Wednesday, June 29, 2011

Showdown at Syntagma?

Was at my buddy's place late tonight where we enjoyed cigars and whiskey on his balcony. Beautiful night here in Montreal but we were thinking about what's going on in Greece and the controversial vote on the austerity package on Wednesday. I told him I went all cash in my portfolio early this morning and going to wait this out even though the stocks I'm watching took off (apart from solars, paying close attention to JDSU, CIEN, FNSR and JNPR at these levels).

I'm going to follow up on my previous post on the ugly truth with some more ugly truths:

1) Ugly truth on why Greece is the future: Watch what is going on in Greece right now because this is the future of capitalism. We are at a historic crossroad. Had an interesting conversation with a money market/bond trader from Toronto this afternoon. Nice guy, sharp, very knowledgeable and he has four kids so he's concerned with what's going on in the world and he's up-to-date on social media He told me to get on Twitter which I did, to update my LinkedIn, which I have not, and taught me how to use Google reader to follow many blogs at once (very cool).

Anyways, for a trader, this guy is a deep thinker. He explained to me how he got interested in pensions because his father was a Nortel employee and his pension got hit when the company filed for bankruptcy. He told me we are using "pyramidal assumptions with a rectangular demographic base. The reality is people are living longer and the G7 is dealing with historic low interest rates, which is pushing pension liabilities through the roof." He told me he wasn't surprised that the NDP garnered so many votes in Canada as there seems to be a leftist push throughout the developed world as people are frustrated with what's going on with their pensions and the financial/economic landscape.

I told him capitalism isn't working the way it's suppose to work as too many people are falling between the cracks. Mass youth unemployment breeds more frustration and social unrest, which is what we saw in Egypt and elsewhere. He told me that the old way of thinking isn't working for the planet's 7 billion people and there needs to be a new way to "pacify the restless many." Interestingly, I mentioned to him that employment growth has been growing strongly in Dallas, Texas, spurred by double digit growth in the video game industry over the last five years. He said that video games might be the way to pacify many restless souls. This reminded me of what my friend, Tom Naylor, said about the "electronically lobotomized US population which has no idea what's going on outside their red, white and blue borders."

The trader told me that too many people attribute the spectacular growth in the US to capitalism but the reality is that the "US was blessed with natural resources and a great river system which allowed them to easily transport materials from one side of the country to the other side quite easily." This reminded me of what a buddy of mine from Wall Street said about most of his hedge fund clients having "accidental success." Maybe the US has had "accidental success" and the next 100 years won't look anywhere as glorious as the past 100 years.

LinkAs far as Greece is concerned, no matter what happens with the vote, the country is going to suffer a painful recession and sell off state assets. And it won't be the rich who suffer, but the poor and working poor. Austerity isn't working for a simple reason: it disproportionately hurts the poor and working poor. The rich will take a hit but they have enough funds to withstand any shock that hits Greece. Most Greeks are very aware of this injustice (no surprise that Naomi Klein's The Shock Doctrine has been the number one best seller in Greece for nine weeks in a row).

But I believe that just like Greece was the birthplace of democracy, what's going on in Greece right now has the potential to spread across the developed world, even if most of the population is "electronically lobotomized." I recently reread Noam Chomsky's The Prosperous Few and the Restless Many just to see how things have changed since he wrote that book (not a big fan of Chomsky any longer but he's dead right on a lot of what's ailing our society). Not much, which is why communists are enjoying popularity in Greece and elsewhere (God help us if communism comes back with a vengeance!).

2) Ugly truth on pessimism: Having said all this, I remain hopeful that humanity will find a way to confront the serious challenges that lie ahead. If we don't, we're fucked. Plain and simple. It's easy to drown yourself in pessimism but the world is innovating and it's not all doom and gloom out there. I was watching a segment on bionics on PBS tonight showing how robots are helping quadriplegics walk again. There are a lot of bright people working on important issues and it's too easy to fall under the "world is fucked" mentality.

Had another discussion with a Montreal hedge fund manager this afternoon who told me that there are many yuppies retiring who long for the nostalgic years of the 50s and 60s and they see everything going downhill from now on. He's optimistic, even on markets and pointed out to me that Libor rate is lower than last April which "tells you that banks are not overly concerned about contagion risk from what's going on in Greece."

3) Ugly truth on Quebec's absolute return fund: This hedge fund manager told me that my criticism on the $175 million Quebec absolute return fund was too critical. "This is just the beginning, there will be other programs targeting seeding funds." He told me that "the scandals of the past like Lancer and others are still fresh on institutions here and that the reality is that seeding hedge funds is dangerous since less than 5% succeed long-term."

I agreed but told him if done properly, focusing on liquid strategies using managed account platforms, seeding is nowhere near as risky as people think. Institutions have full control over the portfolio and because they're liquid strategies they can shut it down at any time. Moreover, I reminded him that Quebec's institutions have lost hundreds of millions in venture capital, which is far more risky than seeding hedge funds (but politically more palatable).

I also told him that I have no problem with established hedge fund managers in Quebec (want to see them thrive), Jean-Guy Desjardins or René Perreault and his boys over at HR Strategies. Everyone is looking after their interests. I just think this SARA Fund was poorly handled from the get-go and the spin they put on it was that there would be an important seeding portion to it. They should have created two funds: one for established managers (using HR Strategies or just investing directly) and one for emerging managers (using Innocap's managed account platform).

4) Ugly truth on sleep: Most people don't get enough sleep, including yours truly. I was watching a segment on Good Morning America that ideally we should get between six and eight hours a night. If you get less or more then you're in trouble.

On that note, I'm hitting the sack because I have to wake up early and head to the gym at six a.m. Pay attention to what is going on in Greece and how it might spread throughout the world. Below is a PBS news video covering the crisis in Greece. Those of you who want to watch the vote, can do so by clicking here where it's broadcast live on Zero Hedge.

**UPDATE***

155 yays, bill passes and new austerity measures will be implemented. Stay tuned and go long risk assets after they sell the news.

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