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“A lie gets halfway around the world before the truth has a chance to put its pants on.”

                -Winston Churchill

In hedge fund circles, a common question to ask about someone is:  Does he or she get it?  During my ten plus year career in the hedge fund industry, I can honestly say I evolved from someone who definitely didn’t “get it”, to someone who clearly “got it”, and finally to someone who didn’t care if they “had it”.

While this morning I am writing the Early Look, I usually have the pleasure of editing the Early Look after Keith drafts it.  That’s what we stay at home defenseman do, we get up early, “put our pants on”, and block shots, or proofread as the case may be.  Yesterday, I was pretty sure that the Early Look would resonate with those who “got it”.  And based on the responses we received from our exclusive network, it did.

As Keith wrote yesterday, a key part of “getting it” is recognizing that people lie.  CEOs lie, Prime Ministers lie, Presidents lie, Investor Relations people lie, and, yes, even the media lies.  That’s it.  Start with that premise when analyzing what certain people say, and you are well on the path to the enlightened place of “getting it”.

Luckily, science actually helps in some degree when trying to determine whether someone is lying.  But since a person produces around 75 – 100 verbal and nonverbal cues per second and the average person is only capable of processing 7 – 10, the process of determining whether a person is lying is far from easy. We’ve reviewed literature on lying and come up with a few recommendations to help determine who is lying, which are as follows:

  1. Establish a baseline – Ask a person the person or view the person in situations where they clearly aren’t lying.  Specifically, ask questions like: what is your favorite restaurant? What was your favorite vacation? Etc. A person will have a baseline of behavior for non-lies, and when the person tells a lie their behavior, voice or body mannerisms, should change noticeably.
  2.  Behavior and body language – When someone is unduly hostile or anxious towards your question, it is likely a red flag.  Lying, even for the best of liars, is an uncomfortable action that is difficult to hide.  Most commonly, aggressively defending the lie and accusing the counterparty of deceiving is natural way to combat this discomfort.  Certain body signals will also give away discomfort, such as: objects or body parts put in front to create a barrier, posture changes, not facing you, rubbing the forehead, and using fewer hand movements than usual.
  3. Verbal cues – The manner in which a respondent answers a question can often be a sign of deception.  The respondent may take longer to answer, may answer quickly before a question is completed, may be overly polite, and may repeat the question.  The primary issue with watching verbal responses, is these can be rehearsed so the tell tale signs can be hidden easily.

Yesterday, we also highlighted another way to tell whether someone is lying.  That is, compare what they do to what they say.  Sounds pretty simple, and as we look around the global macro world this morning it is quite clear - some people are lying and some people are not.

  1. The Chinese aren’t lying – Premier Wen Jiabao of China last week stated that, “latent risks in the banking and public finance sector are increasing” and that slowing loan growth would be important tool to combat this emerging issue.  This morning Chinese lending for February was reported and it was down 49% sequentially and 37% year-over-year.  The Chinese are saying they will tighten, and they are doing it.  That’s the truth.
  2. American officials lie – The CPI is the determinant of the income for more than 80MM people as result of statutory action: 48MM people on social security, 22MM food stamp recipients, and 4MM civil service retirements.  Do you think, perhaps, the U.S. government has a small interest in understating CPI despite what they say?  There may be a reason that the CPI calculation is changed every four or five years . . .to the extent that the U.S. officials are setting policy based on an inflation number that they alter to understate inflation, I would consider that a lie. But of course, maybe I just don’t get it . . .
  3. The Greeks will continue to lie – As outlined above, a key sign that someone is lying is an undue aggressiveness towards innocent parties.  According to Greek Prime Minister Papandreou, speculators are “now threatening not only Greece, but the entire global economy.”  While this might be politically convenient, it is an aberration of the truth intended to remove focus from Greek fiscal policy.  The fact that the policy of the Greek government has led to a debt-to-GDP ratio of north of 110% and deficit-to-GDP ratio north of 14% has, amazingly, nothing to do with speculators. 

So . . . do you get it?

If not, a good way to start is to put your pants on early and catch the lies before they “get halfway around the world”.

Keep your head up and stick on the ice,

Daryl G. Jones

Managing Director


XLV – SPDR Healthcare — Healthcare was down again on 3/9/10 in the face of “Obamacare” inspired fear. While we fear we may be early here, it’s better than fearing fear itself.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


SPY – SPDR S&P500We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10.


EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE again on 3/5 as every sovereign debt risk has a time and price to be short of. We have a bearish bias on the country; massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.