Takeaways From 'The Greatest Trade Ever'

By Eric Jackson
RealMoney Contributor
12/2/2010 12:00 PM EST
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It was an interesting exercise to reflect on what book has had the biggest impact on me as a trader or investor. I'm picking a recent book that recounts the history of John Paulson's bet on a collapse of subprime housing in 2006-2008: Greg Zuckerman's The Greatest Trade Ever.

Most people I talk to about the book have been drawn to it because of the money Paulson made -- several billions personally -- and they are amazed that he was able to see in advance what everyone now sees as obvious after the fact: Housing's explosive growth was illusory, built on a sand foundation of easy credit.

As an investor, you can't help but be impressed by the returns that Paulson scored. However, the pearls of the book are the little things you notice about his process of approaching and then executing the trade. These actions are replicable, even though the trade itself is not.

Here are my key takeaways from the book:

1. Don't let others label you, and more importantly, don't label yourself.

John Paulson had been a moderately successful merger arbitrage guy. He raised money from investors with that as his mandate. People expected him to keep using that strategy. Most hedge-fund managers at that stage of their careers would be on auto-pilot. After all, he could have kept making good money doing just that. Even though he had no housing experience, he wasn't afraid to jump in when he saw the opportunity. Many of his longtime investors weren't happy. This wasn't what they signed up for when they gave him their money. Paulson didn't care. He saw the opportunity and didn't let others, or his own reservations, get in the way.

2. The biggest trades require planning and a refutation of conventional wisdom.

I have never been drawn to momentum trading or studying charts. I know lots of people who do it and are fantastically successful.

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Rosenberg on the Economic Crisis, Part 3

By Eric Jackson10/16/10 - 02:55 PM EDT

Editor's note: Following is the third installment in a three-part interview. Here is Part 1, and here is Part 2.

NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

In the following, final installment of my interview with him, he discusses why the dollar is about to rally and why a global currency war is such a serious problem.

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Eric Jackson: Do you see a rally ahead for the U.S. dollar? It seems to be as hated now as the euro was earlier in the year when people were calling for parity.

Rosenberg: Yeah, the U.S. dollar is hugely oversold. It's ripe for a significant countertrend rally. It's probably as oversold now as the euro was 6 months ago.

Right now, Ireland's deficit-to-GDP ratio is the same as Canada's debt-to-GDP ratio. But the reality is that no one cares because people know the ECB will ride to the rescue of all these Club Med countries. At the margin, there are people who think the euro is not going to survive, but they figure, "If we buy German bonds, and the euro fails, we're getting exposure to future deutsche marks, so what the heck?" The ECB is the only major central bank that's not cutting rates or getting into quantitative easing.

So what you have in the rest of the world is a dysfunctional foreign exchange market. What history shows is that this will ultimately spill over into other asset classes. You've got China as the poster boy for these great problems in the foreign exchange market, but we know that the yuan is undervalued and China is going to march to its own drummer. And the one mistake they're not going to make with their own economy is to follow the footsteps of Japan and the aftermath of the Plaza accord and allow their currency to appreciate with all the unknown deflationary consequences down the road. So, as far as China's concerned, the most important thing is social stability, so it's unlikely that they're going to do anything radical in the foreign exchange market.

In the meantime, we've got the Fed embarking on what could be another round of quantitative easing, which is fascinating because the Bank of Japan just went two rounds of easing ... to no avail. The Swiss authorities did the same for the Swiss franc with the same result. The Fed is now pursuing a policy that is aimed at weakening the dollar in the name of economic stimulus. At the same time, we have other countries, who have seen their currencies surge like Brazil and Thailand, who have raised their income tax on bond income for foreigners. Capital controls probably come next. So, you've got a very unsettling situation in the foreign exchange market right now.

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Rosenberg on the Economic Crisis, Part 1

By Eric Jackson10/14/10 - 12:10 PM EDT

NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

Rosenberg remains pessimistic about the economy and contends that home prices could decline another 10% before they hit bottom, as you'll read in the following multipart interview I conducted with him.

You might be surprised, however, to learn that Rosenberg was an unabashed bull earlier in his career, that he believes a Keynesian approach can save the economy if done correctly, that he thinks the U.S. needs a jobs czar and that he sees the dollar rallying soon.

He's predicting gold prices will hit $3,000 an ounce in the next two years and believes a potential currency war is the biggest threat to the global economy right now.

He addressed all these topics and more when he recently sat down with me for the following wide-ranging interview.

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Eric Jackson: When was the last time you were bullish?

Rosenberg: 2000. Most people know me as a permabear. I'm not. I was bullish on equities in the '80s when I was a senior economist at Bank of Nova Scotia(BNS_) and nobody cared what I thought. Then in the '90s, I was also bullish when I worked with Sherry Cooper at Bank of Montreal(BMO_) and helped [with] her book Riding the Wave about the Internet boom. It was only when I started working at Merrill Lynch in 2000 and I saw the onset of the tech wreck that I turned bearish.

In the past 10 years, I've had different shades of bearishness. This has been the time when I've gotten notoriety, so people only associate me with bearish views. I certainly have been overall underweight equities in my recommendations. I missed two very significant peaks and two significant troughs. The reality is that nobody ever got hurt from my picks.

When did you first start to get ultrabearish about what you were seeing in the U.S.?

Since the dot-com bubble we've had a series of bubbles and policy reflation, combating recurrent market deflation, which has produced all this instability. There's no question there have been massive swings along the way. I have a nasty tendency to be early to a fault. I started getting concerned about the housing bubble in 2005 and very bearish on the economic outlook in 2007.

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Oh, Dear, Canada!

By Eric Jackson
RealMoney Contributor
7/19/2010 1:45 PM EDT
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Canada's economy has been the subject of many glowing reviews by American analysts over the last 18 months. In comparison with the U.S., the Canadians seem to have a great thing going. Unemployment is 7.9% versus 9.5% in the U.S. There has been no major failure of a Canadian bank. The country's debt-to-GDP ratio is only 70% versus more than 90% in the U.S.

The Canadian housing market has also shown remarkable resilience and even strength. Home prices, although they declined in the wake of the Lehman Brothers bankruptcy, have now recouped all their losses and are higher than they were prior to September 2008.

When the U.S. economy drove into the ditch in the fall of 2008, the Canadian government got rightly scared, as Canada's economy has often been the tail on the U.S. dog, manufacturing lots of American cars, as well as shipping oil, gas and lumber across the border. (Most Americans don't know that Canada is the largest exporter of oil to the US, far ahead of any Middle Eastern country.) The Canadian dollar -- used by traders as a proxy for a bullish bet on commodities -- went from a pre-crisis high of near parity with the U.S. dollar to 78 cents by October 2008.

The Canadian government responded to the financial crisis in much the same manner as the U.S. -- a similar level of stimulus dollars on a GDP basis (remember that Canada is 10% the size of the US economy) and a similar level of government purchases of mortgages off the balance sheets of banks on a GDP basis. Interest rates plummeted and mortgages became a lot cheaper.

In contrast to the US, Canada's housing market had not been as overheated for as long. While most U.S. house prices ramped up starting in 2002, when rates dropped after 9/11, in Canada, most housing prices didn't really start to appreciate to U.S.-type levels until 2006. Therefore, even though the Canadian housing market did freeze up after Lehman, by May 2009, with low rates and a comparatively better local economy, most Canadians started to jump back into the housing market with both feet -- especially in the two hottest markets of Vancouver and Toronto. Property bidding wars in Canada became common between May 2009 and as late as April 2010.

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