Paolo and Paulson

Paolo Pelligrini, the man who came up with the idea of shorting subprime for John Paulson, is shuttering his hedge fund after taking a loss on a Treasury short. Reminding all us mere mortals that identifying a bubble is a lot easier than profiting from one because they usually go further than anybody expects.

His ex-boss does not seem to be far behind as he has concentrated his bets in the financial sector and that sector is severely underperforming. His largest common stock holding, Bank of America, is performing miserably.

10 comments:

PJ said...

You think we're in a bond bubble?

I disagree, bond yields will head lower still.

They will carry stock prices with them.

Paulson's bet on banks was really lacking in foresight on the economy. Deleveraging and defaults are not good for banks.

CP said...

Treasuries were not a bubble when he started shorting them, they were fantastically undervalued given the likelihood of a deflationary depression.

CP said...

PJ is right, Paulson has been totally discredited.

Why would anyone ever buy bank stock? You have no information edge because they don't disclose anything useful about their loans.

Tsachy Mishal said...

I should have said "even if one assumes bonds are a bubble".

I dont think they are a good investment though and if the government prints enough money they have the potential to be a terrible investment.

PJ said...

The government hasn't printed enough money yet to make bonds a poor investment and they are not likely to until things get really desperate.

By bonds I mean Treasuries of course. It doesn't matter that their yields are low, in a deflation every other asset class becomes a money-loser and people will seek a safe harbor.

I'm holding long Treasuries in my biggest (conservative) account and will look to take profits once the double dip meme has been widely accepted.

Tsachy Mishal said...

The cost of being wrong on that trade is a lot higher than the reward of being right.

Seth Klarman, in my opinion the best investor of our time, has bought way out of the money puts on Treasuries as insurance.

Tsachy Mishal said...

The worst thing about Paulson is that he cant get out. Hes too big. If he wants out he will crash the positions. All he can do now is pray.

Anonymous said...

Markets are starting to turn. I think the carnage is done for the time being. I will be adding to my longs. I'm expecting a decent month end rally. But where is the volume? Even on expiration day?

Anonymous said...

prices at the pump are coming down. there are positives if you look for them.

PJ said...

Treasury yields track nominal GDP pretty closely. With -1% inflation and -2% real GDP growth, Treasuries can get pretty close to zero. It's not a high risk trade in my mind, unless the government decides to guarantee another $9 trillion of bank assets and enact a new stimulus. Sure, the 10yr yield could go back toward 3% in a countertrend move. But it'll be back to 2% when people realize the depth of the downturn.