"Those who give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."
Yesterday afternoon the Hedgeye foot soldiers of the independent research gridiron rolled out of 111 Whitney to Luce Hall Auditorium for a 4PM roundtable discussion on “US Financial Reform: The Dodd-Frank Act – Will It Work?” The Moderator was Ernesto Zedillo (34th President of Mexico) and the participants were Robert Shiller (Yale), Thomas Cooley (Stern School of Business), and Stephen Roach (Morgan Stanley).
Until Roach started laying into some of academia’s Perceived Wisdoms about modern day risk management, it was a moderately boring event. It took Zedillo 13 minutes to introduce the financial crisis and pump Cooley’s recent books, then he handed it off to Shiller and Cooley whose main contributions to the debate were to A) support Dodd-Frankenstein and B) mock anyone who has worked at the Whitehouse who doesn’t have a Ph.D. in economics.
Now I’m a big fan of both mocking some of the financial academics in the West Wing and of Robert Shiller’s mean reversion work. He was my professor here at Yale in the mid-90s and I’m not going to ride his love-boat this morning, but he is one of the most important Risk Managers of modern day bubble making in the Fiat Republic.
Shiller made me smile when he acknowledged that Barney Frank was a poli-sci Ph.D. dropout and has certain barriers of competence on financial risk management matters. Pleasantries aside, Shiller’s idea that America’s economic resolve is going to be found within the Safety of Academia made me nauseous.
I certainly don’t always agree with Steve Roach, but his basic conclusion on Dodd-Frankenstein was that “it’s a framework” that will render itself an “insufficient solution” to this economic mess. While Tom Cooley was mocking the likes of Treasury Secretaries who don’t come from the Safety of Academia, Roach (who has his Pd.D. from NYU) was quick to remind him that the biggest joke of all is watching their academic colleagues at a G-20 summit talk about real-time markets. Zedillo didn’t like that.
While Shiller and Cooley were focused on whether or not Dodd-Frankenstein Reform would have prevented Lehman Brothers from imposing systemic risk on the US financial system, Roach was more concerned with its ability to prevent the next financial crisis. I agree with Roach’s main conclusion on the root cause of the US financial system becoming as compromised as it has - US monetary policy. Zedillo didn’t like that either.
Shiller didn’t disagree with Roach on the Fed’s impact. Thank God. But the former Mexican Secretary of Education (Zedillo), didn’t like Roach going after another highly regarded academic (Ben Bernanke). This is the debate that needs to be had in this country. Is the root cause of all our leverage and liquidity problems simply the implementation of an academic ideology that monetary policy should only be used as a blunt instrument on the way down and not on the way up?
Roach knocked the pins down pretty convincingly on what the Federal Reserve’s objectives should be:
- Full employment (1946 Employment Act)
- Price Stability (1976 Humphrey-Hawkins Act)
- Financial Stability (2010 Dodd-Frankenstein, God help us Act)
On Full Employment (economic growth) and Price Stability (inflation), it’s very hard to argue that the last decade of America operating under the Greenspan/Bernanke academic ideologies has worked (net American private sector job adds in the last decade has been ZERO).
This shouldn’t be a surprise, neither Greenspan nor Bernanke saw any success applying their academic theories as practitioners of real-time risk management. Volcker’s decade (1980’s, where net private sector job adds was +18 MILLION) was much more successful on both the Full Employment and Inflation scores.
On Financial Stability, I don’t think Dodd-Frankenstein supporters have any legitimate claim at this point that it can supersede or contain the long term TAIL risks that the current monetary policy of our Fiat Republic imposes. As both Harvard’s Ken Roggoff and Yale’s John Geanakoplos have both recently concluded, understanding financial crises starts and ends with the cycle of leverage.
The US Federal Reserve and the Bank of Japan (and now the European Central Bank) have all attempted to manipulate the cost of and access to that leverage. Since Paul Krugman used his economics Ph.D. to advise the BOJ to “PRINT LOTS OF MONEY” in 1997, the Safety of Academia hasn’t shown this modern day Risk Manager with a BA in Economics something that’s actually worked.
I continued to intervene in the Hedgeye Portfolio yesterday, reducing risk by making more sales on this market’s immediate term TRADE strength. In the last 48 hours I’ve gone from a mix of 14 LONGS/7 SHORTS to 13 LONGS/10 SHORTS. That’s the only way to protect my family and firm from the failed policy makers of this world who keep coming up with new policies to creatively destruct our economic liberty.
My immediate term support and resistance levels for the SP500 are now 1107 and 1131, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer