Amstelboy and I were discussing how to make a buck off of the subprime lending crisis and the general “Why am I paying you 2% + 20% of return + 'fund of funds' administration fees so you can loan all my money to homeless people?” atmosphere surrounding the hedge fund industry, so I've been brainstorming some potential ventures. And as I said, even if we can't get into this crisis on time, there's always another one three years away, and most of these are applicable to a variety of global financial meltdowns. I've divided them into several areas we should explore:
1. Providing liquidity and pissing off the SEC
One of the issues under examination right now relates to accounting practices, and there's a pretty standard yet almost certainly illegal way to make a buck off of it, and a perhaps revolutionary perfectly legal way to do so as well. I'll start with the illegal one, since Jim Cramer assures us the SEC are far too stupid to pick up on market manipulations even when he announces them on the radio, so I'm sure they'll never see unusual activity and run a google search. As an aside regarding Cramer's bragging about market manipulations, I just watched that movie “Zodiac”, and apparently the Zodiac got away with murdering several people all whilst mocking the law enforcement agencies pursuing him like Cramer does the SEC. The difference is nutty as he was Zodiac just sent cryptic letters, even he didn't go on MSNBC and say “I'm the Zodiac and the FBI are st00pid”.
One of the big issues right now is large institutions in dire need of liquidity can't afford to discount assets because their accounting practices require that they discount all their remaining holdings as well... in other words, if they figure they have about $10b in Austrian treasury bonds and sell 10% of them at half price to raise $500m in a hurry, they have to record that they now own $4.5b of Austrian treasury bonds and $500m in cash. When the company loses $5b in one day, nobody gets their bonuses, so they don't want to do that. Arguably, if they valued the bonds at $10b before the sale, they should still have $9b in treasury bonds and $500m in cash, so they only lost $500m, the exact amount they came down off their price to move some bonds. It's like the depreciation on a new car, are you really poorer the second you turn the ignition because the market says you are, or richer by the difference between the value of a vehicle less the price you paid? The entire principle of market economics is that wealth is created in trades: both parties are better off, or the trade would not occur, so this type of instantaneous market accounting, while a useful tool, cannot accurately measure wealth. This isn't just me rambling, Bear Stearns has been cited as unwilling to liquidate assets because of the resultant effect on the market value of the rest of their holdings. And really if these crises are on a three year cycle, if you can get a 25% discount on liquidated assets and sell them at full value anytime before the next crisis, that's good for a 10% annual return.
So what's the point, how do we cash in? Simple: we form two corporations, Shortshorts Financing and the Waffle Group, one of which buys Austrian treasury bonds from the fictional institution I alluded to at a discounted rate, getting $1b (long term value) for $500m and offering much needed liquidity to the sellers. The reason they will sell to SSF when they can't risk selling on the open market and devaluing their remaining holdings is that SSF immediately sells all their bonds to the Waffle Group for $1b, and then the two firms transfer the bonds back and forth at that price until there is sufficient volume that the original seller can claim the rest of their holdings are in fact worth $9b and their managers all get their bonuses. The sellers get a shot of liquidity without ruining their entire portfolio, we get Austrian treasury bonds at a steal. While I can't pinpoint who is hurt by this, I am pretty sure the SEC would come knocking, so step three is packing plenty of Swiss Navy in your overnight bag before they send us off to Joliet.
The legal thing to do, and my vast experience in the world of international corporate finance allows me to speak with authority on the subject, is for the shareholders of firms to start awarding bonuses on a different basis. Paying large bonuses based on these short-term valuation leads to foolish decisions by managers who need to prop up positions to insure they get their compensation. Make bonuses payable over the course of five years (or just longer than one boom credit cycle but likely to contain at least one crisis) based on continued portfolio health. The shareholders and investors have longer-term interests than who's getting a bonus in February, so give the person who manages their money a check for the next five Februaries for getting it where they need it, not where she does. Nobody would want to work for a fly-by-night operation that might trash all your positions when you moved on, but is that really a bad thing if more stable institutions have an advantage in attracting talent? Also the long-term vision of managers might reduce their stress level, and less coked up and jumpy managers might actually beat index funds by playing off of trends instead of diving right after them. Anyways, if you have two potential assets, one of which is about to become highly undervalued, and one which is about to be come highly overvalued, do you buy now and ride the over-valuation to its likely peak, or buy later when the under-valuation may hit its nadir? Everybody loses when that decision is based on a fat check that gets cut halfway through. Just a thought from somebody who keeps a salmon-colored paper next to the toilet and over-inflates his own insight.
2.People moving into their parents basements
Whenever there's a huge crisis, a lot of people have to make some lifestyle changes, for instance a whole lot of people with teaser loans are about to need a place to live, as are a lot of suddenly redundant personnel in Greenwich, CT who will be scaling down their lifestyles. Here are some possible secondary markets to get into:
a) Locksmiths, as a lot of empty nesters have more keys made for the kids they thought they were rid of
b) Mini-fridges, so you can keep some beer in the house
c) Weed, since if you can't offer to show a girl the view of the city from your loft, you can at least try “Er, I got weed back at the crib!”
d) Air freshener (see c)
e) Small stepladders, for when you're sneaking cakes in the bathroom window after your granny goes to bed (as it was so eloquently put by one of my recycling plant coworkers). Also probably some hospital slippers or something so she can slip off those heels before making her escape through the garden.
f) Headphones, so you won't get told to “Turn down that racket”
g) Futons: uncomfortable couch by day, and at night, folds down to become an uncomfortable bed
h) wireless internet adapters, so you can get broadband down there and skype your friends who've all moved back into their parents basements but get no cell phone reception
i) Cleaning products to get rid of some of that mildew, and I'd go long on dehumidifiers
j) Tanning salons, since a lot of basement dwellers are going to be fighting off SADS
3. Fashion
A few brief notes on what I consider to be a very significant area. I believe indications are good Ermenegildo Zegna is about to sell a lot of neckties as the hedge fund trader in his open-necked shirt becomes the new bogeyman of international finance, and all those guys are heading out for job interviews. Also, a lot of people just went from sipping champagne waiting for a table at Charlie Trotter's to having a High Life at Hideaway's, and they're going to need a whole new set of hipster shirts, chains, and short plaid skirts to wear over there. Also there may be a run on fishnet and clear heels, as well as mesh shirts... more on that later.
4. Privacy
Pulling the bentley back into the driveway at one's parents' home amidst a liquidity crisis means a couple things for a refugee from the hedge fund industry who escaped with nothing but a collection of open-necked shirts : a lot of creditors are going to be looking for you, and you're probably way out of practice at foiling the instinct for snooping your mother refined during your adolescence. If like me you have a retired father who takes a flashlight and the family dog and forms a search party to look for the mailman if he's five minutes late, you don't stand a chance. Mailboxes, etc. will be making a fortune off of the problem of nosy parents and noisome creditors. Beyond that, I'm investing heavily in those who offer services to those going cash only after their interest only loan on a 10,000 sq ft condo didn't work out so well: 24 hour check cashing, prepaid cellphones, prepaid credit cards, and even Vivid has prepaid cards to buy online porn (should you fail to convince some club rat to sneak in your basement window).
5. Liquidity
People as well as institutions are going to need cash quick, so look into traditional outlets for quick cash: there are pawn shops and used CD shops to consider, and I'd consider a short position on any one-hit wonders... if you'll recall during the Asian currency crisis, shops were telling hopeful sellers to consider using their Alannis Morissette CDs as coasters (“Thank you India, thank you Thailand, tha-ha-hank you currency speculation!”). For a more straightforward play, there's one hot stock I'd consider as as a lever to profit off of financial ruin: Dixie, who make all the little paper cups for panhandlers. Also consider Minute Maid, because when broke people donate blood, they always get that free OJ afterwards. To chase the big returns, my big sector play is pimping: there are going to be a hell of a lot of rent-boys in open necked shirts mulling around Greenwich, CT, which is why I suggested earlier going long on makers of mesh shirts, and anyone with a stake in clear heels is going to make a killing when their coked-up girlfriends and female co-workers realize all those mornings they got high and went jogging will really pay off when they're auditioning down at The Admiral to make next month's interest-only mortgage payment.
6. Education
For those heading back to school to do coke (apparently it's great way to drop the freshman five) and get an MBA, they'll definitely need a cool new (knock-off) messenger bag, which they can later bring to football games... yes, you're cool for having a giant burberry bag, but no, bringing it to a Vikings game and hitting me with it while drunken lunatics pour beer and ketchup on it is not a great way to show it off. (By the way, she was just walking around bumping her burberry duffel into everyone, I didn't actually do anything to make a woman beat me over the head with her bag.) Also important services in today's multicultural, globalist business environment are my handy guide to re-writing a paper with five people who don't speak the same language, based on the my notes on the papers Amstelboy asked me to take a look at where he was trying to integrate five people's edits of a document into a single, cohesive presentation in something recognizable as business Engrish. Seriously, a list of eight items shouldn't be numbered “1 2 * * 4 a b 7”, as explained in chapter 6: “Pick a system and go with it please”. Also in that vein, I would recommend investing in English-Whatever language dictionaries, because of the philosophy of several multinational organizations that using a common language as a medium for translation reduces the costs of that translation: translate Mandarin to Italian by translating Mandarin to English, and English to Italian, thus eliminating the need for rare Mandarin-Italian dictionaries. And obviously to cash in on all those who will blow their financial aid stipends on blow and can't spend more than 16 cents on dinner I'd go short on sushi, and long on Top Ramen.
7. The Wages of Sin
There are also several plays to be made based on the despair of those poor souls who heard Jim Cramer thumbing his nose at the SEC on the radio and thought they could be invincible too, monetizing their growing despair and misfortune. For anyone who's going to prison for defrauding their investors by selling them on CDOs of handshake loans to homeless people, I recommend shorting the 1.5 oz tubes of Swiss Navy and going long on 48 oz cans of Crisco, because after a couple weeks they'll realize they're only pulling down 7 cents an hour making license plates and have to give up some luxuries. I'd also suggest looking at makers of lightweight chairs and short lengths of rope that are strong but thin enough to be easy to tie, but if a hedge fund goes down, none of them know how to tie a windsor knot, I doubt they'd have much luck with a noose, so just go long on Sanofi-Aventis and Fortune Brands (makers of Ambien and Jim Bean).
So that's how to make your fortune off of economic despair. That last part may seem cruel, but I suppose it's because the people I know in that industry to the best of my knowledge aren't so frighteningly short sighted and ethically challenged that I'm too worried about them.
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