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The Daily Reckoning | Friday, February 19, 2010 A Short Convention in Miami Ugly Stocks in a Beautiful City Eric Fry Miami Beach, Florida - Your California editor just exchanged the sunny sands of Laguna Beach for the sunny sands of Miami Beach. This year marks your editor’s eleventh consecutive annual pilgrimage to Miami. Officially, he visits Miami to attend a gathering of professional short-sellers and other n’er-do-wells. Unofficially, he visits Miami only to dine at Joe’s Stone Crab...and to drink a mojito or two. As for the conference, it is an invitation-only affair that consistently offers a wealth of investment insight. Short-sellers are very proficient at identifying structural weaknesses in both companies and entire economies. Therefore, every year, your editor discovers something new that’s wrong with the way the world works. That said, the group of short-sellers that attends this gathering are a fairly affable group. They are not congenitally pessimistic and dour...just congenitally pessimistic. Actually, the members of this group are simply insightful and versatile. They can generate a dollar in markets that go down as well as up...or at least in markets that go down. Every year, the attendees convene to exchange investment ideas. Specifically, each person must present one security to buy and one to sell short. One year later, the host of the conference tabulates and presents the results...to the glory of the best stockpickers and the chagrin of the worst. Your editor is pleased to say that he has performed this stock-picking function without distinction. Although he has never won, neither has he embarrassed himself. His selections have delivered consistently above-average results, which is good enough for a return invitation. Some of his short-sale recommendations from the early years of the conference included disasters-in-the-making like Plug Power (PLUG), Sallie Mae (SLM), General Motors (GM), Pacific Ethanol (PEIX) and Flagstar Bank (FBC). These short-sale ideas did not all work within the first year after your editor’s recommendation. But a sick corporation is a sick corporation...and it will succumb to its infirmities eventually. Unfortunately for The Daily Reckoning faithful, your editor is strictly prohibited from divulging any of the recent insights or investment ideas that surface from the conference. That said, the macro-economic impressions that emerge from each year’s conference profoundly shape your editor’s analysis during the ensuing months and years. This group of short-sellers, for example, was early to recognize the stock market bubble of 2000, and even earlier to recognize the credit-bubble-cum-housing-bubble of 2005-2007. Throughout that entire timeframe, your editor dutifully (and repeatedly) published cautionary observations about the excesses in both housing and credit. Where will the next financial crises occur? The assembled group of short-sellers is nominating some interesting candidates. Your editor cannot name any names. But one of the nominees has a Great Wall and the other has a bunch of famous ruins...(and we’re not even counting its national balance sheet). As the booms and the busts change from year to year, so do the attendees themselves. With every passing year, this cast of characters seems a little wealthier...and a lot older. Your editor, the only exception in the group, shows up every year feeling poorer, but looking MUCH younger. But he is not so young that he would still prefer hanging out in a South Beach nightclub to hanging out in his hotel bed. During the early years of the conference, your editor would sometimes venture out into the wilds of the South Beach night scene. Thanks to his well-connected and high-rolling companions, he would breeze past the long lines and velvet ropes of hotspots like Bed, Mynt or the Shore Club to arrive at a collection of bar tables stocked with Grey Goose vodka and Veuve Cliquot champage. After spending a few hours drinking martinis – amidst a crush of physically flawless 20-somethings dancing to eardrum-numbing “house music” – your editor would amble back to his hotel room, fall into bed and begin to wonder when his ears would stop ringing. In recent years, however, your editor has opted for activities more befitting his demographic profile – activities like eating and falling asleep on a lounge chair next to the hotel pool. Eating and napping may lack the glamour and sex appeal of partying all night in the company of Brazilian models... But eating and napping is much more fun. You should try it. The Daily Reckoning Presents Government Sachs Bill Bonner Paris, France - It’s Goldman this. And Goldman that. And Goldman rhymes with greed. But it’s “Thank you, Mr. Blankfein,” when it’s money that you need. Last week, Greek Finance Minister George Papaconstantinou slipped. He said not what he should have said, nor what he wanted to say. Unwittingly, he said something that was true: his country’s budget was “out of control.” He begged for more time to straighten it out. “We’re trying to change the course of the Titanic,” he said. The EU ministers gave him a month. Mr. Papaconstantinou was speaking of Greece. But he described much of Europe, Britain, Japan and the US. And, in his fortunate metaphor, he prophesied. The big ships can’t be turned around. They’re going to sink. Greece has been taking on water for many years. But this was the first time a finance minister of any country signaled to lenders that they should head for the lifeboats. Then, looking around, the press noticed that one of the lifeboats had already been launched. In it were no crying widows and no shivering orphans. Just one very satisfied Lloyd Blankfein, chief executive of Goldman Sachs. He had sold the Greeks their debt, said the papers; now he has sold it short. Der Spiegel was first to break the story. Then, it came out in The New York Times. And then Bloomberg was on Goldman’s case. It wasn’t the mess that the Greeks had gotten themselves into that attracted the press attention, it was who had helped them get into it. Greece has been in default to its creditors in one out of two years since it got independence in the early 19th century. It is almost the definition of a poor credit risk. By what crook and what hook did the slippery Hellenes manage to get themselves into the Euro Club? Creativity in art makes for masterpieces. Innovation in industry may lead to success. But when the financial industry schemes and canoodles, it invariably leads to disaster. Goldman Sachs, the most cunning of Wall Street’s financiers, is fundamentally a debt monger. Like a liquor store or a drug dealer, it earns money to the extent it is able to move its merchandise. The more the customer wants, the more Goldman earns. Whether the purchase is good for the customer or not is not Goldman’s concern. But just look at where the moneylenders have been most creative and you will surely find something you should not own. In the present example, Goldman earned a total of $300 million. Immediately, the pundits kvetched that its work was both criminal and noxious. As to the noxious charge, Goldman needs no defense. Greece has always been a notorious drunk. Goldman is merely a bartender. The money monger seeks neither the ruin of his customer, nor his reformation As to the criminal charge, Goldman says it was perfectly legal to structure the deal with Greece the way it did. Moreover, the authorities in Brussels have been aware of it for years...and even seemed to approve of it. Member states were allowed to “use derivatives to adjust deficit ratios,” The Financial Times revealed last Wednesday. Goldman arranged for Athens to swap cash for a stream of income coming from an airport and a lottery. Was it debt or equity? Had Goldman lent Greece money...or had it bought part of the national patrimony? It really makes no difference; whatever you call it, the Greeks had impaired their balance sheet. Goldman had merely made a buck helping them do it. Goldman need not worry about persecution; it has friends in high places. Such as Mario Draghi. Mr. Draghi has a long and impressive résumé. Not only has he been a managing director of Goldman Sachs, in charge of business development in Europe, he’s also served as director general of the Italian Treasury and lately, Italy’s central bank governor. And now he’s up for the post of head of the ECB, to replace Jean-Claude Trichet, who is scheduled to step down next year. He is Goldman incarnate – banker, servant of the people, one of the financial world’s high priests from whose hands come unction, salvation...and cash. In the US, Goldman is so tight with the feds it is known as “Government Sachs.” But what’s new? Governments always turn to rich, well-connected moneymen for finance. The Rothschilds largely financed Britain’s continental allies in its war against Napoleon in the early 19th century. Then, in the early 20th century, JP Morgan financed the British in WWI. In both cases, the lenders found innovative and often complex ways to keep the money flowing. Now, we are in the early 21st century and Goldman is providing the money. But this time it is different. Borrowers are not at war. Instead, they borrow to blow themselves up. There is no foreseeable end to their borrowing. The Greek affair is peanuts. America’s ink is so red it looks as though it has cut an artery; this year’s deficit alone is $1.6 trillion. Japan, the world’s second largest economy, now borrows more than it raises in tax revenues. And while the Greeks run a deficit of 13% of GDP, in the UK the deficit is even higher at 14%. Goldman is right; this is a good time to sell government debt. Better to get into the lifeboats too early than too late. Regards, Bill Bonner for The Daily Reckoning Joel’s Note: Once again, Bill Bonner will be presenting his thoughts at this year’s Agora Financial Investment Symposium in Vancouver. If you’ve attended the event in the past, you’ll know what a fantastic week it is, jam-packed with contrarian investment ideas and out-of-the-box thinkers. If you’d like to join us this year – July 20-23 – make sure to get in early. Seats fill up pretty quickly. Bruce Robertson, our conference director, has all the details on this year’s event right here...including the special Early Bird discount.