Investment Manager’s Report: Collecting nickels in front of bulldozers?
“The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function …”
F. Scott Fitzgerald
Ours is a strange portfolio: four hundred odd positions and yet no diversification. So what gives? Why do our treasuries move in line with our oil futures? We blame the Fed. Having doused the vulnerable US economy of 2002/3 with an unprecedented injection of liquidity, they have broken the market’s pricing mechanism. The ability to self-correct just isn’t there. Typically overinvestment in the real economy dilutes returns and discourages new money. Not anymore. Take the exploits of LTCM. Confronted by diminishing returns in bond arbitrage they simply put yet more money to work. Returns of less than 1% on assets were leveraged 36x to produce a $500bn notional profit.
