Juggling Dynamite

“A humbled John Paulson told investors on Thursday he was “too aggressive” with some of the stock bets in his flagship funds and he is trimming back some of his riskiest holdings.

The hedge fund manager told clients in a conference call that he was dialing back the risk by moving away from bank holdings with heavy mortgage exposure.

The investor call came after a tumultuous first half of the year for Paulson, whose flagship Paulson Advantage fund lost about 12 percent. A related fund called Advantage Plus was off 18 percent.”   See: Paulson: our bets were too aggressive..

Paulson is learning what all good money managers have to learn eventually. Getting a couple of big aggressive bets right is great when it works , but when it loses money your unit holders want out. Welcome to the challenge of managing other people’s money, John.

This is one of the most crazy, volatile cycles ever in history. Government intervention has mucked about so much with normal market forces the past couple of years that we are working in the midst of manic price movements that have hurt most long and short players year to date leading hedge funds to suffer losses, pare back risk and step aside. See Soros’s Quantum at 75% Cash leads hedge funds reducing risk:

Even billionaire George Soros, who made $1 billion betting against the British pound in 1992, is perplexed.

“I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis,” Soros, 80, said in April at a conference at Bretton Woods organized by his Institute for New Economic Thinking. “The markets are inherently unstable. There is no immediate collapse, nor no immediate solution.”

Here are just a couple of reasons we believe that the recent spike in the C$ is temporary and our current expectation is for C$ reversion to levels between 91-85 area.

Worldwide austerity due to over consumed debt-laden countries will and has created a dearth of spending that China can ill-replace.

Canada’s outlook like many other nations is pegged to the hopes that China will pickup the slack for the gap left by slower global consumption rates as China itself attempts to slow its own economy. See:  Canada Inflation unexpectedly eases Also: Caterpillar (note second to last para)

Global growth is decelerating  from the short-term effects of QE’s and bailouts to reveal the true glide path of money velocity (real global GDP). When all the re-adjustments and reality set in and private investors are forced to take a hit (Greek Sovereign debt is a good start), then we will get true price discovery. See: German Business Morale

The market is slowly coming to grips with the idea that we are in a deflationary cycle that is the other side of the over-consumption credit bubble that pulled in huge amounts of marginal buyers.

Central banker’s have always tried to alter the business cycle, but alas they cannot. The sugar always wears off and the after-effects are undeniable.

US Republican politicians continue to assert that the American people will not accept an increase in taxes to help pay down the national debt. They are spreading this maneur to protect a select few. Repeated polls attest no evidence of this assertion. There is little disagreement that the American government is much too big and that its maintenance places undue burden on the private sector. But the fact is that most Americans who have been polled express an understanding that the path back to fiscal health is multi-faceted: government downsizing, military budget cuts, an end to financial bail-outs, entitlement reforms, an expiration of the Bush tax cuts, higher taxes on consumption and a removal of non-productive tax loop holes.

See People Support Higher Taxes to Reduce the Deficit by a 2-to-1 Margin:

Over the past 20 years I have done financial counselling for hundreds of families including my own. Key elements of every plan for a better future include paying down debt, increasing savings and controlling spending. It’s just common sense.