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Post Thanksgiving To Do: Show more client editorials from the Hedgeye Network

KM Reply:

On the timing of the debt/deficit commission - fair point - someone always knows something... but in this case, I think what you and I know is what any rational analyst is capable of concluding. This commission has been in motion for a while now and I think they are simply reflecting upon what we talk about every day - they know what we know.

Hedgeye Editorial

To: Keith R. McCullough

Subject: 1995 Revisited

Keith - I did not run a hedge fund in 1995 but I sat across the desk from someone who did. 

Upon reflection here are my thoughts on the asset allocation (sell bonds and move to stocks) question.  The answer to the question revolves around the composition of bond exposure and the collateral upon which it rests. 

As we now know, many strategies employ leverage and leverage requires collateral.  To the extent people have no leverage, own bonds outright and can re-allocate into stocks I see the "rotation" argument.  To the extent there is leveraged derivative composition (swaps etc) to create bond exposure and a leveraged equity portfolio is the collateral upon which the counterparty has access by virtue of the swaps - you have margin calls.  I suspect that reducing leverage impacts the prices of all underlying collateral - asset class not withstanding - (we have seen this movie before).

Second point - the timing of this Debt Commission "draft release" needs some scrutiny.  Why the rush?  Possible answers - Could they know how shaky the foundation of low interest rates is to the status quo?  Could they have insight about the need for other G-20 members to see a framework of a plan?  By virtue of intensely studying the issue, they know something and the timing is an expression of that knowledge...

-Anonymous Hedge Fund PM