A Passionate Amateur

“I can fairly be called an amateur because I do what I do, in the original sense of the word - for love, because I love it.”
-David McCullough

Yesterday, I was listening to American novelist, Kurt Andersen (author of Reset), speak at a thinkers event up here in Maine. He spoke about a lot of things that resonated with me about this country. One was that old trees of perceived wisdom continue to fall. Another was that reinventing America might best be accomplished by empowering what he calls our “Passionate Amateurs”
 
Per Wikipedia, an amateur “is generally considered a person attached to a particular pursuit, study, or science, without formal training or pay. Translated from its French origin to the English "lover", the term "amateur" reflects a voluntary motivation to work as a result of personal interest in the activity.”
 
In terms of pay, most people know that I really don’t pay myself. In terms of pursuit, most people know that I have a passion to win. In terms of perception, well… most people are going to think what they think. Call me a lover. Call me a fighter. Call me an amateur. I’m cool with whatever.
 
When it comes to writing, I am definitely an amateur – and I’m cool with that too. Amateurs like me are allowed to break rules. We’re allowed to call people out. We’re allowed to instigate the fights and conversations that no one on Wall Street’s compensation committee is allowed to have. We don’t have a boss.
 
In 1996, Kurt Andersen got fired as editor-in-chief at the New York Magazine for refusing to back down on a story about the investment banking club of Henry Kravis (KKR controlled the parent company of the magazine). The rest is history. Now Andersen doesn’t have a boss either.
 
Behavioral Economist, Dan Ariely (author of Predictably Irrational) was also at yesterday’s event. Dan is an amateur too. He has a passion for explaining the obvious in terms that people with common sense can absorb. Recently, he’s taken his conclusions on the incentive/performance issue to Wall Street executives. They liked his book, but they didn’t like the idea of applying the solutions from his book to their compensation structures.
 
Ariely’s basic conclusion is that Wall Street banking executives genuinely believe that they aren’t amateurs at all. In fact, some deem themselves to be so “professional” that they are “really special” and “different” from the rest of us. They have an innate ability to be incentivized under stress.
 
Anyone who is allowed to think clearly finds this rather funny of course. It’s like one giant global magnetic force has sucked all of these super special human minds into the one place where these “professional” performers can be paid. To prove his basic point, Ariely tested NBA “clutch” players to see if this God-given ability to perform under stress was more of a belief versus a reality. I’ll save you the required reading - these are simply beliefs.
 
Never mind the behavioral MIT guy, or me, or the other Passionate Amateurs out there who are calling this out. This morning, turning back to the almighty Groupthink Channel, this is what Ken Langone’s belief is on the topic of executive pay: “The taxpayers have an enormous financial risk in these companies, and very simply stated, I want the best person. If I needed neurosurgery, I would want the finest doctor I could get, no matter what I had to pay for it.”
 
That’s cool Ken, but guess what? There aren’t many neurosurgeons running Wall Street’s investment banks anymore.

I think that the topic of executive pay has explosive ramifications for this country. An “Us versus Them” society won’t end well. After the Gong Show you’ve witnessed in Wall Street’s ability to miss both the crash and the recovery in the last 18 months, America is not going to reinvent herself by relying on the perceived wisdoms of the “professionals” that chased this market to its October 2008 lows or this morning’s highs.
 
It’s time for The Passionate Amateur in all of us to take some cold water, slap it on our face, and look in the mirror. If you still think you are super human, do that again. It’s time to wake up and see this US Financial System for what we made it - broken.
 
I don’t agree with every part of Kurt Andersen’s utopia, but I agree with him on this: It’s time to fall in love again. It’s time to fall in love with the American principles of Franklin and Jefferson who, when it came to finance at least, were some of the greatest amateurs Wall Street or Washington has ever empowered.

My amateur call yesterday was to stay short the US Dollar and buy weakness in anything priced in dollars. Provided that the Buck’s Credibility continues to Burn, in a perverse way, we will keep getting paid. I don’t feel passionate about that part. But on Wall Street, I guess it’s better than being wrong.
 
My immediate term support and resistance lines for the SP500 are now 1071 and 1104, respectively.

Best of luck out there today and enjoy your time this weekend with your families,
KM

 

 

LONG ETFS
 
EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.


GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   


XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS
The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

 
SHORT ETFS
 
XLY – SPDR Consumer Discretionary Consumer Discretionary has rallied from the freak-out “short everything consumer” lows, prompting a short on 10/22 as a hedge for a TRADE.

UUP – PowerShares US Dollar
We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.


FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

XLP – SPDR Consumer Staples Strong day for Consumer Staples on 10/16, prompting a short versus our low beta long position in Utilities (XLU).

EWJ – iShares Japan
While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

 

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


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