The first time I saw a swan we were on a class trip to Central Park (Look, kids! Nature!) White and fluffy and graceful, that swan was nothing like the flying rats we had back in Brooklyn. I remember, too, that our teacher said a pair nested every September over at the 79th Street Boat Basin. I bet this year those swans are black, though. After all, can there be any other explanation for daily market moves that look like annual returns?
Of course, volatility decreases with the square root of time — but increases Pepto-Bismol sales exponentially — and spreads a pall over the land. Go find a trader at day's end; they're a mess. Better yet, go find a lender looking to make a loan to a PE-backed company. Good luck: I'm told they've all called it a year. Nor has the innovation economy been spared: even my neighbor here in Silicon Valley who's working on some cold-fusion, perpetual motion, flux capcitor gadget has his own personal raincloud nowadays.
But I try to keep upbeat. Isn't that my duty as an American (or is it to go out and shop? I forget). And I was doing a pretty good job of staying positive until my old buddy Copter called. (Back in the day, we called him Copter because because he was unflappable, he had no flaps. Get it?) Anyhow, Copter lives the Wall Street life, complete with pocket square, and he rings me every now and again to take the pulse of an institutional (or as he would say, "institutionalized") investor. And this time, after some chit-chat, he swooped in on me with some blood pressure-raising questions.
"So how do you think people are fixed for liquidity?" he asked. "You think cats are going to start defaulting on capital calls?"
"Naaaah," I said. "We're talking about professionals. Things would have to get pretty extreme."
"But what if it got to that?" probed Copter, "Would it make sense for funds to start pre-emptively calling capital to build a cash cushion in case people did default?"
And with those words, a wave of dread washed over me; I suddenly felt like the green-eyeshade bank teller who slides open his window only to be greeted by a line of angry depositors stretching out the door and around the block. "Copter, you're talking about a run on the LPs. That's madness! You quit that right now! Relax."
"Relax, don't do it?" Copter said.
"Yeah, relax, don't do it," I replied. But quoting 80s songs felt kinda lame when talking high finance, so I decided to go for some gravitas and drop some B. Franklin on old Copter: "Remember, Slugger, LPs and GPs are partners in this thing and if we don't all hang together, surely we shall all hang separately."
"On that note, bruddah, I gotta go hang at Gotham Grill with my girly-girl," and Copter hung up the phone and whirred off into the New York night.
As I sat there in a vortex of prop wash a continent away, I was relieved to see a email from my buddy Peter that turned the day right around and contained some of the best advice I've seen so far. Fabricated or not, I gotta say the screen below contains perhaps the best Bloomberg headline ever. Forget the Fed, I got my bailout from the BOJ (that's Bank of Jamaica, not Bank of Japan):
[Hey, mon, if you created this and own a copyright – or if you're Bloomberg – and want this taken down, email me at the link above]
Why ya bustin’ on my pocket square?
There is no collective mentality- only individual mentality. One LP doesn’t heed a call, why should the next. And the next after that. The dominoes fall faster than anything John Foster Dulles would have dreamed about.
Just a few entities panic and the rest will have to go along for the ride. That is what should keep you up at night.
Who will call capital and who will balk? Will a balk chill out future capital calls or spark more. Hopefully, we won’t find out.
My meager income is indirectly tied to your returns. I need that summer research stipend.
Please don’t use the word “balk” around a sometime pitcher ; )
I am hopeful about your summer stipend, although I fear that the markets will be of little help to you. Hopefully, it doesn’t get so bad that services are cut and students riot. In that case, I’ll arm you with the following John Foster Dulles line (thanks for the segue) for use in the college broadsheet:
“I wouldn’t attach too much importance to these student riots. I remember when I was a student at the Sorbonne in Paris, I used to go out and riot occasionally.” (as quoted in Time, 4/7/58)