The guest commentary below was written by Jesse Felder of The Felder Report, and is part of a series of posts. You can read part one here. This piece does not necessarily reflect the opinion of Hedgeye.
Just about three months ago, I wrote a blog post which featured this quote, from Charles P. Kindleberger’s Manias, Panics and Crashes: “Swindles are a response to the appetite for wealth (or plain greed) stimulated by the boom.”
Since then, the number of frauds, or swindles, that has been revealed has soared, a clear testament to both the breadth and degree of greed inspired by the current boom.
Most recently, we saw the collapse of Greensill Capital as the result of fraud. Like WireCard, Greensill was a relatively young finance company looking to disrupt its more mature competitors which took a few (illegal) short cuts in the process.
Then we saw the implosion of Bill Hwang’s family office, Archegos. While this may not look like your typical fraud, I would argue its failure was the result of market manipulation, enhanced by an obscene if not illegal amount of leverage, gone wrong. And isn’t market manipulation, “an act of deceiving or misrepresenting“?
What’s more, the Hwang playbook sounds a lot like what we have been seeing in the options markets for the past 18 months or so. It’s almost as if he, discovered his own, “perpetual motion machine,” for a time.
Speaking of manipulating prices, there is also the curious case of the mutual fund whose manager who simply decided to create his own fictional prices in order to enhance performance results.
And then, of course, we have the wild world of SPACs which have been at the center of several outright frauds already. More broadly, however, it is looking more and more likely that SPACs could simply be an avenue for amoral characters to legally cheat investors.
However, if their structure doesn’t constitute outright fraud, it’s looking more and more likely that their accounting methods, according to the SEC, did constitute a certain form of misrepresentation.
Similarly, another of the hottest segments of the investing universe also appears to have misrepresented itself to a great extent in order to attract capital.
Coming back to examples of outright fraud, the massive boom in commodities is already attracting fraudsters of its own.
Hollywood is also getting into the act.
Even central bankers can’t resist the urge to get in on “the bezzle.”
And then, of course, is “the bezzle” that came about entirely in response to the more politically acceptable, though perhaps no less reprehensible, actions of central bankers.
The cryptocurrency space has been the provenance of fraud for quite a while now.
That trend has only continued, and the related frauds have only grown in size, as cryptocurrencies have become ever more popular.
But, as Mr. Taleb seemed to imply, even beyond outright fraud, cryptocurrency best resembles a Ponzi scheme. It is telling that even a coin which promotes itself as a scam can succeed in this booming market for virtual currency.
The only thing I find truly surprising about all of this is that, considering the firm’s involvement in manipulative valuation techniques; manipulative options trading; and SPACs, Softbank has essentially no exposure to the crypto space at all. I guess even they see it as ‘a bridge too far.’
Fed has been in stoking “animal spirits.” JP Morgan said, “Nothing so undermines your financial judgement as the sight of your neighbour getting rich.” Clearly, financial judgement in a broad sense has been undermined like never before.
To come back to Kindleberger, “Crashes and panics often are precipitated by the revelation of some misfeasance, malfeasance, or malversation (the corruption of officials) that occurred during the mania… As the monetary system gets stretched, institutions lose liquidity and as unsuccessful swindles seem about to be revealed, the temptation to take the money and run becomes virtually irresistible.”
In this light, the acceleration in the revelation of fraud over the past few months suggests we could be nearing the tail end of the boom that inspired all of this greed in the first place.
At the very least, it clearly suggests investors ought to be exercising a much greater amount of caution at present than they seem to be doing.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.
