Thursday, October 20, 2011

World’s Most Famous Hedge Fund Manager Is Now Infamous With A Massive 47% Loss And A Few Timely Remarks About One Of His Largest Investments, Gold

One of our long term calls has always been that hedge funds are going bye bye.  The most famous hedge fund manager today, John Paulson, is doing a fine job of helping create that reality by losing an astonishing 47% this year. 

I remember meeting with a top PhD (Piled Higher & Deeper) quantitative model builder for a major hedge fund back before the world collapsed.   I asked him if he had ever considered a few scenarios I laid out.  He arrogantly laughed them off as ridiculous.  Then a matter of a few months later, everything I had mentioned then started coming true.   Understanding the human condition we all suffer from allows us to understand we are able to delude ourselves into believing  just about anything.  Especially when it comes to our own brilliance.  And no one is more self-deluded in today’s world than many who are in the field of investing be that banks or hedge funds or money managers. 

John Paulson was considered a genius a few years ago.  Now, his investment losses are an amazing 47% this year.  Paulson was neither a genius nor likely even qualified to do what he is doing.  He was simply riding the largest financial bubble of all time.  A monkey with a dartboard could become the richest man in America if he had a substantial capital base.   Frankly, I could have been that monkey if I had Paulson’s investors and was willing to make massive naked bets with other people’s money.   You know, those same bets that destroyed Wall Street.

The U.S. financial system has deluded itself into believing its own brilliance.  Instead, their success was nothing more than being in the largest financial bubble in history.  As the money tide recedes, we’ll find out almost all of them were never wearing any clothes.   The dynamics over the last fifteen years will never exist again.  Their perceived brilliance will never again be replicated.  Because it wasn’t brilliance.  It was being in the right place at the right time.  And because their belief system is so rigid and delusional, they are going to be exposed as naked.  

Paulson lost his butt on investments in banks, Chinese stocks, technology and gold.    What were four investments we said we hated since well before the 2008 collapse and the Chinese equity market collapse?  Banks, Chinese equities, technology and gold.   This isn’t rocket science.  And, people in finance are clearly not rocket scientists if it were.  

This is a good point for a remark about gold since John Paulson is one of the largest private investors in gold today.  We have made some very timely calls on gold.  I understand the market for what it is without the delusional ideology of being a gold bug.  We said gold was headed south before the 2008 collapse.  It did.  We said gold stocks represented the only value I saw in the equity market within a few days of their November 2008 lows. (That translated into a more than a 200% return since).   And we have made a few other remarks and calls that were very timely with the shiny metal.   But as I have said countless times, I do not like gold as an investment.  As a trade?  Well, do what you will if you want to speculate but I expect to be pulling out many prior remarks about gold in the future.  Fundamental global demand for gold is imploding (We said this would happen before it actually started happening.)  but demand for paper gold aka derivatives is not.   Not yet.  In other words, gold’s high price is being levitated by financial manipulation rather than fundamentals.  

We have made one statement in particular that I know irks gold true believers.  But the truth is the truth.  Gold investors were saved by the Federal Reserve back in 2008’s collapse.  Gold and gold stocks were imploding just like everything else.  Were the Federal Reserve not to have acted, gold would have been completely buried.   We have said on here that gold investors will not be bailed out by the Federal Reserve again. 

Anyone who is telling you gold is a hedge against inflation or deflation or anything else is feeding you nothing more than complete bullshit.  Gold is and always has been a tool of monied interests.  The status quo is the largest buyer of gold today.  If you think the status quo is going to win this economic battle, then maybe you should be in bed with your neofeudal masters but there are absolutely no historical examples of what is going on in the world today where gold can be cited as a safe haven.  Zero.  Additionally, gold has always been used by those who have it to deny economic and democratic rights from those who don’t.   If you think that is going to be the final outcome to this environment, then by all means, buy more gold. 

This environment is different than anything we have seen since our country’s founding.  As we have said numerous times, this is not the Great Depression.  It is substantially different.  So attempting to curve fit this to the Great Depression or other historical examples is the same curve-fitted nonsense that quantitative finance is built upon.  And that is crumbling.  If you think this environment is just about deflation, then maybe your gold investment provides you come peace of mind.  But this is not about deflation.  It’s about the collapse of global finance.  It’s about the collapse of an unsustainable global economic model.  

It’s no great irony that gold had its worst down days in thirty years over the past few months.  Gold prices are still in an uptrend.  For now.  But you might want to think about something as it pertains to gold.  Gold is experiencing massive financial speculation.   With all of the gold derivatives and ETFs, the turnover in gold financial products happens at such a high frequency that all of the physical gold held by investors around the world today is traded in a very short period of time.  The turnover of gold is enormous.  The same enormity of speculation that we see in the turnover of massively overvalued equities.  That, my friend, is not a safe haven.  That is a train wreck waiting to happen. 

Hedge funds are some of the largest buyers of gold today.  Their investment in gold is cross-tied to countless other overvalued and often worthless paper contracts and assets.  So, when any of these financial positions start to go bad, gold positions must often be unwound in order to cover other failing financial positions in the massive financial Ponzi scheme.   That means the only way to stop gold’s decline in situations like this is to buy all overvalued assets and paper contracts that are souring in order to keep them from unwinding.  That is what just happened over the last few months.  As buyers stepped in to stop the hemorrhaging in other financial assets, gold stabilized.  For now.  Is the Federal Reserve or the ECB going to be able to stop the hemorrhaging so your positions in gold don’t collapse for the same reason they collapsed in 2008?   Well the Federal Reserve again step in to bail gold investors out one more time?  Hahaha. 

Anyone who tells you gold is a safe haven in this environment is deluded by their own faulty belief system at best and dishonest at worst.    It’s just a matter of when………...   The status quo is going down for the count.

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posted by TimingLogic at 1:08 PM

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