Mr. Bassman* is back.
From Simplify Asset Management, November 2:
Over the course of a dozen years and the terms of three Federal Reserve Bank (FED) Chairpersons, the FED has been working dutifully to create inflation in the US economy.
Seemingly at odds with their Congressional mandate to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”, the FED is well-aware that inflation is the only solution to unravel our problem of excessive debt, both public and private.
As a reminder, there are only two ways out of a debt crisis – either default or inflate with the caveat that inflation is simply a slow-motion default.
Now let us consider the implications of what might occur if the FED, with the unanticipated support of COVID, has finally achieved its goal.While it may be a reach to claim “it takes a village” to crash the economy, there was certainly no lack of bad actors and actions that precipitated the Great Financial Crisis (GFC) of 2007-09.
But regardless of blame, at the end of the day there was not only too much debt, but also much of this debt was of poor quality.
At a similar time at the onset of the Great Depression, Treasury Secretary Andrew Mellon advised President Herbert Hoover to “Liquidate labor, liquidate stocks, liquidate farmers...it will purge the rottenness out of the system.”
If this path was unacceptable during the harsh times before FDR’s introduction of Social Security and LBJs creation of the Great Society, it was certainly out of bounds for our modern-day FED.
Thus, the FED’s clever idea, which I still support, relied upon Milton Friedman’s observation that “inflation is always and everywhere a monetary phenomenon”.GDP = Money * Velocity = Price * Quantity
Via a process most civilians would call “money printing”, but what the FED coyly dubs Quantitative Easing (QE), the -feldgrau line- money supply expanded....
....MUCH MORE
Although both Convexity Maven and Climateer investing used the purported Andrew Mellon line, ourselves in Nov. 3's ""Hedge Fund CIO: 'There Is Too Much Capital In The World, And It Needs To Be Destroyed'" it is just a case of "great minds and all that" with Mr. Bassman's being by far the greater.
*Here is our boilerplate introduction to Mr. Bassman:
...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change)."Pish. Posh." is a technical term only used by market professionals for those situations where one has decided to go full Alinsky rule #5:
Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....
#5 Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage...The Convexity Maven is nothing if not a professional. Here is part of his mini-bio at MacroVoices:
Harley S. Bassman
Harley Bassman created, marketed and traded a wide variety of derivative and structured products during his twenty-six-year career at Merrill Lynch. In 1985 he created the OPOSSMS mortgage options product that facilitated risk transmission between MBS originators and financial institutions. In 1988, he assumed responsibility for trading and marketing IO/PO and other levered prepayment securities. Soon after this, he started purchasing RTC auctioned MBS Servicing rights and repackaged them for the securities market as BIGS - Beneficial Interests in GNMA Servicing. Later, he started a GNMA servicing conduit becoming one of the Top 20 originators in 1992. As managing and hedging prepayment risk became a priority focus for the financial markets, Mr. Bassman created PRESERV, Merrill's trademarked Prepayment Cap product. Merrill was a leader in this product category writing protection that covered the risk on tens of billions of notional mortgage servicing rights. Later, Mr. Bassman managed Merrill's initial venture into off-balance sheet mortgage trading.
In 1994, Mr. Bassman assumed responsibility for OTC bond options.
Within a year, Merrill was the leader in this product sector. A wide variety of products were offered including vanilla and complex options on MBS spreads and the Treasury yield curve.
To help clients more fully appreciate Volatility as a primary risk vector, he created the MOVE Index. Similar in form to the VIX Index, it is now the recognized standard measure of Interest Rate Volatility.
From 1995 to 2000 he focused on creating hedge strategies for MBS servicers and portfolio optimization techniques for Total Return and Index investors.
Mr. Bassman became the manager of North American MBS and Structured Finance trading in 2001. During his tenure, he created SURF, (Specialty Underwriting and Residential Finance), a self-contained Sub-Prime mortgage conduit. He supervised the issuance of Merrill’s first Sub-Prime securities. He also transitioned the structuring business to a new technology platform.
In 2006 he built the RateLab, a full spectrum US Rates Trading Desk Strategy Group. Here he worked with investors to advise and optimize their risk exposure. As a key member of the client trading business, he facilitated activity by providing liquidity to both the firm’s clients and market makers.
After a (too) brief sabbatical, in 2011 Mr. Bassman joined Credit Suisse's Global Rates business where he identified and integrated investment and hedging opportunities for sophisticated investors.
Most recently, Mr. Bassman was an Executive Vice President and Portfolio Manager at PIMCO - a leading global investment management firm. Here he managed investments for the Liquid Alternative products group as well as advised on portfolio strategy across asset classes for the firm's franchise businesses.
Mr. Bassman splits his time between Laguna Beach, California and New York City. He has a B.A. in management science from the University of California, San Diego and an MBA in finance and marketing from the University of Chicago....
And so much more, all those cutesy Merrill acronyms can be blamed on him and his team.
