The Daily Reckoning PRESENTS: If you read the Forbes list of rich people, you will find hedge fund managers in droves, but our Bill Bonner guarantees you won't actually find one hedge fund investor. Today, Bill explicates his thoughts on the titans of speculation… BUBBLE KINGS
by Bill Bonner "I had by this time got too rich to live down in Bleecker Street. I was becoming one of those big bugs in the financial world. There weren't so many back in those early days - Jake Little, Vanderbilt and a few others. If these fellows could have big, fine houses to live in, I thought I ought to have one too." The Book of Daniel Drew
Bouck White Every era has its clowns, its heroes, its fools…and its winners and its losers. Often, the honorable among them are sent to the scaffold; the dishonorable go to Congress. The burden of today's essay is to try to tell them apart. And here, it is only fair to give warning: Karl Marx would be pleased with us. For we will argue that today's big winners make their gains in a new and perverse way; unlike the winners of the past, they get rich at the expense of the poor. At the very top of the hero category, now wiggling a bit, is our recent Fed chief, Alan Greenspan. Featured on the cover of Time magazine, along with two other men, he is thought to have "Saved the World." He did this, and indeed all his acts of monetary heroism, at someone else's expense. He flooded the world with cash that did not belong to him and with credit he didn't have. The result of this was that the world was spared the correction it desperately needed at the opening of the 21st century and awaits the more severe correction now. We wonder how the maestro's reputation will survive? For this wave of liquidity led to what Kevin Phillips calls the "financialization" of the U.S. economy. It was as if Mr. Greenspan had blown up the Grand Cooley dam. A wall of cash and credit flood around the world like a rogue wave. One after another, markets were lifted up. Of course, Mr. Greenspan was not the inventor of excess liquidity, nor was he the only man with access to monetary dynamite. The Japanese set off their own deluge in the late '80s, and then again in the mid-'90s, dropping interest rates to zero. The combination of Nipponese desperation, with American ingenuity, is what we have to thank for today's bubbles. After the Japanese stock market imploded in 1990, the U.S. tech stocks took off - up 900% between 1995 and 2000. Then the Kuwait stock market ballooned up 471% in the next five years. Bombay stocks took off in 2003 and rose 340%. Meanwhile, U.S. housing priced doubled between '95 and 2005. In England, the increase was even greater. Average house prices rose 220% in the last 10 years. But Alan Greenspan is not our target this morning. All he got from the bubbles he created was an undeserved reputation; it will pop, too, we predict, along with the bubbles themselves. Our target instead is the new aristocracy brought forth by all the bubbling. When the going is good, as always, it is much better for some than for others. "Them that has gits," is the general drift of things. In countries like France, where the gittin' of those who have is more obviously done at the expense of those who haven't got, the latter naturally detest the former. "Behind great fortune lies a crime," observed the great French novelist Balzac. A sensible man in France tries to look poorer than he actually is. But in the Anglo-Saxon countries, it is different. A man tries to appear richer than he actually is, because there is a shared assumption that wealth was honestly got. The lower classes tend to envy and even admire the rich; they have no desire to cut their heads off. In America, a man who wants others to think highly of him has an easy time of it. He just has to appear wealthy. He sends out the news that he has swindled the Department of Homeland Security or won the lottery and he rises in stature overnight. If he appears wealthy enough, people will even begin to care what he thinks. They will ask his opinion on politics or even wine. That is why he is willing to risk everything to buy a big house and a fancy car on credit. In fact, the poor man genuinely believes the rich are better than he is. Tthey are smarter. They are better educated. They have more information and better contacts. He even supports low tax rates for the rich, as long as he preserves a lurking chance of joining them. Thanks to the current issue of Vanity Fair, we are able to press our noses to the glass and look in on the lives - or at least the architectural follies - of the super-rich. Backed by speculators from Goldman Sachs, builders are putting up a mammoth 19,000-square-foot spec house on Zaccheus Meade Lane in Greenwich, Connecticut. They will spend $5 million to build the house. Who will buy it? "Hedge fund guys," guess the builders. They expect to sell it for $12 million. There are already plenty of hedge fund guys in Greenwich. Known as the "richest town per capita in the world," they swarm toward the place like hooligans to a soccer match. The average house sold in the city last year brought $2.5 million, up 40% in the last two years. Five times as many sold for $10 million or more than two years ago. Clifford Asness, of AQR Capital Management, bought a 12,500-square-foot place on North Street for $9.6 million. Steven Braverman, of Braverman Asset Management, paid $9.5 million for his pile. And David Ganek, of Level Global Investors has a nine-bedroom, 15,710 square-foot English-manor house, not far away. Trader Monthly reports that Ganek made between $75 million and $100 million last year. We also learn that he hired LA artist Ed Ruscha, famous for doing paintings of words, to paint the word LEVEL on canvas for the Ganek house. One house that probably won't be built is one proposed by Joseph Jacobs of Wexford Capital It is a house of 32,000 square feet, with an additional 1,165 square-foot pool house. The house, according to Vanity Fair, is reminiscent of Venice's Ducal Palace. It has everything a deluxe hotel should have - including wine cellars, exercise rooms, panic rooms, hockey rink, massage rooms with waterfalls, and even a yoga room. "Enough is enough," said the local authorities. Jacob's house was considered too big, too gaudy, too over-the-top even for Greenwich. They denied him a building permit. Of course, Greenwich has long been a haven for titans of industry. It was a haven for the rich in the 1920s, too. Zalmon Gilbert Simmons made his fortune in mattresses, "the nighttime furniture of the nation," said the New York Times in his obituary. Some of his fortune was spent in Greenwich, constructing a monumental house, which later became the home of the Skakel family, one of who, Ethel, was married to Robert Kennedy. Phelps Stokes, heir to the Phelps Dodge fortune, had a 16th-century Tudor house taken apart in England so that it could be reassembled in Greenwich. There was also Daniel Gray Reid, who made his money in tin plates…Jeremiah Milbank of Borden Condensed Milk, the widow of "Sugar King" Henry O. Havemeyer, the Rockefellers, Carnegies and even Prescott Bush, father of one president, grandfather of another. These men and women were the winners of their time. They made themselves rich, but they made the nation rich, too. For while the machinery of the industrial age thumped and humped, wages rose steadily. Families that lived in stinking tenements with hardly enough to eat at the beginning of the 20th Century, ended it in air-conditioned houses with wall-to-wall carpeting and too much on their plates. But what about the new winners? What have they brought? What have they wrought? They are winners and titans, too, but of what? Have they given the nation steel? Coal? Soft mattresses to rest its weary bones? What advances have they brought the common folk who admire them so? We have no ready answer. These rich really are different. Not only have they more money; they got the money in a new way. No, these are not giants of industry or commerce. They are titans of speculation…they are the Bubble Kings. What did they do to get rich? And here, our wish is not to attack the Bubble Kings, but to save some admiration for them, too. No one likes the highwayman who robs the poor of their last pennies. But, who can fail to appreciate the polished society burglars, who pass among the rich only to relieve them of their diamonds and gold? What these super-rich hedge fund managers do is almost respectable: they separate the rich from their money! You can verify this for yourself. Just read from the Forbes list of rich people, where you will find hedge fund managers in droves, but we can guarantee you, not one hedge fund investor. But let us back track. While them that had were gittin' more, the poor wretches at the bottom of the income ranks were not. General wage levels in America stopped rising in the '1970s. Since then, it has been hit or miss, with little to no real gains in purchasing power per hour worked by those in the lower-paid positions. Even college graduates have found money hard to come by. Real hourly wages of young college graduates have picked up slightly over the last year after declines for three years in a row. Hourly wages in 2005 were $23.10, up from $23.03 in 2004, but still below the level of $23.77 in 2001. Though real incomes did not rise, Mr. Greenspan's bubble policies doubled the price of a typical house. This led typical Americans to make a serious mistake: they borrowed much of the increased "equity" in their houses and spent it. Now, they live in the same miserable house - though they've added marble countertops - and owe more money on it. They are poorer in the way that counts; they have more debt and no more money to pay it with. Now, we turn back to the super rich. As reported here in The Daily Reckoning, the 26 top hedge fund managers - many of them with houses in Greenwich - earned an average of $363 million last year, up 45% from the year before. Steven Cohen of SAC Capital Advisors, with $10 billion under management, took home $1 billion in the last two years. Eddie Lampert of ESL Investments earned almost $1.5 billion in the same period. Both have places in Greenwich. Where did all this money come from? A quick answer is easy: they took it from people with too much money and too little sense. According to the Vanity Fair report, Steven Cohen keeps as much as 50% of the returns on other peoples' money. Celebrity fund managers are able to put together big piles of money and take a big cut, 2%, before any performance fees. On a fund of $2 billion, that's $40 million in management fees alone. Commendable as that is, it is only part of the story. And not the best part. More interesting is that in this new "financial economy," more profits are made from lending money - that is from "finance" - than from manufacturing. No wonder the financiers have gotten rich. They mongered debt when people wanted a lot of it. While most of the financier's paid cash for their own palaces in Greenwich, they managed to lure the middle classes into more than $11.8 trillion in outstanding mortgages. And when the bubbles finally pop, it won't be the hedge fund managers who lose their houses, it will be the lower classes…the proles…the lumpen with no savings and no way of earning more money to pay their debts. We don't know what will happen next, but here we offer some unsolicited advice to Greenwich's super rich: don't show off too much. When the lumps figure out what has happened to them, they are likely to have revenge on their minds…and a rope in their hands. Bill Bonner
The Daily Reckoning Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons). In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount - just click on the link below: The Most Feared Book in Washington!
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