“Bernanke is, in fact, begging us to speculate.”
-Jeremy Grantham
Jeremy Grantham is one of the most important thought leaders in modern day finance. After seeing the forest beyond the trees in the early 1970’s when he started one of the first index funds, he has successfully realized the art of managing money – having money to manage. With $107 Billion in assets under management from his perch in Boston, the investment world is a better place with his hedgeye for risk management in it.
Grantham’s Quarterly Letter for April 2010 was titled “Playing With Fire” and, as usual, it didn’t disappoint. There is actually an addendum to his letter titled “Friends and Romans, I Come To Tease Graham and Dodd, not to praise them” that is one of the better contrarian (and quantified) analyses of some of the Perceived Wisdoms associated with value investing that I have read. I highly recommend studying his conclusions.
Studying what we know is easy. In fact, it gets easier and easier to understand what we know if we choose to wake up every morning focusing on those certainties. Unfortunately, those who use VAR models (Value at Risk) have recently learned the hard way that managing risk in an ever increasingly interconnected world doesn’t start with certainty. Real-time risk management starts with accepting uncertainty.
Now, Grantham doesn’t spend as much time on interconnectedness as I do, but he certainly took some time in his letter to address the realities of the societal risk associated with a government sponsored Piggy Banker Spread (marking the short end of American savings rates to model so that the banks can borrow there and beg you to speculate on stocks/bonds). Without going through his entire note, here were some of his best quotes:
- “The Fed’s promises look good and, as long as you’re not a small business, you can borrow to invest or speculate at no cost.”
- “Collectively, we forego hundreds of billions of potential interest, but at least we can feel noble because we are helping to restore the financial health of the banks and bankers, who under these conditions could not fail to make a fortune even if brain dead.”
- “The urge to weasel and own a little more emerging is a direct result of the lack of clearly cheap investment alternatives.”
Over the short 12 years I have spent in this business, I have come to realize that the only people worth respecting are those who have the mental malleability to change. Markets and the risks embedded in them are constantly changing and we, as a profession, have a special duty to change with them. Grantham does a great job of calling it like it is, and shunning the Glaring Groupthink that ultimately gets investors run over.
Today, Lloyd Blankfein is going to get run-over by the populist madness of crowds. He’s already released his proactively predictable defense. He’s once again proclaimed his mystery of faith that he is smarter than you and Goldman “managed our risk as shareholders and regulators would expect.”
That’s actually a very appropriate summary of what Goldman did. They did exactly what the likes of Grantham and I would expect. They bought the 2006-2007 leverage top, saw in-house funds like “Goldman Alpha” get annihilated by “6 standard deviation events”, then asked their friends to bail them out as they “hedged” the final stage of the selloff, ultimately perpetuating a bottom.
Having their ex-CEO (who signed off on using VAR (Value at Risk) as a risk management tool as they levered themselves up the wazoo in 2004 and beyond) twilight as the US Treasury Secretary is risk management in and of itself. Gotta have the inside man if you want to get anything done in Washington folks. No wonder why Hank Paulson puked as the entire narrative fallacy what these guys call “risk management” blew up in their face.
We have a lot of friends at Goldman. Our call on the stock isn’t personal. It is what it is – right. We took plenty of heat for saying the stock would go to $151/share, but it went there and that’s all I have to say about that.
The point here is to hold certain actors of the new era of Goldman leadership accountable. Blankfein was a corporate tax lawyer and then a precious metals salesman, not God. He’s made his way to the top the good old fashioned American way. Now he’s looking over the precipice of history’s lessons. Real leaders take the fall.
There are $63B reasons (his derivatives book) and a huge ownership stake that will give the likes of Warren Buffett the opinion that Blankfein should be saved. Or are there? Maybe the stock is telling us something folks. At 7x earnings, value investors must be calling it “cheap”, but that doesn’t mean the Blankfein leadership discount won’t remain. The cheap gets cheaper - until it doesn’t.
In front of his shareholders, employees and Americans alike, Mr. Blankfein will be interviewing for his job today. We’ll see if he can detach his emotion and ego from the kind of risk management “shareholders and regulators” should “expect.”
On a breakdown and close through $151/share, our immediate term TRADE line of support for GS is now $142.29. The intermediate term TREND line of resistance that we signaled on Friday April 16th ($165.59/share) remains broken.
Mr. Blankfein, “value” investors around the world, are “begging you to speculate” that you are indeed smarter than the collective wisdom of the crowd. However populist these winds blow for or against your case today, Godspeed.
My immediate term lines of support and resistance for the SP500 are now 1207 and 1221, respectively.
Best of luck out there today,
KM
