Guzzo the Contrarian

As so poignantly written yesterday by Andrew Leonard on Salon.com:

The word of the day on Wall Street is “deleveraging.” The simplest way to explain the concept is with an old bromide: What goes up, must come down. If you borrow a lot of money to make big bets in the market when times are good — a process known as “leveraging” — then you are going to owe a lot of money when the bets go sour and you have to settle your accounts — deleverage — during the inevitable bad times.

The more things change, the more they stay the same. We’re all familiar with the phrase: “Those who cannot learn from history are doomed to repeat it”. Well, it looks as though we’re repeating it right now.

Can the U.S. Economy Hold Up?, September 28, 1998.

What is perhaps most unsettling about the current recession threat is that it’s so different from anything today’s economic policymakers–and investors–have ever dealt with.

Hedge Funds: What do we really know?, September 1999.

Government authorities are moving cautiously as they consider whether new policies or regulations are needed to control the activities of hedge funds. Certainly, the record of the past decade suggests instances of large position taking, either directly by hedge funds, or by other investors with greater capital at their command who may take their cues from hedge fund activity. Yet this recent history is far from clear that hedge funds, on balance, do more harm in precipitating the fall of asset prices than they do good by helping break the free fall that can afflict oversold markets, including markets for currencies. Thus, new restrictions on hedge funds may do as much harm as good.

Some of the clearest excess involves instances of very high leveraging of hedge fund capital, as with Long-Term Capital Management. This has led to the consideration of measures to ensure that banks and their regulators are fully informed about hedge funds’ total borrowing. But difficulties persist in determining how and where to collect such figures on a global basis, and whether, if they are required, some funds might shift their legal domiciles to offshore havens.

From Recession to Recovery, December 2001.

All good things must come to an end, including good economic times. It’s now official that the longest economic expansion in U.S. records has ended after ten years of rising incomes and employment. The National Bureau of Economic Research (NBER), the private non-profit research organization that is the official arbiter for dating economic cycles, recently declared that the latest expansion ended and a recession began in March.

It comes as little surprise that the economy is in recession, but the NBER typically waits for some time after the economy begins to contract before determining both whether and when there is an actual recession. The NBER has no fixed rule for making its determination, such as a two quarter decline in GDP, but weighs a number of economic indicators, in particular industrial production, employment, real income, and sales. For an economic downturn to be declared a recession, there must be a significant decline in economic activity that is spread broadly across the economy and that lasts for more than a few months.

A little weekend reading:

1. More Volatile Waters Ahead For Battered Agency Mortgage Bonds
2. Hedge Funds Squeezed As Lenders Get Tougher
3. Hedge Funds Stem Exits as Credit Lines Tighten
4. More Margin-Call Woes at Carlyle Capital
5. Thornburg Can’t Meet Margin Calls, Survival in Doubt (Update5)
6. The Hedge Fund Implode-O-Meter