An Interview with Victor "Trader Vic" Sperandeo
One thing you quickly learn about Victor "Trader Vic" Sperandeo is that the man doesn't mince words. He's a highly intelligent and successful force of nature who possesses no fear speaking his mind. Regardless of whether you agree or disagree with him, it's difficult to deny that his honest, matter-of-fact approach to the markets, politics and the economy is a big, refreshing breath of fresh air.
Also known as "Trader Vic", Sperandeo is a trader, index developer, and financial commentator with over 40 years experience trading numerous markets. He has traded independently, and for many notable investors such as George Soros and Leon Cooperman.
He is widely regarded as an expert in commodities, particularly in the Energy and Metals sectors. His market crash prediction during a September 1987 Barron's interview earned him great recognition and highlighted his deep understanding of financial markets. In recent years, Mr. Sperandeo is best known for developing indexes and trading strategies that are designed to benefit from futures price trends. These include both actively managed strategies as well as rules-based algorithmic quantitative models.
Based in Dallas, Texas, he currently serves as the President and CEO of Alpha Financial Technologies, LLC, is a founding partner of EAM Partners L.P., and serves the President and CEO of its general partner, EAM Corporation.
I'd like to begin by highlighting the fact that you were one of the lone market voices who successfully predicted the 1987 stock market crash. You were quoted in Barron's just a few weeks beforehand warning investors of the steep, impending selloff. Please explain what led you to conclude the market was headed for trouble and how you positioned yourself.
The market was set up for a crash. It had moved up in a virtual straight line. Technically it was overbought, and those who were heavily invested had large profits which they were in fear of giving up. All the market needed was a government mistake and or an unknown event to cause everyone to morph instantly into sellers.
The mistakes that were game changers were the Smoot-Hawley Tariff Act of 1929, raising taxes in 1931 (the worst performing year in US history overall), and in 1987 James Baker threatening Germany by saying "if you don't lower rates we will let the dollar slide" (i.e. devalue the dollar) by an unknown amount. The dynamic insurance at the time caused the market to accelerate its already precipitous decline.
I was short, and shorted more at the opening.
The major market issue of the day remains the never-ending sovereign debt saga engulfing Europe. It's all headline risk, all the time, with Europe a stubborn thorn in the market's side. How do you think this mess ultimately resolves itself? Is there any hope for resolution, or is this a riddle incapable of being solved?
The best way to understand the Euro Crisis is to get a DVD of "Animal House" starring John Belushi. There is no hope for this chaos. They cannot come together on fiscal policy; it is impossible.
Things happen within a country; politicians do not control the people. Brussels can use all the smoke and mirrors it wishes. Ultimately, if the people get into a situation where they are suffering, they vote the leader out and the new leader will break the agreement. However the hot air gives markets the perception that change is possible, or even underway. It's all ethereal, and will dissipate in a moment's notice.
This is a sucker bet of the highest order. The Euro is dead, and like Keynes it should be buried. Also remember Merkel and Sarkozy will not win their next elections, just as Obama will not...these are not leaders but rather losers, as they are not for the people but for personal power via politics.
On a related note, as a trader, how are you positioning yourself with respect to Europe? In other words, how concerned are you about contagion risk or any potential market fallout?
Being long Gold and short the Euro are core positions. Long the Canadian Dollar and Australian Dollar, while short the British Pound and Japanese Yen, are also core positions but with lower weights.
While we're on the subject of macro risk and related headwinds, let's move the conversation away from the mess in Europe to the mess in Washington. Hedge fund manager Leon Cooperman-who you used to work with incidentally-wrote a blistering critique of President Obama a couple of weeks ago. It was a full-bore indictment of Obama's "divisive, polarizing tone" class warfare approach and attendant negative consequences. Do you think Mr. Cooperman has the story right? Is Obama as big a problem as some people make him out to be?
Of course Lee (whom I have known since 1982 and regard as a close friend) has it right. But this is like writing a letter to Santa Claus. His appeal to reason is written to, at best, a Socialist who wants to keep his power, and at worst a Marxist who would love to see the OWS protests turn into a revolution to kill Capitalism.
The Class Warfare talk is not rhetoric, it is Obama's agenda! Read the "Communist Manifesto" and read Marx's ideas of the people with Capital versus the "worker". In the 10 critical principles to overturn capitalism (published in 1847) #2 is "A heavy progressive income tax." The U.S. Constitution was written in 1787, and in Article 1 Section 9 states "No capitation or other direct tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken."
These principles of freedom are opposites. Compromise is for "More." In the U.S. the top 1% of earners each year pay 40% of the taxes, while the bottom 53% pay no Federal tax. But that 53% has more votes than the 1%. This is simple math: freedom loses.
Yes, Obama is a monster problem to the economy, but more so a threat to the freedom of the successful individual.
Okay. Bearing all that in mind, let's fast forward to Tuesday, November 6, 2012. It's 11pm and the major news networks have confirmed that President Obama has just won a second term. Please describe what you envision for the U.S. economy and markets during the next four years of Obama.
If Obama wins again, the economy will decline into a major recession or depression.
However, the stock market may rally on hopes of "QE5" by that time. The current economy, and zero or negative real interest rates, help Corporate America instead of Main Street. People like me should do very well - after taxes - as I can buy stocks and gold/commodities and make money. People living week to week do not have the ability, knowledge, and capital to "hedge" the inflation the Fed promotes.
Shifting gears here a little bit, you've been very active and successful in the managed futures and commodities space for many years. Now I need to confess that I'm a bit of a neophyte on the subject of managed futures. Can you explain to a beginner what the allure is of managed futures and how you can make money in the space?
Managed Futures (MF) is a fund or account of futures contracts that generally goes long and short, mostly based on algorithms and/or systems. In 1981 a Harvard Professor named John Lintner showed that adding MF to a classic portfolio adds return and lowers risk, e.g. increased efficiency. This is coupled with Modern Portfolio Theory (MPT), conceived by Professor Harry Markowitz in 1952. MPT, in very simple terms, says to diversify your assets is the genesis of MF. The asset class of MF is also negatively correlated to traditional assets, meaning that when stocks and bonds are losing MF is winning (and sometimes vice versa).
What's your take on gold prices right now? Is there any chance gold breaks through its inflation-adjusted high in the next year or two?
Gold is a primary hedge to "future" inflation and chaos. At zero interest rates there is no opportunity loss owning it. Gold wins in the environment and will go beyond $2000/oz. at a minimum, unless things change on a political level. Gold does not act as well with real GDP growth of 3% and/or the rising nominal interest rates that reflect growth. From 1982-1999 Gold went up at a 22 bps rate (or less than 1/4 of 1% compounded). So if Nancy Pelosi and Harry Reid suddenly want a zero capital gains tax, sell gold!
What about commodities in general? A year or two ago, Jim Rogers made headlines with his remarks that, "The farmers are going to have the Lamborghinis in the future, not the brokers on Wall Street." Do you subscribe to this school of thought? Are commodities the place to be in the years ahead?
Yes, Jimmy is on the mark.
Commodities - in the long run - will move higher as the only way out of world debt is inflation. In the short run commodities will reflect the forthcoming recession, as the political power is in the hands of people that hate capitalism and success. What you want for growth is Reagan and Thatcher. The worldwide debt is so high that we are headed for hyperinflation.
The real debt in the U.S. is not the $15 trillion normally reported. You need to add state debt of $3 trillion, another $3 trillion from Fannie and Freddie Mac, and about $1 trillion in student loans. So a better estimate is $21 trillion. If the government was a company it would have to use GAAP accounting, not cash based accounting. In that case, you would take the deficit of $1.3 trillion and add about $6 trillion more for a GAAP accrual accounting of what has to be paid. So own some gold; 10% is a fair amount, plus 10% in Managed Futures.