Oliver Stone’s movie Wall Street was released when I was seventeen years old. To say I liked it a little is akin to saying that Mayor Ford only has a small drinking problem. I loved it. I think I can still recite every line in the whole movie.
Over the years, my affection for the movie has changed. As I have grown older, I find myself more enamoured with Martin Sheen’s character. In an unusually terrific casting choice, Martin Sheen played the role of dad to his real life son Charlie’s character. Bud Fox’s dad did not have a big part, but there is one scene at the end of the movie that brings Oliver Stone’s whole message together.
CARL (BUD FOX'S DAD) (supportively) ...you told the truth, you gave the money back. All things considered-- in this cockamamie world--you're shooting par... MOM ...you helped save the airline and the people at the airline are gonna remember you for it. CARL ...if I was you, I'd think about that Bluestar job Wildman's offered you... BUD Dad, I'm going to jail and you know it. CARL (shaking his head, sober) Maybe that's the price, Bud, maybe so. It's gonna be rough on you but maybe in some screwed up way, that's the best thing that can happen to you...stop trading for the quick buck and go produce something with your life, create, don't live off the buying and selling of others... MOM ...you can do it, Bud, once you set your mind to something, I believe you can do anything in the world...
Although I have been very fortunate to have made much more than anyone deserves by basically playing a game for a living (trading might be the greatest game ever – but it is still a game), as my kids grow up I find a little more Carl Fox in me each day.
Now don’t misunderstand me – I know that the role of speculators in our capitalist system is important. A world without traders and speculators is a world that does not distribute resources nearly as efficiently. However, when I look at the choices that our industry and government leaders have made over the last couple of decades, I find myself more and more wishing that my kids grow up to be something more productive – like doctors, scientists, engineers, or in the case of my youngest one’s fledging ambition – an inventor.
But if my kids grow up wanting to work for a hedge fund, then I would want them to work at a hedge fund like David Einhorn’s Greenlight Capital. The more I see of David, the more impressed I am. In contrast to the other blowhards that get on TV touting their positions and getting in pissing matches with other hedge fund managers, David is the epitome of a thoughtful, kind, brilliantly smart hedge fund manager.
I still remember when David got on CNBC and calmly explained why Lehman had a good chance of going bankrupt. He didn’t stoop to using manipulative techniques to make his argument. He just laid out the facts. Everyone thought he was just a typical hedge fund manager trying to make a name for himself.
Well, it turns out he was bang on correct. Even though the Wall Street elite tried to drag his name through the mud in a smear campaign to discredit his argument, eventually the facts showed that David’s concerns were very real.
However, even with his success, David does not seem to change.
My buddy used to live in Greenwich and was well used to seeing famous hedge fund managers tootling around town in ultra high performance sports cars.
One day he said to me – “you’ll never guess who I saw hopping into a 5 year old Honda minivan today.”
“I don’t know, that mom with 8 kids from the reality TV show?” I replied.
“No, David Einhorn… Seriously. It wasn’t even a new minivan. I think it was the previous style before they upgraded it”
Here was one of the most successful hedge managers in the world and he was still piling into his family minivan for an outing. I knew right then that this guy was a different breed.
David Einhorn is much more of a stock picker than I will ever be. He is a different style of trader – one more akin to an investor than a true trader, so for me he will always be held slightly below the Soros’ and Druckenmiller’s of the world. But he is right up there with the true greats.
If my kids wanted to work for Einhorn, then I would view that as the next best thing to becoming a doctor.
Which finally brings me to the real point of this story.
Recently Einhorn had lunch with Ben Bernanke. David had been critical of Bernanke’s policies in the past, so this was a cathartic moment for him to try to understand Ben’s point of view.
Here is Bloomberg’s recap of Einhorn’s recounting of the meeting:
“I got to ask him all these questions that had been on my mind for a long time,” Einhorn said in an interview today with Erik Schatzker and Stephanie Ruhle on Bloomberg Television, referring to a March 26 dinner with Bernanke. “It was sort of frightening because the answers were not better than I thought they would be.”
Einhorn, 45, has been critical of Bernanke’s willingness to leave interest rates near zero for more than five years. The hedge-fund manager has said the benefits of low rates diminish over time until they are more harmful than helpful, and that the Fed’s stimulus has led to income inequality. Bernanke, a former Princeton University economics professor, stepped down this year after eight years helming the U.S. central bank.
In describing the dinner conversation at New York’s Le Bernardin, Einhorn criticized Bernanke for saying he was 100 percent certain there would be no hyperinflation and that it generally occurs after a war.
“Not that I think there will be hyperinflation, but how do you get to 100 percent certainty about anything?” Einhorn said.
“Why can’t you be 99 percent certain?”
After this interview on Bloomberg TV, I saw many market pundits comment with a big “so what?”. Here was a typical comment:
Benn Steil @BennSteil – @zerohedge Looked like a pretty boring interview to me; I guess Einhorn is easily frightened.
Easily frightened? Seriously? Einhorn is the guy who got on national TV and told the world that Lehman stood a very good chance at going bankrupt while every Wall Street executive threw insults at him in attempt to discredit him.
Einhorn is not easily frightened – he is just an extremely careful, precise and tactful fellow.
He is not going to get on TV and say “I just met with former Federal Reserve Chairman Ben Bernanke and I realized that he doesn’t have a f’ng clue what he is doing. There is no real plan and they are simply patching holes in a leaking ship the best they can. They tell you that they are confident that there won’t be any other holes, and if there are – don’t worry they know how to deal with them. But the reality is that the whole sense of confidence is all an illusion.”
When Einhorn says that the answers were “frightening” that is code for things are worse than he feared. We also don’t know what Bernanke told Einhorn off the record.
So when market pundits dismiss Einhorn’s comments as not that scary sounding, I am going to take the other side of the trade. If David met with Bernanke and describes the answers to his questions as frightening, then I am going to take him at his word. Don’t forget what everyone was saying about Einhorn when he was warning about Lehman. At that time, everyone was shitting all over him calling him a fear monger. He was a despicable hedge fund trying cause a panic. But the reality was far from that. Einhorn was the only one telling the truth.
We have embarked on one of the greatest monetary experiments of all time. Government officials are trying to tell you to not to worry – they have everything under control. Meanwhile one of the greatest hedge fund managers of all time is telling you that he met with the former head of this grand scheme and that he was scared by the answers. I think you would be foolish to dismiss Einhorn’s concerns…
Moving my shorts over
Proving that even a blind squirrel finds a nut sometimes, I have been right with my call over the last little while about the continued underperformance of former high flying momentum stocks. I have been short calls in these names and have focused my short index positions in the Nasdaq index.
However, whereas at the beginning of the year anyone suggesting that you short Facebook or Tesla was viewed as an idiot, the tide has definitely turned. Yesterday as I listened to CNBC on satellite radio as I chauffeured the kids around town, I was struck at how everyone was focused on explaining why you shouldn’t buy these stocks because they are still so expensive. Seriously? Now you think they were expensive? But it was only two months ago at the highs that you needed to be involved in this growth part of the market.
Yesterday the Nasdaq drastically underperformed the S&P 500. I used that weakness to move my short from NQ futures into S&P 500s.
Although I am far from bullish on these momentum names, I think the time to focus on shorting this part of the market is behind us. The easy part of their underperformance move has happened. Continued weakness from here is much more of a crap shoot.
I expect last month’s weakness from these stocks to branch out to the whole market in the coming weeks.
Also, while I am at it, I am going to clean up any calls that have not expired of these former high flyers that I sold. They are all pretty dusty so I am going to just get them off the sheets.