I’ve made it a point not to use this blog to say “I told you so” over the years, which is probably why it remains among the most-read in finance while so many others have come and gone. The braggarts and table-pounders have been picked off one-by-one since I got started – either their blogs have been shuttered owing to a dwindling readership or they are still toiling away in the dark somewhere, raging at the emergence of outcomes they did not (could not) see coming. Fortunately for me, I’ve never prized my own guesses about the future quite so highly as to have become married to them.
But I have gotten some stuff right…
There are two reasons I don’t take victory laps here – in the first place, I get plenty of stuff wrong too and in the second place, I don’t really believe in forecasting anyway. The things I call ahead of time, at least in my own opinion, probably have as much to do with luck as they do with prescience.
And so with that lengthy preamble covering my ass (a shorter preamble would perhaps not be ample enough), I lay out a few things I saw coming, on the early side. How useful these may have been to readers at the time is an open question, one I do not attempt to answer.
The Bottom in Bill Ackman
Here I am in August 2013: “The piling on re: Bill Ackman – I would bet – has now reached its pinnacle. If he was a stock, and I a deep value investor, I’d be buying him in size here.” Ackman was under siege at the time on multiple fronts – his big long position, JC Penney, was in meltdown mode while a gaggle of rival hedge fund titans were actively working to wipe him out in his big short position, Herbalife. In the meantime, investors were jumping ship and the media’s mantra was “he’s done.”
Only he wasn’t done (is anyone on Wall Street really ever done?). Instead, Ackman’s Pershing Square fund was cutting its losses in JCP while converting the structure of its short position in HLF to something with more flexibility in the face of a continued squeeze. Ackman went on the offensive in 2014, pulling off a masterful trade in Allergan that was so unique and unprecedented, all his haters could do was just stare, slack-jawed and blinking. Notably, he converted former rival Carl Icahn to an admirer shortly after.
Pershing Square’s assets under management have zoomed from $11 billion to $19 billion in the time since I wrote that “bottom call” and it was the top-performing hedge fund of 2014, according to Bloomberg Markets magazine. And guess who graced the cover of that particular issue, a scant 16 months after being pronounced dead in the water…
You guessed it!
Gas Prices Disproportionately Benefit the Lower 50%
There is a raging debate happening right now amongst capitalists and economists alike about whether or not crude oil’s 50% plunge is “good” for America and for business. Last fall, I opined that plunging energy prices would be great for Americans in the lower half of the income spectrum and that this benefit would come directly out of Wall Street’s hide.
I could not have been more spot-on with this one.
Here I am in Fortune magazine, November of 2014, in my article ‘As oil prices drop, Wall Street takes one for the team‘: “With the recent drop in commodity prices, especially for West Texas Intermediate crude oil, consumers are poised to win big-time while many in the financial markets are seeing a stream of losses. This is quite a reversal of the way things have generally been going between the two sides. Even the most biased of observers would be forced to admit that the post-crisis period’s scoreboard for Wall Street versus Main Street is almost hyperbolically lopsided. Now, things may be evening out just a bit. The global drop in oil prices, while terrible for Wall Street upon first blush, has yielded a commensurate decrease in gasoline prices that may act as a massive tax cut for the very people who have, so far, reaped very few benefits from the economic recovery.”
This morning, the New York Times has handed me a win on this idea, in an article called ‘Lower Oil Prices Provide Benefits to U.S. Workers’ where the authors point out exactly this juxtaposition:
In recent years, most of the other positive economic trends — things like efficiency gains driven by new technologies, higher corporate profits, rising home prices, lower borrowing rates and stronger demand for white-collar workers with advanced degrees — have also mostly benefited businesses and wealthier Americans.
But the latest drop in energy prices — regular gas in New England now averages $2.35 a gallon, compared with $2.94 in early December, and it is even cheaper in the Midwest at $1.95 — is disproportionately helping lower-income groups, since fuel costs eat up a larger share of their more limited earnings.
Not too shabby, if I do say so myself 🙂
Retail Forex will be a Client Killer
This week, the Swiss monetary authorities removed a peg that kept the franc on an even keel with the euro and the currency immediately shot up in value, wiping out currency traders from large hedge funds to small moms and pops in the space of minutes. The fact that currency speculation involves a ton of leverage made this event an inevitability long ago, not a fluke. I said as much as far back as 2010 when retail forex trading was becoming all the rage and brokers like FXCM were filing for IPOs.
Rather than rehash, here are some links (of many) on the topic:
Repeat after me: High leverage plus massive information asymmetry will always and forever mean a bloodbath for retail investors. Add in a business model in which you’re not the customer but the counterparty and the potential for loss nears 100%. FXCM was rendered effectively insolvent thanks to the losses among its customers until another bank quickly arranged a bailout investment to keep them operating.
The Wall Street Journal estimates that 6 of 10 “customer” accounts of FXCM lose money each quarter. I would guess that, if you controlled for survivorship bias, the truth would be even worse. Good thing they were rescued.
Non Purpose Lending is a Stealth Source of Risk
Lastly, I warned about the potential for both personal and systemic risk in the new Non Purpose Lending boomlet happening at the wirehouses of Wall Street last month. In my story for Fortune, I called non purpose loans “Rich Man’s Subprime” owing to the similarities between these portfolio-based borrowings and the way in which debt money was doled out for real estate during the last decade. Apparently, this piqued the interest of the regulators, as just a few weeks later they added it to their list of risks to watch for in 2015. Here’s the Wall Street Journal:
Securities-backed lending hasn’t been much of a disciplinary issue, but Finra is concerned about the increase in loan volumes as consumer loans are harder to get following the financial crisis and as investors look at other assets to leverage, Mr. Ketchum said.
“What asset has grown considerably for the last six years? That would be equity securities,” he said. “But equity securities and portfolios can fluctuate a great deal, and with that can come the risk.”
Perhaps with increased scrutiny over the incentives Wall Street is ladling out to brokers selling portfolio loans, we’ll see a potential systemic risk nipped in the bud before the numbers get too out of control. And hopefully not too many clients will be hurt in the next downturn because the bull market lulled them into thinking they should be heavily borrowing against their stock and bond holdings.
Thanks for permitting me this opportunity to follow up on some items I got right.
We’ll now return to our regularly scheduled, around the clock, humility.