Monday, December 31, 2007

Post Hoc New Year Predictions

Year-end brings to the financial community the obligatory round of New Year predictions. The prophet camp is usually split in two: "play it safe and give'em what they want to hear" types and those that "go for broke" and try to foretell multi-sigma events. Both can be fun to read, if rarely accurate, and they are forgotten faster than cheap bubbly goes flat. Before proceeding with 2008, however, let's first look at some otherwise timeless wisdom and how it could have been applied post hoc (after the fact) during 2007.

Delphic pronouncements like J.P. Morgan's "It will fluctuate" survive the test of time best. Seemingly useless, it should be dusted off occasionally, for example when VIX (volatility) was scraping the low 10's for months on end. I dedicate it to all correlation traders. Another favourite comes from the collective wisdom of the Street: "Don't confuse brains with a bull market"; I dedicate it to the financier who bragged earlier this year of being so successful he could raise tens of billions at the snap of his fingers. For him, and other hombres at Rancho Liquid Leverage, I will throw in a slight modification of my own: "Don't confuse credit with liquidity".

"Caveat emptor" (buyer beware) is thoughtfully offered to buyers of credit insurance, particularly CDS. For further elaboration please apply to Mr. Buffet and his brand-new credit insurance monoline. To sub-prime borrowers and lenders alike, a quote from Hamlet: "Neither a borrower nor a lender be; for loan oft loses both itself and friend".

For the embattled rating agencies, also from Hamlet: "To B, or not to B, that is the question". To the ex-heads of Citi and Merrill, from Benjamin Franklin: "Drive thy business or it will drive thee".

To the financial engineers who dreamt up all sorts of statistically-driven structured finance products like CDOs, CPDOs, CLOs, etc: "There are three kinds of lies: lies, damn lies and statistics", by Benjamin Disraeli. To their clients, from Bob Sarnoff: "Finance is the art of passing money from hand to hand until it finally disappears".

All right, then, how about 2008? As the Italians say, make me a prophet and I will make you rich. I am neither Italian nor Prophet, but this dictum comes from Cicero who is a sort of Italian and his sayings have lasted far longer than any portfolio prophet: "Endless money forms the sinews of war". Obviously, to Mr. Bernanke.

Finally, since this is, after all, a public version of a daily journal, to myself: "It is not advisable to venture unsolicited opinions. You should spare yourself the embarrassing discovery of their exact value to your listener" (Ayn Rand). Come to think of it, given the provenance, it is quite apropos for Mr. Greenspan as well.

A Happy New Year to all, filled with love from your family and friends.


  1. God bless you. Happy New Year--from all of us here in the U.K.

  2. And from one commenter to another,

    "On the outskirts of every agony sits some observant fellow who points." -- Virginia Woolf

    Happy New Year!

  3. "Don't confuse credit with liquidity"

    That is the quote of the year!

  4. This comment has been removed by the author.

  5. Recall that Ayn Rand once made the following rather damning assessment of her now (in) famous acolyte. "Alan, he's such a social climber." In other words. the mendacious, self aggrandizing so and so who asserted that sub-prime mortgages were good because they would increase home ownership could not be expected to resist the opportunity to offer a prediction with any degree of fanfare involved.

    As for the quote of the year, I vote for the following:

    "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. "

    Donald Rumsfeld

    Your tax dollars at work.

  6. Hellasious,
    Happy New Year to you.

    And for those who will spout "Who could have known that..."

    Unto thine own self be true. Thou canst not then be false to any man."


  7. Bankruptcy. I predict bankruptcy for Detroit. Maybe cleveland.

    Just like the automakers they have high retiree costs, specially for healthcare, and a shrinking population to pay the taxes and major league white flight.

    Detroit had a notoriously corrupt city govt. Not sure about Cleveland.

    New accounting rules supposed to require cities to recognize retiree costs on the balance sheets as a present liability using actuarial rules. I don't know how long Kwamee Kilpatrick can obfuscate to avoid the dirty little open secret.

  8. The Donald Rumsfeld quote happens to be Satyajit Das's favourite one too. hehe

  9. "To B, or not to B, that is the question"

    Funny quotations, Hel. To CCC, or not to CCC is even more of an issue.

    Is it really possible that, with the worst credit crunch of the past 30 years, we won't see junk yields surpass their previous highs of 1991 and 2002? Moody's et al. are still not CCC-ing much.

    Incidentally, you wrote a very interesting piece on the end of the Ottoman empire a couple of months back. I read a piece on the same subject by Niall Ferguson today. It's in if you are interested.

  10. Happy New Year Hellarious -

    God Bless you in 2008.


  11. Where can I find the TED spread? Thanks

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