Juggling Dynamite

Jeremy Grantham’s Q1 2013 letter is a wonderfully honest reflection on the competing goals of a money manager to, on the one hand, protect clients from the certainty of loss in buying and holding over-valued assets, and on the other hand, protect your job from the possibility that clients will fire you for “missing out” when prices go up without them for a period. Given the potential peril to one’s career and business model, few managers have the courage to do the right thing for the client at risk to their own revenue stream.

I see it as inverse to this. In the end, clients fire managers for losing money. If I have to choose–and sometimes we do–I would rather be fired for protecting capital from over-valued markets than for losing it in the inevitable mean reversion that always follows.

I talk about Grantham’s experience in the late 90’s in my book Juggling Dynamite, when extreme over-valuations moved him to dramatically underweight equities by 1998. By the time the tech bubble burst in 2000, his 2 years of under-performance had caused his firm to lose 40% of their clients. In the end, the clients that stayed were more than compensated for their patience. And after the crash, the firm quickly regained new clients from all the other many firms that had not protected their client assets and had garnered “benchmark losses” and worse. This is the normal cycle for long always managers, and the reason they tend to market constantly to keep replenishing the steady flow of accounts leaving after losses.

Managers can choose to sometimes lose clients for moving preemptively to protect the assets under their care, or regularly lose clients each down cycle for losing capital.  I decided years ago that the former of these options was the far more attractive risk.

In fact Grantham’s experience was one of the early inspirations for my firm Venable Park when we first decided to go off benchmarking to an absolute return strategy a decade ago. It is interesting to me that his firm GMO is now rolling out its own “Benchmark-Free Allocation Strategy” where, as he puts it, the urge to put risk management first has won out.  See his whole article here at Jeremy Grantham’s Q1 2012 letter.

Excellent piece today by Simon Hunt on the state of global growth and likely developments over the next couple of years. The spending-on-debt bubble that has been a mainstay of, first the consumer credit bubble of the past 10 years, and now the sovereign credit bubble of the past 4 years, is now moving into the exhaustion phase. History assures us that all bubbles come to an end. Here is Hunt:

“A limit will soon be reached when central banks will be unable to expand their balance sheets any further and when repeated liquidity injections have diminishing returns. Ultimately the market is bigger that of central banks. The point will soon be reached, if it has not already, when the market will punish further liquidity injections by central banks, whether QE3 in the USA or more LTRO’s in Europe.”

All of which brings us closer to the next more pragmatic phase of the great global deleveraging cycle where debts are written off and down, deficit-spending is reined in, asset prices fall to levels where they are finally attractive for investment, and savings rates build on consumer balance sheets.  More from Hunt:

“…the process of deleveraging must be crossed.  It has only just begun.  The history of credit crisis shows us that it takes about seven-years for the process to complete.  Given the global imbalances, the geopolitical overlay to what is inherently a fragile financial base the world has entered a period of rolling recessions.  There will be a second and deeper global credit crisis, probably starting to burst around mid-2013 if not sooner.  There are just too many band-aids holding the system together; one is almost bound to snap.  When that moment arrives there will be a rush for cash.”

The rampant tax-payer funded injections from governments and central bankers tolerated over the past 4 years are necessarily a finite course. Those who maintain that the money printing will never end are almost certainly deluding themselves. Spending that cannot be funded will cease. When the next dash for cash resumes, many of those who have placed great weight in other assets will be looking for buyers. All at the same time. This presents significant downside from present prices in stocks, real estate, commodities, some bonds, art, antiques and yes–precious metals. Which brings us to this next clip from the Daily Ticker. Food for thought:

“For the past decade, gold has been an incredible investment, rising from under $300 per ounce to as high as $1,900 per ounce before retreating to around $1,650 in recent trading.

For the bulls, gold’s recent drop is nothing more than a temporary setback on its inexorable march toward $2,000 and beyond. The case for gold rests primarily on factors familiar to anyone who’s even remotely familiar with the metal: easy money from central banks around the world and rising demand from emerging economies, notably China and India… But all good things must come to an end and Yoni Jacobs, chief investment strategist at Chart Prophet, believes gold’s best days are behind it. In fact, Yoni believes there’s a bubble in precious metals that’s about to collapse.”

Here is the direct video link.

The Federal Reserve has been releasing its transcripts on a five-year delay. It released some from the 2008 crisis early, following a Freedom of Information Act request from MSNBC’s Dylan Ratigan show. The Fed says they are all about disclosure.  Their redactions show the truth about who’s interests they are serving first. Here is the direct video link.

Visit msnbc.com for breaking news, world news, and news about the economy