In Search of a Steady State of Exuberance

Scene I:

April 2003, random bar in the East Village (11th St. and 1st Avenue)

NY bartender: “Excuse me, you can’t smoke here!”

Foreigner: “Pardon me?”

NY bartender: “You are not allowed to smoke”

Foreigner: “Oh…but..but this is New York City. I mean…why?”

NY bartender (matter-of-factly): “The mayor has forbidden it?”

Foreign guy (now with an accentuated fake British accent): “The mayor? What’s his name?”

NY bartender: “Bloomberg. If you have a problem with it, send him an email. His address is”

Foreign guy (forgot about faking the accent and now clearly emotional): “Oh, this sounds familiar: help me out here, mate, I am from London: I read a book a while back that was entitled ‘Bloomberg by Bloomberg.’

(He didn’t say it was part of the required reading at the two-week
Lehman Brothers’ Analyst Training Program in Jersey City, NJ. He didn’t think it would be cool to mention that). In his book, he mentions how he admires short-sellers because they embody our “animal spirits.” Wouldn’t this smoking ban contradict that? Wouldn’t it stifle my very own animal spirits?”

NY bartender: “No, it’s wouldn’t.”

Foreigner: “Why not?” (the urge to smoke a fag was now insurmountable!).

NY bartender: “Because Bloomberg, unlike some short-sellers, didn’t break the Bank of England. Or the Bank of America, for that matter (he meant the Fed). Nowadays, this type of speculative behavior would be considered un-American.”

(Foreigner remembered that he attended a lecture once where it was argued that short-sellers are a source of much-needed liquidity in the global financial markets. But since he couldn’t remember quite what the speaker said in precise terms, he let it go. Besides, the fella must be just another smart guy that no one quite listens to and he may very well have been “un-American.” After all, he did have a knack for Camembert and other French cheeses).

Scene II:

April, 2003, random hedge fund in Midtown (55th and Lex). Run by an ambitious MBA who just raised some funds from friends and family.

Senior Hedge fund guy: “Let’s go long the 5-year off-the-run US Treasury!”

Junior hedge fun guy: “But why?”

SrHFG: “Just do it!”

JrHFG: “OK. But I personally think we should short the on-the-run 10-year US Treasury. I just read an article in Barron’s arguing how overvalued 5-year Treasuries are.”

SrHFG: “No! We’re at war. Shorting at this point in time would not be patriotic. We can only go long! And remember: we’re an event-driven hedge fund. We operate in a niche and we have an “edge.” Besides, we have a fiduciary responsibility towards our shareholders.” (He wanted to quote the State of the Union Address but couldn’t remember GWB’s exact words. Damn, the clapping was TOO loud. Did Tony Blair really have to clap this loudly?)

Then again he thought that the word “fiduciary” should do the trick. It’s sounds very powerful: FEE-DUU-SHIARY).

(JrHFG remembered that this not the reason he joined the fund in the first place. I mean, the fund used to do what was right from an arbitrage perspective and not follow politics. Since when are hedge funds, for God’s sake, politically correct? He recalled that someone called Warren Buffet had written a long piece about value investing etc. that he sent to his investors. But then again, he couldn’t remember the details and he wasn’t sure if this guy had an MBA or not).

Final Scene:

April 2009, financial newspaper owned by News Corp published the following Editorial. (NWS is exempt from SEC and Spitzer’s regulations because it’s based in Australia).

“The past seven years may come across to the na‹ve investor as bad years for investing. After all, interest rates have sky-rocketed to 20%, inflation is in the double-digits, and we are faced, once again, with a twin-deficit. The stock market has experienced a quadruple dip, fixed income markets (except for TIPS which have been renamed “Cheney Bonds” in honor of our former VP who never came out of hiding) have exhibited a dismal performance, and no one still understands how derivatives work. But this is not true. The markets have simply overreacted to the “terror effect.” Once the markets return to their steady state of exuberance (and it’s only a matter of time), we are confident the good times will roll again.”

March 10, 2003
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