The Integrative Pediatrics Council: Looking at the Whole Child

I have a close friend named Dr. Lawrence Rosen. Larry happens to be a very bright guy, an MIT educated, Mount Sinai-trained pediatrician. He also happens to have a heart too big to describe. Ever since I have known him (which now is frighteningly approaching 20 years) he has questioned traditional protocols for pediatric care. Not that they were necessarily bad, but that they didn't take into account all of the factors or all of the impacts on the child. Emotional issues. Family issues. Environmental issues. The benefits of non-traditional and Eastern therapies. Nearly two decades ago Larry envisioned a model based around the "whole child," a perspective rooted in viewing the child as a complex being in need of an integrated approach to care taking into account the mind, body and spirit. Further, Larry felt that Western medicine didn't corner the market on knowledge or know-how, seeking an amalgam of therapies, protocols and treatments unbounded by culture, geography or discipline, in an effort to deliver the best care that the world has to offer.

Larry took this passion and jumped into the world of integrative medicine. He went to conferences. He presented papers. He lead discussion groups. And he networked his butt off. What he found was a group of very accomplished, like-minded practitioners from across the globe, each of whom shared the same passion and the same goals as he did. I am proud to say that Larry was one of the driving forces behind the newly-formed Integrative Pediatrics Council:

The IPC is a non-profit dedicated to transforming children's health care. Our mission is to enhance the health and development of children, families and communities by leading the evolution of pediatric healthcare toward integrative, high-quality, accessible care.

Larry also folded his blog, The Whole Child, into IPC, and is moderating the site and taking in commentary, views and approaches from leading integrative medicine practitioners to share with the larger community. I couldn't be more proud of my friend for his leadership in organizing a group of such importance and merit, and for providing the community with a resource for learning, growing and collaborating. Regardless of whether or not you have kids you should check it out. I think what we're seeing here is the future of medicine - not just pediatric medicine, but the way in which we approach care. I can't wait to see their progress and for their vision to become more closely linked to "mainstream" practice.

Austin City Limits ROCKS (and Interpol Ain't so Bad, Either)

I admit it, I like to FEST. Music festivals in general, and ACL in particular, are one of humankind's greatest creations. Where else can you hang out with your 65,000 closest friends while wallowing in the dust, sweating bullets in 95 degrees, looking like something that got the crap kicked out of it in the desert and come out LOVING IT? This was my second ACL, having attended the (in)famous fest of 2005 that was plagued by fears of Hurricane Rita, 105 degrees with some serious humidity yet with a lineup that was second to none? Bottom line: you go down to Austin, connect with some friends, hear a wide variety of amazing tunes, learn about some new bands, swim in a spring for self-preservation, drink gallons of water (to augment the Makers Mark, Patron and whatever else you might have on hand) and make your reservations for next year before even leaving town. And this is without all the other stuff that Austin has to offer like 6th Street, Stubbs, SoCo and everything else. In short, a sublime experience that transports you from your work-a-day existence into another dimension. A dimension of happiness. Of grooviness. Of peace. Of fun. Run, don't walk, to ACL 2008. I'll be there.

Now I happened to take the first day off because one of my favorite bands, Interpol, was making their Madison Square Garden debut. My wife Carin and I got great tickets and decided to defer our trip, and to fly down crack of dawn Saturday to take in the last two days of the fest. They were in fine, fine form. Paul's voice has never been better, Daniel played the shit out of his axe, Sam played his pulsating and energetic drums and Carlos was, well, Carlos. They played a set evenly distributed among Bright Lights, Antics and Our Love to Admire. It was a great show and more than compensated for our being bummed at missing Day 1 of ACL.

Down at ACL on Saturday we took in Augustana, Cold War Kids, Clap Your Hands and Say Yeah, the Arctic Monkeys and Arcade Fire. In the words of Larry David, "Pretty good. Pretty, pretty good." No, Larry was wrong. They ROCKED. I wasn't familiar with Augustana, had heard of but never seen Cold War Kids, and have long loved CYHASY, Arctic Monkeys and Arcade Fire. They all stepped up and played to appreciative and knowledgeable ACL audiences. The only crappy part was that part of the sound system blew during Arcade Fire's set, so the fidelity was not so high. But anyway, it didn't materially detract from the experience. It was enjoyment, pure and simple.

And now for some pics:

Hanging in the Grove: my friends Mary-Gail, David, Patti and yours truly swilling a cool one. Notice the cowboy hats - truly self-preservation. Tried a baseball hat and it really didn't do the job given searing heat and intense sun. I don't look too much like Billy Crystal, do I?

Cooling off in Barton Springs: a short walk from the fest, this was the late afternoon way of dropping your body temperature by 5 degrees and getting prepped for an evening of music and coolness.

   
Me and my fest-babe. Loving the cute pig-tails.

My friend Dave spent some time during undergrad and grad school at Vanderbilt, where he honed his taste for Makers Mark. And what better place to enjoy than at ACL?

Me with my friends Ed and Dave. It just so happens that two of my music friends also happen to be my counsel, Ed (Intellectual Property) and Dave (Corporate and Securities Law). How lucky am I that I actually like my lawyers - and want to spend time with them off the clock?!

Sunday at ACL didn't disappoint, either, as we took in Ben Kweller, Midlake, Bloc Party, Wilco, Ziggy Marley and the Decemberists. Ben was sweet, Midlake cool, Bloc Party rocked, Wilco rolled, Ziggy bopped and the Decemberists grooved. It was a fitting end to a spectacular few days. I could get all critical of the artists but that's not what this post is about. It is about the experience of being at ACL. An experience I highly recommend you take in one of these years.

Bridging the Gap Between Economic Models and Reality

As a student of economics, I have long marveled at the intricacy and mathematical beauty of microeconomic models. They seem to explain so much about the world in which we live and why we do what we do - except when they don't. And a stark reminder of these limitations was on stage in an article titled A Reality Check for Home Sellers in today's New York Times. At the end of the day, the story offered a prescriptive for seller behavior grounded in economic rationality without consideration of an even more powerful forces - psychology and utility.

While discussions of utility in neoclassical economics are generally absent of behavioral impacts, and merely seek to quantify rational trade-offs among economic goods, utilitarian explanations take into account consumer psychology and offer a more robust framework for understanding motivations and their implications for policy-making. Preference utilitarianism, as put forth by Peter Singer, seems to be the most useful model for understanding the behavior described in today's article than more classical economic frameworks. It takes into account the uniqueness of each individual's perspective and validates their actions as being rational - for them. And this happens to describe the world in which we live, a world that is perceived differently by each economic actor.

Their study, “Loss Aversion and Seller Behavior: Evidence From the Housing Market,” appeared in The Quarterly Journal of Economics in November 2001. The professors gathered data on almost 6,000 Boston condominium listings from 1991 to 1997 and showed that for essentially identical condominiums, people who had bought at the peak and were facing a loss generally listed their properties for significantly more than those who had bought at a time when prices were lower.

Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.

In classical economics, that’s not supposed to happen, but the episode did comport with the behavioral economics theory of loss aversion: people have a visceral — some might say “irrational” — hatred of losing money. They try to avoid doing so, even when it goes against their own best interests.

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So by being hung up about whether your condominium will sell for what you paid for it, you aren’t just driving yourself crazy trying to get a buyer. You may be threatening the very performance of the economy and driving up the unemployment rate — provided that many others behave in a similar way.

What is to be done? Well, if you are holding out for an above-market price to recoup your losses, perhaps you would do well to hear the advice that Professor Mayer gives his own family members.

“If you want to sell your house then you list it at the market price and you sell it,” he said. “If you don’t really want to sell then don’t put it on the market. But don’t say you want to sell and then set the price so high that you spend the year cleaning up every morning, having people walk through your living room and look in your medicine cabinets and reject you. That’s just painful — and expensive.”

His research offers a simple lesson for everyone out there waiting for a high price to push them back into the black: Get real.

You know what struck me when reading this article - one could replace the word "condominium" with "stocks" and you'd have the exact same effect. In general, retail investors hate selling losers. There is a psychological barrier to taking a loss, admitting a mistake, even if it is economically prudent to do so. How many people do you know that held on to stocks from $60 down to $1, even when they really thought they should get out at $30? I personally know dozens. The concept of sunk costs gets thrown out the window when emotions get involved. As I've written previously, humans are not wired to everywhere and always make rational economic decisions, though they are wired to always seek to maximize their utility. A discussion of consumer behavior in the absence of psychology and utility is almost valueless, IMHO.

In the case of the Boston condo market, while it might not be economically rational to hold on in a depressed market, it would clearly cause greater emotional costs to sell than the economic benefits it would generate. And economists themselves just need to "get real" - people don't want rational economic explanations as a prescriptive for their behavior. They want to feel good. And if feeling good means holding on to losers, then this is what they'll do, regardless of what big-brained economists may say. Therefore, policy-making needs to take into account consumers' inevitable "irrational" behavior, as this is a constraint that is very real, time-tested and one of the few immutable certainties of life.

Living Life the Right Way?

This time of year is a time filled with much introspection and reflection. The Jewish New Year. Yom Kippur. The new school year. And more than in years past, I find my thoughts turning towards my own mortality, the way I've chosen to live my life and to question and ponder if I've made, and continue to make, sound choices for myself, my family and those whose lives I touch. Because, quite frankly, I am about one of the luckiest people on earth yet find stress, angst and frustration plentiful parts of my day-to-day life. Trying to do too much. Trying to take on everything that comes my way. Yet sometimes forgetting to dig the process and the people and instead getting locked-in to a task-oriented, execute, execute, execute mind-set. Not good.

This year I've had a friend, a peer, die from an awful strain of cancer. I've had another friend, a peer, diagnosed with early-stage Parkinson's. Both with wonderful, loving spouses. Both with beautiful, happy, healthy children. And then I look at my blessed life, my stresses, my angst, and weigh it against the lot of my two close friends, and I feel like I need a wake-up call, or some healthy dose of perspective given the whirlwind of life. Speaking for myself, I find it so easy to get caught up in the intensity and complexity of New York living. It's great much of the time, don't get me wrong. But it plays into the "gotta do this/gotta do that/gotta rush/gotta hop/drop off kids/go to meeting/make phone calls/do 300 emails" nutso routine, especially if you are a Type A freak like me.  If I let it. This is the time of year to take a big step back, assess, and figure out what changes you want to make and make them. And make them stick. Because while I can make resolutions and atone for crappy stuff I've said or done, the proof is in how I live my life. And some changes need to be made.

I read one of the most touching and instructive stories I've seen in this vein in today's Wall Street Journal. The story was based on a speech titled How to Achieve Your Childhood Dreams given two days ago by a beloved Computer Science professor at Carnegie-Mellon University. The speech happened to be part of a "Last Lecture" series, where top professors give talks as if it is the last lecture they are going to give, ever. The strange thing about this particular speech is that the speaker, 46-year old Randy Pausch, is going to die of pancreatic cancer within the next two months. A loving wife. Three young children. And an outlook so positive it makes me embarrassed to even contemplate the kind of bullshit that irks me day in, day out. There is a four-minute video with highlights of his talk that is a must-watch. Professor Pausch is an extremely dynamic, engaging speaker, and his subject matter couldn't be more relevant to what has been on my mind that past few weeks:

Flashing his rejection letters on the screen, he talked about setbacks in his career, repeating: "Brick walls are there for a reason. They let us prove how badly we want things." He encouraged us to be patient with others. "Wait long enough, and people will surprise and impress you." After showing photos of his childhood bedroom, decorated with mathematical notations he'd drawn on the walls, he said: "If your kids want to paint their bedrooms, as a favor to me, let 'em do it."

A few other notable quotes from his talk:

• "Experience is what you get when you don't get what you want"

• "What would you say if it was your last chance to say it?" [This would be instructive and informative not only for those whom you are speaking to but for yourself]

• "This is not about how to achieve your dreams, but how to live your life"

From reading the WSJ story and listening to Professor Pausch's words, I take away some key nuggets that I will attempt to imprint on my brain in order to adopt a better, healthier, more peaceful outlook on life:

• Be patient with others

• Be persistent in pursuing your goals

• Dig creativity in yourself and in others

• Turn the struggle into a positive learning experience

• Maintain perspective by testing your mind-set

And tomorrow I pray and I atone. This was some pretty good prep work, to be sure.

Putting the Current Market Turmoil in Context

It is easy to get swept away by the drama of the credit crisis as portrayed in newspapers and other media outlets each day, every day, over and over again. Are the problems real? Absolutely. Do they pose a risk to the US economy and those of other Western nations if not taken seriously? Without a doubt. But are we heading into the abyss of depression and stagnation arising from inflated real estate values and a debt bubble of historic proportions? Unlikely, IMHO.

But regardless of how I might portray today's circumstance in rational, thoughtful, pragmatic terms, Robert Steel (Undersecretary of Domestic Finance) and David McCormick (Undersecretary of International Affairs) over at the US Treasury have already done so in an editorial carried in last week's Financial Times. And they have somewhat more credibility and influence than yours truly. Here are some particularly interesting excerpts:

Despite understandable anxiety over current market turmoil, recent events are unfolding against the backdrop of very robust economic fundamentals. The global economy continues to grow at about 5 per cent annually; overall worldwide growth in recent years has been the strongest in three decades, with emerging markets as a key driver. US economic fundamentals remain strong: unemployment is low, wages are rising, core inflation is contained and our financial system remains well-capitalised.

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Benign market conditions bred complacency and credit discipline deteriorated, particularly in leveraged loans, US subprime mortgages and other, related asset classes. Recent volatility in the credit and mortgage markets reflects a reassessment and a re-pricing of risk, as well as retrenchment from lower-quality and less-liquid assets. This readjustment is a painful reminder of the importance of robust risk management and of the need for investors to properly understand, evaluate and examine risk.

We have also been reminded that when capital markets are globally integrated, disturbances and uncertainty, like capital, also flow across borders. We have seen some improvement in recent weeks, but it will take more time for the impact of these financial market dislocations to play out and for their impact on the global economy to be completely clear.

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...Mr Paulson and his counterparts in the Group of Seven leading industrial nations will ask the Financial Stability Forum (FSF) – a body of finance ministries, central banks and regulatory bodies from leading financial centres created after the Asian financial crisis – for a timely examination of four issues.

First is financial institutions’ liquidity, market and credit risk practices, including treatment of complex credit products and conduits. The second is accounting and valuation procedures for financial derivative instruments, particularly for complex, narrowly traded products that become difficult to price in times of stress. Third is basic supervisory oversight principles for regulated financial entities, especially given exposures to off-balance sheet, contingent claims. And fourth is the role of credit rating agencies in evaluating structured finance products.

From my perspective, Messrs. Steel and McCormick, together with their boss Mr. Paulson, have got it right. Situation is serious. Must act with clear and decisive action. Must coordinate with other major market participants. But don't panic because the underlying backdrop is fundamentally sound. Maybe I'm being a pollyana, but I think this is the right path and the correct interpretation of the facts. Painful, yes. But we'll come out the other end hopefully just a little bit smarter than before.

"Mind the Gap" and the 1980s S&L Crisis: Financial Turmoil 21st Century-Style

Make no mistake, what we've got today is a mess. And it is hard to put your finger on any one thing and say "this is the proximate cause" of the dislocation, except to maybe say "easy money." How that easy money manifested itself, however, is what makes the story so interesting. If, for a moment, we buy the argument that the US Fed kept rates too low for too long after injecting massive amounts of liquidity into the market in the wake of the tech bubble bursting in 2001, and that it neglected to sop up all those extra dollars sloshing around the system after the crisis passed, its impact has had a ripple effect that provided a window of opportunity for businesses and consumers alike through:

• Cheap consumer mortgage loans with heavily back-ended costs;

• Cheap private equity/LBO loans with weak covenants;

• Cheap hedge fund loans with easier collateral requirements; and

• An abundance of opportunity through the "carry trade" across markets and asset classes.

And when I think about this from a historical perspective, it seems to me like a synthesis of the Savings & Loan (S&L) crisis of the 1980s and the junk bond implosion of the late 1980s/early 1990s. The S&L crisis was fueled by a classic blowing-up of the carry trade, as shorter-dated liabilities repriced at much higher levels much faster than longer-dated assets, causing balance sheets to bleed until capital was wiped out. Yes, the regulatory environment was a principal driver of this dislocation (as rates paid for deposits were de-regulated, causing a competitive environment for attracting financing for all those low-earning, long-dated asset portfolios), but this was a brilliant example of the carry trade gone awry.

Gillian Tett, who penned an article in the Financial Times asking why the market missed this new "monster" (e.g., long-dated, illiquid asset vehicles funded by short-dated commercial paper), said the following:

But while risk managers have been obsessively watching hedge funds, another problem has been brewing, unnoticed – conduits and structured investment vehicles.

For though few observers outside the halls of high finance had heard of SIVs until this summer (let alone their mutant cousin, SIV-lites), these vehicles are now throwing global money markets into a panic.

In particular, what investors have suddenly realised in recent days is that not only have financiers created these vehicles on a startling scale this decade but they have also done so using an appalling funding mismatch.

Most notably, while these vehicles typically invest in long-term assets that tend to be illiquid, they finance themselves with asset-backed commercial paper that typically lasts just three months. This summer, however, investors in the ABCP market have gone on strike. Thus conduits and SIVs are now suddenly calling on bank liquidity lines instead.

From my standpoint there is nothing new here. This monster - poor gap management - is nothing new. It has plagued financial systems from time immemorial. And this isn't really a regulatory issue, it is an investor due diligence issue. So I don't believe the issue is being framed right; regulators should have nothing to say about this particular monster, unless issuers provided false or misleading disclosures (in which case the regulators have an historical tangle on their hands). If investors are inclined to do stupid things, that is their prerogative (though their investors may vote with their feet and walk to their nearest class-action lawyer to ponder a lawsuit), but the relationship is between the investors and issuers, not regulators.

That all said, I think we're all going to be just fine because of two key things:

• Global central banks, led by the US Fed, will pump the necessary liquidity into the market to avoid a monetary meltdown; and

• Global institutional investors, with the liquidity and the desire to put trillions to work, will keep asset prices from reaching the rock-bottom levels generally found at the end of epic credit crunches and liquidity crises.

I've touched on this previously as has another of my favorite writers from the FT, John Authers. Ultimately, the is a liquidity crisis and the Fed is taking the lead on managing this crisis on the global stage. And they're not going to screw it up. The stakes are just too high. We've seen this movie before, as have members of the Fed and other leading central bankers. The only question is whether or not they'll keep too much liquidity in the system as they did post-2001, laying the groundwork for another bubble. Hopefully they'll let investors take some of the pain and get us on solid, stable, healthy long-term footing once again.

The New York Venture Scene is Rocking!

As both an active angel investor and entrepreneur, I can say one thing for sure: macroeconomic woes aside, the New York early-stage investment scene is vibrant, exciting, and full of possibilities. I have seen more interesting deals with strong business models than any time over the past three years: deal quality is just getting better. And the kinds of deals I've been seeing and working on have been concentrated in four key sectors: digital media, social media, gaming and financial technology. What I can say is that video is booming; monetizing the wonder that is Facebook is only picking up steam; the dedication, passion and monies spent by gamers is getting increased attention; and that making money from those with money is a time-honored passion and one that is a key focus in today's market.

I'll write more shortly about my own personal investment activities, but I felt compelled to share my perceptions of what is going on across Silicon Alley. The energy spanning the New York venture scene is palpable. I am excited to see it continue and pick up momentum. I'd love to hear about what you're seeing as well.

Pier 40: A Jewel for the Downtown Community, NYC and Children Everywhere

For those of you who are unaware, Pier 40 is a 15 acre site on the Hudson River located just west of Greenwich Village in Downtown NYC. While some of its space is used to provide low-cost parking, most of its square footage is devoted to playing fields that serve much of the Downtown community. Park space is disappearing as commercial and residential development takes hold, and Pier 40 is one of the most valuable remaining open spaces suitable for playing fields.

Problem is, a broken process to solicit proposals for developing Pier 40 have put the community and NYC in the position of possibly facing a seriously flawed project from the Related Companies. The Related proposal would turn the most desirable playing fields into a permanent installation for Cirque de Soleil, movie theaters, restaurants and other non park-like activities. Now I love New York for its food, movies and performances, but I can tell you that these three things are far more abundant than playing fields, and can be situated in many more places than the open space required for multiple baseball diamonds, soccer and football fields. The prospect of taking Pier 40 away from its highest and best use - active recreation space for the benefit of Hudson River Park, the Downtown community and all of NYC - is too sad for words.

Rather then get depressed and weepy, a group of concerned community, business and civic leaders banded together to form the Pier 40 Partnership. The group's formation was catalyzed by a community hearing on May 3rd to discuss the development proposals, which was attended by over 2,000 concerned citizens.  We have been meeting with City and State Government officials to make our case, and have already garnered significant contributions towards a private-public partnership to support the right development project for Pier 40. Fred Wilson, who is also involved with Pier 40 Partnership and set up the group's website, has a terrific post on Pier 40 as well. If you want to get involved, please drop me a note and I'll help figure out how to make it happen.

A Few Thoughts on Market Dislocations

The events over the past few months have been fascinating, at least when taking a clinical view of things. It is like a slow-motion train wreck where the force of the collision spreads detritus all across the landscape. Is this like LTCM? No. Is this the emerging markets debt crisis redux? No. Did legacy government policies contribute to a real-estate bubble that has seemed poised to pop for years? Yes. The current crisis is, in fact, a contagion, where Wall Street and Main Street are inextricably linked in a complex web of relationships that only time and suffering will help untangle. And do we have Alan Greenspan sitting in his exalted perch pulling strings and lending confidence and authority behind the scenes? No. And this is part of what makes this story so compelling.

What are some of the factors that make this market meltdown so, well, intriguing?

Quasi-governmental agencies competing with the private sector: Long story short, it seems to me that Congress let FNMA and FHLMC get way, way too big, doing business well beyond their original charter. They used an implicit government guarantee to provide ready credit to too many homeowners, and fostered a competitive landscape that placed origination volume over loan quality, the problems of which we are dealing with today.

Rating agencies not imagining beyond their Monte Carlo simulations: Investors rely heavily on ratings. Issuers pay rating agencies lots of money to validate their securities, which, on its face is a conflict of interest. Well, let's forget about that for the moment. Getting back to ratings quality, what is the purpose of having ratings if they are adjusted post-facto? Isn't this kind of like Wall Street sell-side analysts putting a Sell rating on a stock after they whiff on earnings, when they previously had a Buy rating on it? And this happens every day. Boo.

Leverage, leverage everywhere: Homeowners. Securitized vehicles. Investors. With leverage comes reduced margin for error, and with error comes pain. The issue is that the pain incurred does not move linearly, it moves exponentially. Once the pain starts happening, its effects ripple outward, often swallowing everything in its path. With a leveraged portfolio, a normal drop hurts, but isn't fatal. However, when the drop moves beyond normal, beyond the expected, the investor is asked for more collateral, which causes further downward pressure on portfolio value as liquidations are needed to make margin calls. But as more securities are sold in a rapidly declining market bids start to fall away, committing the leveraged investor to months in purgatory, working out a busted book. And what about homeowners? As adjustable rate mortgages get reset sharply upward and payments can't be made, remember the value of that equity in a home? Poof. Now what if that happens 1,000, 100,000, a million times or more? All those real assets flooding the market? There is no bid. Which causes builders' inventory to crater, which kills their stock prices, which hurts investors' portfolios, consumer demand, etc. It just goes on and on.

A rookie running the Fed: I don't envy Mr. Bernanke. Not for a minute. His wealth of deeply-felt, academically-grounded views and best of intentions by seeking to avoid the "moral hazard" of a Fed put all went out the window in less then a week. There is nothing more hazardous to one's professional reputation than being at the helm of a true market Chernobyl, especially when you were just given the keys to the reactor, but this is what Ben is facing early in his tenure. He was (and still is) staring at a liquidity crunch right in the face, challenging it to a game of "who'll blink first," and he lost. And fast. Notwithstanding my leanings towards letting the chips fall where they may and letting those who made bad and irresponsible decisions get smoked, Mr. Bernanke made the only decision he really could make. Even if it went directly against statements he made earlier in the month concerning his focus on inflation pressures and, therefore, stable to higher - not lower - interest rates. Water under the bridge. He's learning. Dust him off, wind him up and he'll be ready for the next (read: inevitable) series of crises during his tenure.

A pro running the Treasury: As much as Mr. Bernanke is grounded in academia, Mr. Paulson is steeped in global financial realities. The academic vs. the pragmatist. They are really great foils for each other, especially at a time like this. While Mr. Bernanke is clearly the bell of the ball of the global financial markets, there can be little doubt that notwithstanding Treasury Secretary Paulson's low profile during this crisis, he is having an influence on Fed thinking. He spent a career at one of the most successful and deft global financial powerhouses, leading part of the charge during its worldwide expansion. Let me tell you, it makes me a lot more comfortable knowing that Hank is back there providing his two cents to Ben and his Fed pals, because he knows the way it is, not the way it should be as depicted in Ph.D dissertations and textbooks. In another few years, Hank and Ben could be a virtual "dream team," the princes of theory and practice side-by-side. Nice.

I think we are in the early innings of a global financial de-leveraging that will necessarily take place, and it will be the skill of those like Messrs. Bernanke and Paulson along with their EU and Asian colleagues that will dictate how the air is let out of the bubble. Moral hazard sucks, and we are right in the midst of some pretty morally hazardous stuff taking place from a policy perspective. Certain firms and investors will be bailed out though they shouldn't be, but net net, the impact of letting them go may well be far worse then showing the financial community that the Bernanke Fed will not be issuing put options as the Greenspan Fed did. There are times and places for making points, grand, sweeping points, but this is not one of them. The next twelve months should be challenging for investors across many if not most asset classes, and it is largely due to the government messing things up and then trying to fix them post-facto. And this is the real hazard that should be driving the discussion.

Picking up Girls? Landing a Job? Contrarian Investing?: George Costanza's "Do the Opposite" Holds the Key

When George Constanza came to the conclusion that every instinct he had, every thought that passed through his mind was simply wrong, he logically reasoned that by doing the opposite he should enjoy  much better outcomes. He tested it out by trying to pick up a hot, seemingly unapproachable woman. It worked. He tried it out by being rude, yet brutally honest with George Steinbrenner in a job interview. It worked. In one fell swoop George figured out that by being a contrarian,  he could achieve much better results than by following his  gut. And the funny thing is, this kind of thing just works, and often-times is the best strategy to follow in investing. Like right now. When it is too painful for most to put fresh cash to work in beaten-up sectors and funds. Unless you're really smart and really liquid like, say, Eli Broad, Hank Greenberg and Goldman Sachs?

Let's consider what I mean when I say "Contrarian investing." Per Wikipedia:

A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Similarly, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don't pan out. Avoiding investments in over-hyped investments reduces the risk of such drops. These general principles can apply whether the investment in question is an individual stock, an industry sector, or an entire market or asset class.

Contrarians are sometimes thought of as perma-bears—market participants who are permanently biased to a bear market view. However, a contrarian does not necessarily have a negative view of the overall stock market, nor does he believe that it is always overvalued, or that the conventional wisdom is always wrong. Rather, a contrarian seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced. While more "buy" candidates are likely to be identified during market declines (and vice versa), these opportunities can occur during periods when the overall market is generally rising or falling.

It might seem a little stunning that in the face of a $1.4 billion drop in assets of Goldman Sachs Global Equities Opportunities Fund, three investors, including Goldman itself, would pony up an extra $3 billion. In actual fact, it makes perfect sense. This has been a bloodbath. Certain types of funds have gotten hit worse then others, and then the question becomes: are these strategies broken or is this a liquidity-driven price adjustment that is somewhat overdone? Clearly the three investors have great faith in the team and the strategies being managed, so much so that they feel they are making a deep-value bet on a fund that has been a strong performer. Just because many stat arb funds have gotten crushed over the past month, does this mean that stat arb as a strategy sucks or that the managers (like, say, Jim Simonds?) themselves suck? Clearly not. But a lot of people neither have the stomach nor the liquidity to make bets like Hank Greenberg and Eli Broad.

And I'll tell you now that some smart, rich folks are going to make an absolute killing on lower-rated credit spreads. Because so many funds and firms were all playing the same two games, borrowing liquid short and lending illiquid long and going long lower-rated credit spreads and going short either equity or higher-rated credit spreads, often on a highly leveraged basis, the speed and depth of the unwinding that is taking place (and isn't nearly done) will cause out-of-favor asset prices to get overly depressed and present a massive buying opportunity. If you have the guts and the liquidity, that is.

And this reminds me of a quote from Bill Gross of Pimco in last Saturday's New York Times:

“Our current system of levered finance and its related structures may be critically flawed,” said William H. Gross, the chief investment officer of Pimco, a mutual fund company. “Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.”

Now I respect Bill Gross quite a bit and generally think he says some pretty intelligent stuff, but this doesn't fall into that category. The problem isn't with the system - it's with the participants. You know how you hedge liquidity risk? By doing one of a few things:

1. Keeping excess cash on hand to cushion statistical anomalies in returns (at least what you might model as statistical anomalies);
2. Diversifying the portfolio such that your asset classes don't approach perfect correlation in market dislocations; and
3. Avoiding too much leverage.

Now if the funds that melted down had followed at least one of these three rules, do you think they would have suffered the same fate? I think not. But if you want to fly high like Icarus, you run the risk of having your wings burned off. The problem is, you know who ends up holding the bag? Jeff Larson? No, his investors. This is why funds like Sowood managed $3 billion (run fast, run hot, put up numbers, get big, rake in fees and blow up - a classic negatively skewed/short option return profile),  while guys like Nassim Taleb can't raise much of anything (run like a turtle, hemmorage theta, bleed until the market craps out and then make a tidy sum - a classic positively skewed/long option return profile). There is no sexiness or appeal about losing most of the time and then winning big, as opposed to "winning" most of the time and then losing big. The issue is that most investors can't get out when the usual winner is about to give it all back, while the principals of such funds still captured a large share of the spoils on the way up. It is what it is, I guess. I just find times like these instructive. If only managers and investors took instruction...