Young and Invested

In our first featured Blogger Interview, Young & Invested is pleased to bring you the thoughts and views of Kid Dynamite, one of the most followed bloggers on Seeking Alpha, with more than 9,300 followers. He shares with us his opinions on some of the major issues confronting investors in this market.

Kid Dynamite is the man behind the popular blog “Kid Dynamite’s World” – http://fridayinvegas.blogspot.com/. Kid Dynamite spent 8 years as a trader at a major Wall Street investment bank. From June 1999 through April 2005 he specialized in portfolio trading, and from May 2005 through November 2007 he was the head trader for an internal hedge fund on the buy side of the same firm. Kid Dynamite managed a multi-billion dollar merger arbitrage portfolio, and continued to implement portfolio trading related strategies as well.

1. How did your blog transform into one discussing and evaluating financial markets?

I quit my job about 5 months before Bear Stearns blew up.  Once I was free of the shackles of the corporation, I could write much more freely about financial markets without fear of enduring negative consequences if my employer had found out about my blog.  You are probably aware that big companies are very wary of having the views of employees misinterpreted as the views of the company, and thus they usually don’t look kindly on opinionated writing.

2. What kind of economic/market issues do you like to address in your writings?

What bugs me most is when journalists try to write about trading or mechanics of trading that they simply don’t understand.  They invariably get it wrong, and that “wrong-ness” usually spreads.  I found that for a while most of what I was writing was simply correcting factual errors that people have in their understanding of things like high frequency trading, program trading (my background), flash trading, etc. Lately, too, the biggest problem is the pervasive populism that has taken over even the mainstream media.  It skews the facts, and the reader sentiment just spreads ignorantly like a snowball.  At the same time, it fails to address the real issues, and ensures that they will not be addressed.

3. Do you think the current debt situation in developed economies is bigger than most other problems capitalist countries have faced before?

Yes.  I happen to think that we’ve reached the end of a massive multi-decade cycle of debt accumulation, and that debt must be reduced.  This is true on an individual/household level, corporate level, municipality level and national level.  It shocks me when economists predict recoveries based on, literally, a HANDFUL of data points, which by themselves would be statistically insignificant.  Add to that the fact that the inputs are vastly different now, and it shocks me that people quote past recessions, past stock market rallies, past periods of unemployment, etc.

4. Do you believe the unintended consequences of government action are getting bigger than the problems which government action was meant to solve?

Well, I believe you can’t cure a leverage problem with more leverage – so in that sense, yes.  The cliff gets pushed back, but also becomes taller with each intervention.  The problem is that there is no solution – politically, we just aren’t willing to make the difficult decisions.  Without making this a political issue, this for me is the most disappointing factor about Obama’s actions thus far.  It’s not that McCain would have done better – it’s that Obama, upon entering office, had so much support and the American people had such faith in him.  Combine that with his eloquence and leadership skills, and it’s possible he actually COULD have made the hard choices and talked the public through the aftermath.  Very few Presidents even have that potential – but I think he did, and he missed his chance.  So now, we continue to extend and pretend, delay and pray, and there is no solution.

5. Have economies just resigned to moving from bubble to bubble in different asset classes? Is there a solution to this cycle?

Right on cue – I think I just answered that question above!

6. Do you think the bailout strategies being contemplated in the Euro zone will work any better than the ones that were utilized by the US government?

I am not qualified to comment intelligently on the Eurozone.

7. Is the debt situation just something we are worried about in a downturn and something that’ll be much easier to control in once economic growth returns?

You are assuming that economic growth returns!  Growth will certainly resume someday, but I think that anyone who expects the kind of housing market performance we saw in the last 10 years anytime soon is delusional.  That housing bubble really affected all other aspects of our economic growth and juiced it way beyond normal levels. I mention housing because I think it was a huge part of the bubble in America – people spent paper profits on their homes, accruing debts in the process. MEW – mortgage equity withdrawal!!! It fuelled everything.  As long as we don’t have a downturn, you don’t have to worry about this debt – you just refinance it – MAGIC!  Of course, that MUST end at some point.

8. How has your past experience helped you get a better grasp of issues that hit the headlines and are often blown out of proportion or at other times understated? Any examples?

Well, everyday journalists misinterpret financial stories.  Some do it out of ignorance, some do it to appeal to what they know are their readers’ views.   I addressed this above when I mentioned populism.  The Goldman Sachs – Greece story is a recent excellent example.  Der Spiegel broke the story (http://www.spiegel.de/international/europe/0,1518,676634,00.html) of how GS helped Greece structure a currency swap.  This swap was a bit unusual because it was done at non-market rates so that Greece immediately got a big payment upfront from GS.  Of course, that payment needs to be paid back at some point, and we’re now seeing the consequences.  Anyway, everyone loves to hate Goldman, and this is actually a pretty interesting story, because this  swap allowed Greece to fool European regulators and may have been a key factor in its inclusion in the European Union’s formation!   So far so good – but then the NY Times picks up the story several days later (http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp=&pagewanted=all) and gets sidetracked with:

“In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.”

That’s pure garbage – Greece selling assets to pay down debt has absolutely NOTHING to do with hiding their financial situation via a non-market rate currency swap designed to deceive European regulators and gain entrance into the E.U..  It happens to be a shortsighted, doomed to fail way to fix budget problems (since they are selling income producing assets) – but it’s a total red herring to include it in a discussion of spurious financial dealings.  Of course, the readers don’t get this point (surprisingly, since it’s not a complex one) and just rail on the “Goldman Sachs is the root of all evil” train.  GS may be evil, but the way to illustrate it is with the off-market rate currency swap it structured for Greece, not the sale of assets it arranged for Greece.  Kudos to Felix Salmon for taking an unpopular view and doing an excellent job summing up the facts in his piece: http://blogs.reuters.com/felix-salmon/2010/02/16/the-greek-derivatives-arent-goldmans-fault/

9. What do you see becoming the big surprise for market investors and observers in 2010?

I have no idea where the stock market is going short term, (read this, though, for my imparted wisdom: http://fridayinvegas.blogspot.com/2009/12/kds-year-in-review-part-1-isaac-newton.html),  but I would be shocked if we didn’t have a major selloff sometime in the next few years.  That sounds vague, but one thing I’m learning over and over again is an oft repeated cliché:  The markets can stay irrational longer than you can stay solvent.  It’s a slight twist on that – governments can extend and delay problems longer than we think – it may take 18 months, 5 years, or even 10 years, but I would be very surprised if we don’t see SPX 800 again. I am still waiting for the mainstream press to pick up the pending disaster in underfunded pension plans, and in the numerous major US municipalities which are bankrupt.

10. What are some of the other blogs you read for insights into new developments?

Calculated Risk – for not-too-opinionated, very educated, and very accurate interpretations of economic data points.  Barry Ritholtz – for more opinionated and less censored interpretations of the same.  David Merkel’s Aleph Blog, Paul Kedrosky’s Infectious Greed,  Tyler Cowen’s Marginal Revolution, Michael Panzner’s Financial Armageddon, for focused and always insightful pieces.  I think Felix Salmon has become one of the better mainstream writers – he is a journalist, but he gets the facts straight, doesn’t manipulate them, and accurately explains unpopular views in an attempt to educate, not to generate hype and hysteria.  Mike “MISH” Shedlock has also done a good job repeatedly focusing on the municipal debt problems we are facing – which no one seems to be talking about.

Last 3 posts by Shishir Nigam

• The Era Of Unintended Consequences - June 13th, 2010
• First Dose Of Moral Hazard Delivered - April 18th, 2010
• Two Big Issues - RIM’s Future Hangs in the Balance - April 3rd, 2010