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According to Wikipedia:

“The Game (always capitalized) is a name given to the football game between Harvard University and Yale University. As of 2008, the Harvard Crimson and Yale Bulldogs have met 125 times beginning in 1875, when American football was evolving from rugby. The Harvard-Yale game is played in November at the end of the football season, and the venue alternates between Harvard Stadium and the Yale Bowl. As of 2008, Yale leads the series 65-52-8. The 2009 Game will take place on November 21, 2009.”

The culmination of the college football season begins this weekend with games between traditional rivals.  For the hockey heads at Research Edge, that means the Yale-Harvard football game.  While these two teams are not as competitive as they were back in the 50s and 60s with the likes of Brian Downling, Calvin Hill, and Hank Higdon, it should be a competitive battle and great day, nonetheless.

The newest member of our team, Darius “Sunny D” Dale, is a former offensive lineman for the Bulldogs.  Unfortunately, Yale’s gridiron loss is our gain.  And while the loss of stalwart Dale has led to some offensive line issues this season for the team,  Sunny D has been blocking and tackling very effectively within the confines of 111 Whitney.  In fact, since Sunny D joined our team, Brian McGough hasn’t been sacked once!

Ahead of this weekend, and as a sign of school pride, I wanted to highlight a couple of quotes from two famous Yale practioners of the dark science of economics.  The first, Irving Fisher, is of course a well known academic whose theories are finally coming back into vogue well after his death.  The other would probably not call himself an economist, but as one of the most successful short seller of the modern era, we think Jim Chanos is likely worthy to be held in the same category as some of the great economists of our times.

In a speech he gave to the Virginia Value Investing Conference titled, “Ten Lessons From The Financial Crisis That Investors Will Soon Forget (If They Haven’t Already!”, Chanos made some adroit points.  We wanted to highlight a few:

1. Borrowing Short and Lending Long is Still a Bad Idea – Duration gaps create a mismatched book and short term funding can always be rolled, except in a credit crisis.

2. Too Big to Fail = Too Big to Exist – State sponsored entities are given an unfair advantage and implied government backstop encourages excessive risk taking.

3. Capitalism on the Upside and Socialism on the Downside is a Bad Policy – Hands off regulation, until Wall Street needs a hand. All bailouts are not created equal.

4. Quantitative Easing (‘Helicopter Finance’) Has a Cost – Zombie banks financed with cheap money only prolong the problems.

5. Insurance Without Reserves is Not Insurance – Owning hedges does not mean you are hedged as there is counter party risk.

Back on March 5, 2009, we wrote a note titled, “Eye On The Fish: Irving Fisher Revisited”.  In that note we wrote:

“Fisher wrote in “The Debt-Deflation Theory of Great Depressions” that there are two dominant factors in great booms and depressions, “namely over-indebtedness to start with and deflation following soon thereafter.”   A recent report by the Bank Credit Analyst, suggested that current non-financial institution debt in the U.S. is at 190% of GDP versus 160% just prior to the start of the Great Depression.  While we haven’t stress tested the 190% number, we do believe that it is directionally correct.  As Fisher goes on to write, while “over-investment and over-speculation are often important; they would have far less serious results were they not conducted with borrowed money.”  Thus the high debt level only serves to amplify the typical business cycle.

Many of our clients have asked about our thesis that the US dollar needs to go down for the stock market to go up.  Partially this is driven by observations.  We use price rule as a primary factor in much of our work and we have observed that the market and the dollar are inversely correlated, or have been for the last 3+ months.  The derivative question is obviously, why is this so? In our view, it is that the market understands basic Fisher economics.  Specifically, we have an emerging debt asset / imbalance that can only be solved by re-flating assets.”

Fast forward to November 20th, 2009 (today), and it’s safe to assume that ‘He Who Sees No Bubbles’ (Bernanke) and the Squirrel Hunter (Geithner) have inflated us out of the so called Depression.  Unfortunately, while assets are being inflated as Fisher would have recommended, the debt issue is only accelerating.  The Fed’s balance sheet liabilities, which is a broad gauge of its lending to the financial system, expanded to $2.19 trillion this week, which is the highest since December 31st, 2008.  Most concerning, the Fed now holds $847 billion in mortgage backed securities. Yikes!

Enjoy the weekend. Go Bulldogs!

Daryl G. Jones
Managing Director