?I?m already against the next war,? said a bumper sticker in Napa, California.
Global Market Comments
July 29, 2016
Fiat Lux
Featured Trade:
(REPORT FROM THE MATTERHORN SUMMIT),
(TESTIMONIAL)
?
From where I stand, the rolling foothills of Northern Italy spread out below me to the south.
On my left lie the distinctive peaks of the Dolomite Alps. On my right I can see the massive expanse of Mont Blanc, at 15,781 feet the highest mountain in Europe.
I am standing at the summit of the Matterhorn. Knock another item off the bucket list.
I have been trying to climb this mountain for 45 years. During my early attempts I possessed the physical conditioning, but not the money to acquire the necessary equipment needed to get to the top.
An ice axe, crampons, helmet, and ropes don?t come cheap to a 16 year old.
In later years, vile weather frustrated my every attempt. Now the forecast was perfect, and the sun, the moon, and the stars aligned.
The Matterhorn has long been the premier climbing challenge on the continent. My doctor in Zermatt heads up many rescues and tells me that a dozen people a year die trying. The year 1999 was especially bad, claiming 39 lives.
Still, if death isn?t on the table, it?s not worth doing.
I spent a restless night sleeping under a heavy wool blanket in a shared bunk with a dozen other climbers at the 10,695 foot Hornli Hut. Get a group of guys like this together, and there is always one who snores.
At 3:00 AM we bolted out of bed to eat a hardy breakfast of eggs, cold cuts, and lots of strong coffee before launching an assault on the Mountain.
We then quietly filled canteens and donned climbing harnesses and backpacks. The night sky was crystal clear, an ocean of stars shimmering upon us, with the occasional shooting star giving it's blessing.
I had spent the past week acclimatizing myself to the high altitude, completing practice climbs to the top of increasingly difficult surrounding peaks. I was joined by my Swiss guide, Christian, of the Zermatt Alpine Center.
In his mid forties, chocolate tanned, with thighs like tree stumps, he had already climbed the Matterhorn an impressive 77 times.
We took off at a rapid pace, passing most of the early starters. Zermatt guides are notorious for speed climbing, the theory being that the quicker they wore out their clients, the sooner they could go home.
I realized there was something far more responsible going on. Christian had to gain the confidence that I had enough energy reserves left for the descent, when 90% of all fatalities occur. At 11,800 feet he said ?Good,? and we roped up.
It was about this time that I started to wonder if I should really be here. Most of the climbers we were passing were in their twenties and a few in their thirties, old enough to be my grandchildren.
After all, I?m the silver haired gentleman people give their seat up to when riding the San Francisco BART. At 12,200 feet Christian ordered, ?Now we put on our crampons.?
From there on we silently pushed our way upward in the darkness, headlamps illuminating the way, methodically positioning our feet to make the leap to the next boulder above.
The mountain has been climbed for 151 years and many of the surfaces have been polished smooth by boots to the point of becoming dangerously slippery, especially when wet.
Much of the slope is frustratingly unstable. Half the rocks you reach for are loose. Stones sent flying by climbers above are a major risk, which is why we wear helmets.
By 5:00 AM we were at 12,700 feet and the sun started to rise. I took out my camera to take a picture, but fumbling with my climbing gloves, I dropped it. It smashed into a dozen pieces on a huge boulder and then skittered down into the great Matterhorn crevasse below.
I still had my iPhone to take pictures. But it's touch screen required me to take my glove off. With the temperature at 10 degrees below freezing, photos were not worth risking fingers to frostbite. So you?ll just have to read about it.
During the first half of the 19th century, the Matterhorn was the Holy Grail among climbers, and was considered impossible to conquer. Englishman, Edward Whymper, finally led a seven-man team to the top in 1865. He pioneered the same Hornli Ridge route that I was ascending today.
But on the way down a rope broke and four perished. One body was never found. Today, you can see the rope in a Zermatt museum, a crude manila affair, along with the clothes from another dead climber found months later.
Some 5,000 now attempt the climb every year, and about 500 make it to the summit. Ulrich Inderbinen made the top over 370 times and last climbed it when he was 90. I was able to shake his hand at a picture signing in Zermatt a couple of years before he died from old age at 103 (click here for his obituary).
At 13,000 feet we approached the Mosley slab, so named for an American who fell to his death here in 1879. Beyond beckoned the Solvay Hut, a tiny, precariously sited rescue from weather that suddenly turns bad.
Taking a break, I found, amazingly, that I still had cell phone reception. Should I send out a Trade Alert from 13,133 feet?
That was where I encountered my first zombie, a climber who grievously underestimated the mountain and had used up every ounce of energy to get this far. His guide was coaxing, shouting and cajoling him to climb down one rock at a time.
Looking at his dead eyes, you know it was going to be a tough and dangerous descent. I later heard that the poor fellow, Japanese, fell and broke his leg and had to be helicoptered off.
There were many more zombies to come.
Above Solvay, we encountered the ?fixed ropes,? which are actually steel cables bolted to the face to help traverse the steepest and most dangerous passages. Lose your grip here, and its 3,000 feet straight down.
This is where we ran into the traffic jam, with simultaneous ascending and descending climbers competing for the same handholds. One dummy actually abseiled down on top of me, nearly knocking me off of my grip. Here, falling climbers are a major danger.
At 300 feet below the summit I passed Sophie?s Ridge, so named for a young Italian woman who was turned back in the 1880?s because high winds were embarrassingly blowing her Victorian ankle length dress above he waist. Now, altitude sickness was taking its toll, with many puking climbers turning back, the disappointment showing on their faces. Luckily, I felt fine.
Not far from there was the location of the original 1865 accident. We approached the small bronze statue of Saint Bernard, the patron saint of mountain climbers.
Bolted to the side of the peak, it was covered with ropes, as many teams tie on to it to rappel down.
Then we were on top. The weather was glorious. The summit was graced with a wrought iron cross that one finds atop many Alpine peaks. There was an impatient line of climbers waiting their turn to tag the summit, take some quick pictures, pick up a rock, and then start their way down.
The feeling of accomplishment was immense.
We carefully picked our way down, rappelling down the steepest faces. By now the sun was well up, the ice was melting, freeing up infinitely more loose rubble. One boulder the size of a small car crashed down 50 feet away, making a thunderous roar.
?Yikes,? I thought. ?We better get out of here.?
At 13,000 feet, we encountered a team with one climber absolutely paralyzed with fear and refusing to budge. After some discussion, I agreed to let her rope up with us and escort her down to the Hornli hut. The other guide was Christian?s friend and that would enable him to continue upward with his other clients. Our expedition turned into a mountain rescue.
Once Christian tied her in, I had second thoughts about being so charitable. If she fell, she could take me with her. Christian then convinced me he could hold both of us with a belay. We then encouraged her down the mountain one step at a time. I went through my entire repertoire of German jokes, which is rather short.
I learned
that she sold toilets on behalf of a Swiss plumbing company for a living, and that until today had never done anything more serious than a day hike out of Lausanne.
All of her equipment was brand new. Part of the problem was that she had failed to don her crampons, which we found in her backpack, untouched in it's original packaging.
Back at the Hornli Hut I was dog tired. Our impromptu guest suddenly fell to the ground and burst into tears. She then bought us both a celebratory liter of beer each. I was dying of thirst, as I had done the entire climb on just two quarts of water to save weight.
It had been the hardest day of my life and after 15 minutes at the table I couldn?t move. The $1,200 investment in Christian had been well spent. He departed for Zermatt to pick up his next client.
I elected to spend a second night at Hornli and complete the 3,000 foot hike down to Schwarzee the next day. From there I was taking the gondola down. Nothing left to prove here. The second time, I slept like a rock.
It is traditional for successful climbers to pick up a stone at the summit and deposit it on a giant cairn at the beginning of the trail at 7,000 feet. Some of these weigh over 50 pounds, a macho display of strength and endurance. When I made my contribution, a small pebble the size of a quarter, I made sure no one was looking.
I now have an empty place on my bucket list. What will replace it? I hear that Africa?s 19,341 foot Mount Kilamanjaro is pretty easy.
Life is good.
Climbing One Step at a Time
Only 4,000 Feet to Go
Half Way and All Is Good
The Traffic Jam
The Summit
A Mountain Rescue
Take That Item off the Bucket List
?This is very bullish for markets. It?s bullish for markets intermediate term. Before, I thought we were in the seventh inning of a four-year bull market. Two waiters just came in and delivered another punch bowl. We?re going into extra innings, baby,? said Stanley Druckenmiller of hedge fund Duquesne Capital Management.
Global Market Comments
? July 28, 2016
Fiat Lux
Featured Trade:
(AUGUST 3 GLOBAL STRATEGY WEBINAR),
(SHAKING THE HAND THAT KILLED OSAMA BIN LADEN)
The team fought their way up two flights of stairs in pitch-blackness, dispatching several fighters along the way.
A tall figure emerged in the green glow of the night vision goggles. It hesitated. Two shots were fired, and the body hit the ground.
That was how Navy Seal Team Six member, Mark Owen, described the last seconds of Al Qaida leader, Osama bin Laden, in the raid on his Abbottabad, Pakistan compound.
I can?t tell you how I met Owen, except that the circumstances are classified, and it took place at an undisclosed location. A number of terrorist groups are seeking retribution for the raid, making Mark and his teammates prime targets.
He and his family now live in the witness protection program buried deep somewhere in the US.
Owen isn?t his real name of course, but a nom de? guerre. In fact, I can?t even tell you what he looks like. His prosthetic make up and wig were so convincing, I doubt his own mother could recognize him.
But there was no doubting the bone-crushing handshake of a Navy Seal.
Spending an hour with ?Owen?, I learned several fascinating details about the raid. Just before launching, the team was told there was a 70% chance the Pakistani Air Force would shoot them down on the way in.
There was also the possibility that their top-secret stealth helicopters would crash on a ground hugging flight through the mountains on the darkest night of the month. Every man was given the option to pass on the mission.
Not one did.
However, that didn?t stop them from joking among themselves about the suicide aspects of their assignment.
What guts!
What was the inside story of the raid?? The most wanted man in the world, the author of the 9/11 attack that killed 3,000 at the World Trade Center, used ?Just for Men?. ?
That was the brand of the hair-coloring agent the Seals discovered in the world?s greatest terrorist?s bathroom, used to make him look younger than he was.
Some of the seals speculated he did this to cut a more threatening figure in his online propaganda diatribes. Others said it was because he had two wives at the site.
The discovery of bin Laden?s secret fortified compound was the result of a decade of tireless investigation by CIA analyst, Maya Lambert. Her role was portrayed in the 2012 film, Zero Dark Thirty, with much embellishment.
The US torture of suspects probably slowed down the hunt, rather than accelerated it, because a glut of false information obscured valuable tips. People will say anything to stop the water boarding, right?
I would.
In the end, it was a junior CIA analyst trolling through ten-year-old archived data gathered in Morocco that uncovered the crucial clue. That was the name of Ibrahim Saeed Ahmed, who turned out to be bin Laden?s personal courier to the outside world.
Constant National Security Agency monitoring of his mother?s phone line in the Persian Gulf led to Ahmed?s location in Pakistan. He was then discretely followed to the mysterious compound in Abbottabad.
Bin Laden successfully hid for so long because he had fallen far off the grid of modern civilization. He never left the building, and didn?t use cell phones or the Internet. Trash was burned on site.
His sole means of communication was via flash drives and DVDs physically carried by Ahmed on an infrequent and unpredictable basis. Bin Laden had effectively jailed himself for five years to stay under the American radar. How ironic.
Since there was no means to verify the identity of the compound?s occupants before the raid, the Seals were the only option. Maya Lambert personally saw them off on their departure from an Eastern Afghanistan base. She too was committed to the mission to the very end.
Even when the helicopter in which Owen was riding crashed because of freak lift conditions, the mission went ahead. Since their carefully crafted and much practiced plan fell apart, they improvised on the spot, a mandatory Seal quality.
They professionally and methodically breached the compound?s outer wall and blew some steel doors off their hinges before they reached their third floor destination.
Owen went to great lengths to explain how the civilians on the site, including bin Laden?s own family members, were kept out of harm?s way.
After dispatching their target, the Seals quickly photographed him, took a DNA sample, and uploaded it via satellite link to Washington DC. Confirmation came back in minutes.
They had gotten their man.
Before the team cleared out, they bagged every possible item of intelligence value. There was so much material that they ran out of bags to carry it. Computers were smashed open and the hard drives pried out to save on space and weight.
Analyzed back home, this data revealed that several new attacks on the United States were in the planning stages.
After blowing up the remains of the crashed helicopter, the entire team piled into the remaining operational one, with only minutes of reserve fuel left. A much-feared counterattack from the Pakistani military never appeared.
After further identification, bin Laden was buried at sea from a US aircraft carrier in the Indian Ocean.
The success of the raid has done much to alter the discussion on the future of military forces, in the US, and around the world.
It turns out that it is strategically and tactically advantageous, and much more cost efficient to field a small number of super warriors, like the Seals, than a large number of cannon fodder.
Every general and admiral I know, and there are quite a few, would love to junk expensive, antiquated Cold War weapons systems whose sole benefit is that they create jobs in battleground congressional districts.
The Army still buys useless, unprotected, IED vulnerable Humvee?s because they are built in Florida, a major swing state in the last six presidential elections.
The Air Force has more wheezing, ancient, fuel inefficient C-130?s than pilots to fly them (we?re now on upgrade number 22) because they were assembled in Georgia, the home state of former Speaker of the House, Newt Gingrich.
Oh, and the manufacturer, Lockheed Martin (LMT), made sure to buy parts supplied by all 50 states to make it politically ?kill proof.?
Better to spend money on training, cyber warfare, drones, and Special Forces, which will be essential to fight the wars of the future.
?The greatest threat to national security is wasting money in the defense budget,? one brass hat told me, with some irritation.
In fact, the Seals, and the Army?s Delta Force are so effective and destructive that they could well replace entire divisions of the past. It?s a matter of hundreds doing the job of tens of thousands.
Owen went into great detail to explain the incredible difficulty of Navy Seal training. Only small fractions succeed at the 24 week Basic Underwater Demolition/Seal (BUDS) program.
The majority, ?ring the bell,? give up early, and are reassigned elsewhere in the military, without shame.
Mark says he was trained to ?eat the elephant one bite at a time,? and described how he struggled to get through a half year of torture a half day at a time. ?You wake up hoping to make it to lunch without quitting. Then at lunch you focus on getting to dinner without giving up. You then repeat this everyday until you graduate.?
Mark spoke of being dumped a few miles offshore and told to swim home in the icy Pacific. Classes would link arms and lie in the surf for eight hours to get accustomed to hypothermia.
They were tied up and thrown in a swimming pool for ?drown proofing.? For good measure they would then have to push a bus uphill, or repeatedly hoist a telephone pole over their heads.
Modern Seals can not only jump out of a plane at high altitude and blow up anything, they can also hack into computers, disassemble cell phones, and track you down online, no matter where you are.
Spurred on by my Dad?s tales of the old Under
water Demolition Teams (UDT), with whom he had experience during WWII, I once thought about applying to the Seals myself. But in the end, I passed. I didn?t think I could make it through the training. There are not a lot of things I won?t try, but this was one.
Because of their prolonged and extreme training, the Seals always get the toughest missions. Owen also participated in the rescue of Mark Phillips, the captain of the containership, Maersk Alabama, kidnapped by Somali pirates.
The cost of these accomplishments is high. Owen held up his cell phone and said it still contained the numbers of 40 close friends killed in action. He will never delete those contacts.
The Seals? focus on teamwork and leadership is so legendary that it has become an area of interest by American corporate management. Seals will volunteer for once unheard of 10th, 11th, and 12th tours to Iraq and Afghanistan, not because of any extreme patriotism, but because they want to be there to support their buddies.
Unsurprisingly, the divorce rate among Seals is about 90%.
Because of this spectacular record, the Seals are shouldering an ever-larger share of our defense burden.
Their numbers have expanded greatly in the past decade. I can?t tell you how many Seals are in action today because it is classified, but it is a much larger number than you think.
One of the greatest honors I have received in writing this letter is when I was invited by Seal commanders to attend a BUDS graduating class in Coronado, California.
Despite receiving many medals and commendations, Mark comes across as humble and self-effacing. It turns out that the braggarts and big talkers don?t make it through BUDS training.
The son of Christian missionaries in Alaska, Owen is now retired from the forces and is trying to get his life back together.
On complaining about neck pains after his helicopter crash, Mark said the Veterans Administration sent him home with a one-year supply of Motrin. After a hedge fund manager friend volunteered to pay for a private specialist, he was told his neck was ?broken? and sent into surgery the next day.
That sheds some uncomfortable light on the current VA scandal.
When my precious hour was up, I thanked Mark for his service and wished him well.
Mark has published his amazing account of the Abbottabad raid in his book ?No Easy Day.? It is a real page-turner, partially ghost written by a journalist friend. To purchase the book from Amazon, please click here.
It?s All about Discipline and Teamwork
?Investing now is like taking a shower while Norman Bates is somewhere in your house,? said Jim McTague, a journalist at Barrons.
Global Market Comments
July 27, 2016
Fiat Lux
SPECIAL BLACK SWAN ISSUE
Featured Trade:
(THE COMING BLACK SWANS OF 2016),
(TESTIMONIAL)
Let me make this clear.
These are not forecasts, predictions, or prognostications. They are not even guesses.
They ARE events which have a very low probability of occurring, but which can have an extremely large market impact if they do.
That is the textbook definition of a ?Black Swan?, a concept created by my friend, fellow mathematician, and fractal geometry fan, Nassim Taleb.
And here?s the bad news: Black Swans almost always have hugely negative impact on asset prices.
Black Swans have been occurring with disturbing regularity this year. Brexit, which almost everyone thought would fail, is a perfect example. So would an extreme, out-of-consensus monthly Nonfarm Payroll Report.
A black swan can come out of nowhere and completely wipe out your performance for the year. I have seen it happen to the unfortunate and the unwary too many times.
So it behooves us to engage in the intellectual exercise of what possible black swans are headed our way.
I won?t engage in the ridiculous, the fanciful, or in science fiction.
So an asteroid destroying the earth, a global pandemic, a giant solar electromagnetic pulse, or a visit from aliens, are definitely off the list.
I?ll limit myself to the highly unlikely, but not impossible.
1) Janet Yellen raises interest rates at the September 14 FOMC Meeting
You may guffaw at this one, with deflation accelerating, Brexit, a strong US dollar, and global uncertainty running amok.
However, I happen to know that the Fed governors absolutely HATE low interest rates, seeing them opening up a Pandora?s Box of risks for the US economy in the 2020s, and would love to abandon them at the earliest opportunity.
So if the recent bout of stock market strength continues into autumn, Janet may use the opportunity to nudge up overnight rates by 25 basis points. And you all remember what happened to risk assets the last time she did this.
Unlikely, but definitely a ?maybe?.
2) Donald Trump Wins the US Presidential Election
Despite all of the fanfare generated by the Republican National Convention, Hillary Clinton is still massively ahead of Donald Trump by 33 points, or 67% to 33%, on the betting sites, the most accurate predictors of election outcomes this year (click here at http://tippie.uiowa.edu/iem/).
This compares to the Bloomberg poll results, which still give Hillary an 18-point lead, 54% to 36%.
As a result, markets are discounting a Clinton win, which is why we have seen such a monster stock market rally since June, and is also why the Dow Average rose for nine consecutive days after the FBI gave her a clean bill of health on the email server matter.
However, TRUMP COULD STILL WIN.
If complacent Democrats stay at home and highly energized Trump supporters show up in droves, even the betting pools could get upset.
Just ask Thomas Dewey, who was supposed to beat Harry Truman, hands down, in the 1948 election.
Since details of Trump?s economic plans have yet to be clearly elicited, companies would simply cease new investment and sit on their hands.
At this point, they only know about the walls, the isolation, and the deglobaliztion of Trump?s, dark dystopian view made clear in the primaries, not exactly barn burners for risk takers anywhere.
Big capital only invests in high probabilities and certainties, not maybe's, possibilities, or uncertainty.
Recession would ensue, corporate earnings would collapse, and the stock market would crash. And I?m not talking about a measly 10% correction. This would be more like a severe 30%-40% bear market.
You have been forewarned!
3) The Apple iPhone 7 Bombs
Steve Jobs? creation has produced one of the longest strings of successful product rollouts in corporate history. Each one pushed the technology envelope unimaginably forward, to the very cutting edge.
So far, the next generation iPhone 7 roll out is scheduled for September. New sales records are anticipated, partly on the back of accelerating sales in China.
But what if the iPhone 7 is delayed? What if consumers fail to show? What if it just plain doesn?t work.
If the most widely owned stock in America, and one of the largest capitalized, suddenly drops by a third, as it has done on many occasions in the past, it would cast a pall on risk taking generally.
The downstream suppliers would certainly take a giant hit.
I don?t buy it, have great faith in Tim Cook, and think Apple will deliver once again. But there is one seriously disconcerting fact to consider.
Apple?s stock chart show than many investors believe this dire scenario is at least a possibility.
Apple?s shares have already been one of the worst performing big tech shares of 2016.
4) The Disintegration of Europe Accelerates
Sitting here in Europe, listening to the political posturing in the aftermath of Brexit, I can tell you that the future of Europe is uncertain, to say the least.
Will Brexit get undone? Will it stall for six years and drown in an endless series of meetings? Or will it accelerate?
If the latter occurs, the sharp recession now unfolding in the UK could spread Europe wide. Only last week, British business confidence hit an all time low, while redemptions from publicly traded commercial property ETF?s have been frozen.
A European recession would produce a serious drag on global growth, demolishing stock markets around the world.
So far, the Germans seem to be insisting, ?If you play, you pay.? The idea that Britain could maintain free access to the European market, while retaining it's subsidies, but restricting immigration, is being proven a fantasy.
It looks like my 2017 Mad Hedge Fund Trader European Global Strategy Tour is going to be a lot cheaper.
5) A Large Unicorn Goes Bankrupt
OK, I am definitely not naming names here, as I don?t want to prematurely trigger a stampede.
But there is no doubt that the San Francisco ?Unicorns?, non-public technology companies owned by founders, employees, and venture capital firms, are the most overvalued financial assets anywhere in the world today.
Many of these start ups either lose money, or sport astronomical price earnings valuations.
If any one of these 70 or so companies goes under, it could have a cataclysmic effect on the valuations of all the others.
There is a tree in the forest effect here protecting the general public. If no one is there and a tree falls, would anyone know it?
However if a serious unicorn collapse occurs, it could have a spill over impact on the public markets. That could hurt.
At least I?d finally be able to get a reservation at a decent restaurant at home.
Just thought you?d like to know.
Is a President Hillary Such a Sure Thing?
Watch Out! They Bite
Your background is very impressive and intriguing. You definitely have a lot of valuable and unique experience.
I read your most recent post on activist investing and couldn't agree more. I have always been a fan of activist strategies because even under an assumption of efficient markets, activism can still generate alpha in theory.
I have also heard about how process-oriented investments such as activism or distressed investing, where you have a greater influence over the final outcome, are valuable from a standpoint of downside protection.
Many thanks,
Andrew
