a primer, remember that the VIX measures the cost of buying 30 days options on the top 100 U.S. stocks. When the level is low it is believed that investors are too complacent. Many commentators believe that the US equity market (like housing) is being artificially propped up by the Federal Reserve's policy actions. Mr. Bernanke's trump card, QE3, was kept in reserve until last week allowing market participants to remain complacent - the so called Fed "free put". Why pay for protection when Ben has your back? However, if one looks at longer dated volatility (for example go out 1 year versus the standard one month) and long term volatility measures are not nearly as low. So it would appear, as FT's James Mackintosh notes, that the "free put" is really just short term in nature. Now that the FED has introduced QEternity, my guess is that the VIX has bottomed and the entire volatility curve is likely to shift upwards. Monetary policy has now officially run its course and in fact could potentially be damaging to the economy. The market will fade this QE more quickly than the last two as the real changes required for the economy to grow and create the jobs the FED is now looking for, require structural reforms. Why is Monetary Policy Now Damaging? It seems like we have been living with QE for forever.  People forget that this “tool” is both new and unproven – it is non-traditional; it is experimental:  As Jim Grant aptly describes it “For Policy A, you bet your boots on outcome B but while Policy A may deliver outcome B, it may alternatively serve up outcomes J or Q or Z – or, not inconceivably, some other result too strange to be classified”.¹ In other words, the probability of unintended consequences is high – and this adds to the appeal of reasonably priced VIX futures now. But what are the unintended consequences?  Maybe the Fed, seeing a real change for the worse has decided that, like chemotherapy for cancer patients, side effects be damned.  Or worse, the US economy is like a Phase 1 clinical trial – fingers crossed.  William White submitted an excellent Working Paper in August to the Federal Reserve Bank of Dallas.²   He stated that ultra easy monetary policy may serve up undesirably long run effects.  “The conclusion is that there are limits to what central banks can do.  One reason for believing this is that monetary stimulus, operating through traditional (“flow”) channels, might now be less effective in stimulating aggregate demand than previously.  Further, cumulative (“stock”) effects provide negative feedback mechanisms that over time also weaken both supply and demand.  It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the “independence” of central banks, and can encourage imprudent behaviour on the part of governments”. For me, the moral hazard created by ZIRP for governments is extreme.  Despite the massive rise in government debt outstanding, the yearly interest bill has continued to fall – delaying and in fact likely lulling government officials into a very false sense of security.  Worse, as Leigh Skene of LSR suggests;³ “Excessively low interest rates benefit those close to the money printing process, such as bankers and wealthy speculators at the cost of the non-financial companies and workers who produce the wealth, but exist far away from the money printing process.  This is increasing income inequality and hands political power to those who are redistributing wealth from the poor to the rich, such as to-big-to-fail bankers.  This is the exact reverse of the trickle-down effect of wealth that proponents of monetary stimulation claim, which assumes lower interest rates stimulate spending”.  There is evidence mounting that CEO’s of those non-financial companies are increasingly alarmed with the lack of progress on the “fiscal cliff”.  For some it is an excuse but for many it is a real concern.  They now understand the negative feedback loop associated with poor government and monetary policy.  They have good reason to hold such large cash balances despite the cries of central bankers like Mr. Carney.  Ask the CEO’s of insurance companies and those managing money market funds how well the FED is doing for their businesses.  There is no doubt that the FED has slowed the pace of decline especially with the first QE.  They bought time for governments to act but as we all know politicians will only act when the market riots. Finally, there has to be concern that all this monetary policy has made a mockery of true market pricing (although one would have to add in the HFT thugs to this mix as well).  All in all, the VIX looks like a good and unintended beneficiary of central bank policy. Jim McGovern Grant’s Interest Rate Observer, September 7, 2012 – page 1 Ultra Easy Monetary Policy and the Law of Unintended Consequences, William R. White, August 2012, Federal Reserve Bank of Dallas, Working Paper No. 126 Seven Unintended Consequences – but who’s counting?  Lombard Street Research, Leigh Skene, September 16, 2012. Jim McGovern Wed, 26 Sep 2012 20:58:00 GMT f1397696-738c-4295-afcd-943feb885714:160 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/156/September-4-2012--Back-to-School-Day.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=156 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=156&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/156/September-4-2012--Back-to-School-Day.aspx Welcome back to reality!  Hopefully the first day back is a good one for the kids – and for the markets as well.   By the way, in case you were wondering I think some guy from RIM took this picture! (Hat tip to Chris H out west for the pic)   Cheers, Jim McGovern Jim McGovern Tue, 04 Sep 2012 12:58:00 GMT f1397696-738c-4295-afcd-943feb885714:156 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/155/August-30-2012--A-Good-Book-and-a-Funny-Video-for-the-Long-Weekend.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=155 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=155&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/155/August-30-2012--A-Good-Book-and-a-Funny-Video-for-the-Long-Weekend.aspx Ian McEwan is without a doubt one of my favourite novelists.  His latest book “Sweet Tooth” was released Tuesday. (Click book cover for Amazon listing) If you are not familiar with his work but enjoy wonderfully written psychological thrillers then this is a must read. After reading “Amsterdam” in the late 90’s, I have read all of his works– I especially enjoyed Enduring Love, Atonement (both made into movies that really did not do justice to the written word), and Saturday. All good choices for a relaxing upcoming long weekend read. You gotta love the Irish! I could not resist, given all the blah blah that will be spewing tomorrow out of Jackson Hole, to forward along one of the funniest You Tube clips I have seen this year (the other was Honey Badger (click here) hat tip to Claire Van Wyk for both!).  It involves Olympic Sailing as only seen from an Irishman’s perspective.  Enjoy – will post some more serious stuff next week! Cheers, Jim Jim McGovern Thu, 30 Aug 2012 14:13:00 GMT f1397696-738c-4295-afcd-943feb885714:155 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/154/August-22-2012--Global-Slowdown-Continues.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=154 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=154&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/154/August-22-2012--Global-Slowdown-Continues.aspx The data last night out of Japan was not pretty. Japanese exports, especially those to the EU, fell dramatically as July represented its biggest monthly trade deficit ever. Part of this is the high value of the Yen but the reality is that Europe, and indeed the world, continues to slow. We continue to see Japan as a critical market given its precarious state of fiscal imbalance and it’s important in global economic affairs. Looking at the other side of the ledger, Europe recorded its biggest trade surplus ever in June. This despite the fact that the European economy actually shrank in Q2, with Italy, Spain and other countries officially in recession. So, as Bloomberg Briefs noted today, the imbalances in Europe just continue to get worse – with the German and Dutch showing terrific export growth while the countries that need to benefit from a lower euro cannot generate anything resembling growth. As Bloomberg notes,“trade balances of countries facing or receiving bailouts are recovering mainly because of declining imports rather than rising exports. That increases the risk of future imbalances.”* Lowering European rates and the value of the euro arguably help European growth but unfortunately not those countries that need it most. Everyone knows that markets and economic activity are not highly correlated but is amazing how equity markets this summer have rallied on a mountain of worries based on more “easing”. Jim McGovern *Bloomberg Briefs, August 22, 2012 page 6 Jim McGovern Wed, 22 Aug 2012 16:27:00 GMT f1397696-738c-4295-afcd-943feb885714:154 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/152/August-8-2012--More-Japanese-Red-Flags.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=152 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=152&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/152/August-8-2012--More-Japanese-Red-Flags.aspx Bloomberg BRIEF Newsletter was out yesterday with a terrific note on Japanese demographics and its impact on GDP growth and debt dynamics. As we noted in our Q1 2012 report to clients, the Japanese economic situation should be much higher on investor's radar screen. With debt-to-GDP over 200% and potential GDP growth negatively impacted by an aging population (where by 2022 over 30% of its population will be over 65 years old), Japanese Government Bonds and the yen have yet to reflect these risks. Today they both rank as major "safe-haven" trades...but for how long?   Jim McGovern P.S. I highly recommend the Bloomberg BRIEF Newsletters. They pull together the reporting, insight and analysis of senior editorial staff and dedicated economists to help you stay informed. Check it out on www.bloombergbriefs.com. Jim McGovern Wed, 08 Aug 2012 14:09:00 GMT f1397696-738c-4295-afcd-943feb885714:152 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/150/August-7-2012--All-Fogged-In.aspx#Comments 0 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=408&ModuleID=1477&ArticleID=150 http://www.arrow-capital.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=150&PortalID=0&TabID=408 http://www.arrow-capital.com/MediaUpdates/ArrowInsightsBlog/tabid/408/ctl/ArticleView/mid/1477/articleId/150/August-7-2012--All-Fogged-In.aspx Back from holidays now - back to regular posting! First post is our second quarter update on the big macro issues facing the global economy entitled "All Fogged In". I hope you enjoy it. Jim McGovern Jim McGovern Tue, 07 Aug 2012 13:27:00 GMT f1397696-738c-4295-afcd-943feb885714:150