Letting It Fly

Time keeps on slippin,' slippin,' slippin'
Into the future
--Steve Miller

The always insightful Stan Druckenmiller zooms with the USC student investment fund group. In the first 20 minutes he offers prepared remarks, primarily concerning his current macro view, while the remainder is Q&A.

Druck lets it fly in part one. After unprecedented monetary and fiscal intervention in response to CV19 last spring, he contends that both the federal government and the Fed are being reckless on a historic scale by continuing to pump stimulus into the system after indicators show that the economy no longer needs assistance. Debt has exploded and prices are rising. He is preparing his family trust fund (a few $billion large) for Big Inflation with bets against the US dollar and on commodities. 

Although he remains long stocks, Druck says that he'll be surprised if he isn't out of equities before year end. I'm not sure whether he thinks inflation will hurt stocks or whether he believes prices are too high (he mentioned that he sees bubbles in nearly all assets classes).

Several interesting notes from the Q&A. On lessons learned from his mentors, Druck highlighted the advice he received about envisioning what things will look like in 1-2 years rather than where things are today. Today has already been priced in. Also enjoyed the Soros story about sizing positionss accordingly. Attractive opportunities should be well funded.

Re digital currencies, he suspects that the dollar et al will be headed electronic. However, he isn't keen on Bitcoin or its brethren being the chosen one.

On unequal wealth distribution, Druck suggests there has been no greater facilitator than central banks--a point these pages has made before.

In prepping for inflation, was surprised there were no questions or comments on gold. I'll take that as a bullish contrarian indicator...

His remarks on shorting also surprised me. While the last 10-12 years have been 'miserable' on the short side, Druck said that recently his shorts have been doing better than his longs. Moreover, given the historic macro situation, he suspects that upcoming years may be very friendly to shorting assets that are wildly overpriced. 

This inspired me to start thinking about setting aside modest short side space in my taxable account for some put projects. Also set up a short candidate watch list. 

position in gold 

Harvard and Yale Endowments

"Ever wonder why fund managers can't beat the S&P 500? 'Cause they're sheep. And sheep get slaughtered."
--Gordon Gekko (Wall Street)

Because fiscal years for university endowments often end in the summer (consistent with the academic calendar), year end results are just now making their way to the news. Two of the largest endowments are Harvard ($35.7 billion) and Yale ($25.4 billion).

This year, Yale reported a 3.4% annual gain vs Harvard's -2% performance. This marks the sixth straight year that Yale has outperformed Harvard. It also marks Harvard's worst annual performance since 2009. Both schools outperformed the average school endowment which reported a -2.7% net return.

Although both schools were among the first to add alternative investments to their portfolios, they manage their funds in different ways. Yale, managed by veteran David Swensen, outsources most individual investment decisions to dozens of investment managers. This is similar to individual investors who invest in plethoras of mutual funds. Those individuals put their faith in the investment prowess of the money managers in charge of those mutual funds.

Harvard, on the other hand, has relied on the 'old fashioned' approach of managing some of its assets in-house. It is also searching for a new chief executive for the endowment.

Also interesting was Yale's forecast parameters for 2017 asset allocations. Private equity and venture capital will might comprise up to 53.5% of the portfolio. Domestic stocks won't be higher than 4%, and cash and bonds won't exceed 7.5%.

It appears that David Swensen's well known 'equity bias' is still manifest in Yale's asset allocation.

Free Will, Government, and Easter

"You can break a man's skull. You can arrest him. You can throw him into a dungeon. But how do you control what's up here? How do you fight an idea?"
--Sextus (Ben-Hur)

As he has done in the past, Judge Nap reminds us of the link between freedom and Easter. This time around, he emphasizes government's tendency to compromise freedom and, by extension, free will.

"Freedom is the ability of every person to exercise free will without a government permission slip. Free will is a characteristic we share in common with God. He created us in His image and likeness. As He is perfectly free, so are we."

Government intrusion on freedom constitutes intrusion on free will. As such, government is stealing a gift from God. "It violates natural law; it prevents us from having and utilizing the means to seek the truth."

As God has told us, He has endowed each individual differently with respect to those means. For example, some individuals are endowed with huge reservoirs of economic resources while others have next to none. Why this is so is perhaps beyond our comprehension.

What we do know is that God does not prescribe the use of government force to even the distribution of means that he has endowed among people in the name of 'the common good.' Instead, He has told us thru His Son that it is up to us via our free will to decide whether to act peacefully to help others--perhaps thru voluntary cooperation and trade or thru charitable acts.

Easter demonstrates the role government often plays as agents of aggression who tread on individual free will.

It also demonstrates thru Jesus's acts that, even under the worst aggression imaginable, we need not surrender of free will in order to pursue the truth.

Family Privilege

"They are going to take you."
--Bryan Mills (Taken)

Socialists like to evoke the notion of 'privilege' when justifying programs of redistribution. In the socialist sense, privilege is a benefit or advantage endowed on a person that the person did not rightfully earn. Because they are undeserving, privileged people should not have complete authority to dispose of their endowment as they wish. Instead, privileges must be forcibly shared with those less privileged in the name of 'fairness.'

Pushing this thought process toward completion conjures ludicrous scenarios such as this one that suggests good parenting as a set of unfair privileges endowed to some children but not to others. One solution: abolish the family to level the playing field and increase 'social justice.'

Such follies arise when confused minds commingle the concepts of rights, property, and privilege. True rights exist simultaneously among people and impose no obligations on others--except for that of non-interference. Property consists of person, wherewithal to produce, and production that the owner has the authority to dispose of as he/she wishes as long as that disposition is not aggressive in nature. The distribution of property is uneven in nature and in God.

A privilege is an exception to the right of property. Privileges are granted by government, and permit the privileged to forcibly take property from its rightful owners.

Families have the right to peacefully dispose of their property as they wish. People who want to interfere with this right are the ones seeking privilege.

Bureaucratic Priority

Leave it till tomorrow to unpack my case
Honey disconnect the phone
--The Beatles

Connected to the previous post, the only way that a particular socialist program can approach the performance of unhampered markets is by bureaucratic priority. For example, bureaucrats might designate Obamacare as a 'succeed at any cost' program and then proceed to redistribute more and more resources toward its development.

Thus, the healthcare.gov website that has had hundreds of $millions diverted in its direction receives an even greater resource endowment in order to make it functional.

But that resource allocation comes at great opportunity cost. These resources have been taken from private hands that, by definition, had other uses for those resources if their owners were free to allocate them.

If bureaucrats see Obamacare as a top political priority, then they will divert as many resources as it takes to obtain something deemed workable in the eyes of the public.

If so, that is what will be seen.

What won't be as apparent is the damage wrought elsewhere in the name of bureaucratic priority. Other endeavors will be starved of resources that are forced toward Obamacare.

The Soviet Union offers the classic precedent. Soviet bureaucrats identified military programs as top priority, and then proceeded to force more and more resources toward military program development. At the program's apex, central planners were diverting massive quantities of economic resources, perhaps half of the country's annual output, toward military uses.

Yes, the USSR developed a competitive military. The trade-off: millions of Russians lived and died in squalor.

University Endowment Trends

Watch me clinging to the beat
I had to fight to make it mine
That religion you can sink in neat
Just move your feet and you'll feel fine
--Culture Club

This paper is somewhat dated (2008), but it still points out interesting trends in university endowments over a decade or so. Note big difference in endowment size between private (especially Ivy) and public. This really sticks out when examining endowment/student.

Asset allocation shows movement out of fixed income in favor of alternative assets. Some stats (medians):

2005 Overall

n = 726
endowment size = $72 million
return = 9%
AA equity = 59.6%
AA fixed income = 20.4%
AA alternative assets = 7.6%

Interestingly, Ivy League AA in 2005 was 38.1% equity/13.0% fixed income/37.1% asset allocation.

Of course, we now know that those increased allocations toward alternative assets were a source of pain during the credit meltdown of 2008-2009. Many alt investments, particularly illiquid ones, were crushed when bid/ask spreads fell thru the floor.

Still, the attractive characteristic of many alternative assets is that they can be less correlated with other asset classes, which makes them useful for diversification purposes.

position in SPX