Investors Ignore Andrew Lahde at Their Certain Peril
In Gregory Zuckerman's book The Greatest Trade Ever, Zuckerman recounts the exploits of the now very famous (and rich) John Paulson and, the not so famous, but equally successful Andrew Lahde, of Lahde Capital, as they made fortunes shorting sub-prime residential derivatives of mortgage backed securities. You have almost certainly heard of Paulson, but Lahde is most likely a different matter.
We believe we have a unique perspective on this moment in history, as we worked very closely with Lahde Capital, which was a small, West Coast hedge fund at the time (it is no longer in existence). We knew Andrew Lahde quite well, as we spent countless hours before and during the sub-prime debacle with him discussing the players involved in the game and how they were inevitably "toast", which was his favorite term at the time. He positioned his fund so that a catastrophic sub-prime failure would ultimately earn his investors extraordinary returns. Needless to say, his investors were not disappointed.
By July 2008, Lahde had already cashed out of his sub-prime residential short, as well as his commercial real estate short. His next allocation was a short on the major Wall Street brokerage houses as Lahde was convinced that they were leveraged way past the point of no return and would all go under as a result. His primary concern however, was that, as a derivative holder, he was an unsecured creditor. This meant that while he would "win" the bet as the financial giants collapsed, he would also be forced to wait in a long line to collect his due; chasing assets of highly levered, and now insolvent, Wall Street firms. As a result of those concerns, Lahde made the decision to close his last fund, and return capital to his clients. As we now know, he was correct - without a government bailout, all of these entities would have been "toast".
After learning of his plans to close his firm I, of course, asked him the obvious question, "if you were us, where would you allocate your capital now?" His answer was very clear, "put all of your money in gold." He reasoned that the global economic system was so overleveraged that either severe money printing would be needed to inflate the leverage away, or the entire global monetary system would collapse, and gold would be the only currency accepted by individual and institutional citizens alike.
At the time Lahde told us to buy gold, it was trading around $750 dollars per ounce. Since then, global conditions have in fact worsened dramatically, papered over by extend and pretend central bank policies both here and abroad. Despite the media fixation on short-term price movements in gold, these colossal, institutionally-created market distortions will continue to push gold in only one direction.
In our opinion, it is not too late to take Lahde's advice as global fiscal mismanagement has only made the situation clearer. Investors today are seeking a safe haven from the massive distortions we are currently experiencing and have reverted to the quaint notion that U.S. Treasuries are the ultimate safe haven.
When these same investors realize that the U.S. government is "toast" and unable to pay back its obligations in real terms, global bond markets will collapse, interest rates will explode, and gold will trade at levels which were unimaginable even a few years ago. During this global financial Armageddon, in order to restore confidence in its currency, the U.S. will have no other choice than to back the dollar with a hard asset. It will, of course, be backed by gold.