Gary North, in the middle of a long column warning that the inverted yield curve is telling us a recession is on the way, touches on the Amaranth meltdown and the illusions of trading geniuses.
There is a temptation that faces investors who happen to buy into a market just before a major rise. They think, "I’m a genius. I can beat the market."
The most recent example of this mentality is the 32-year-old hot-shot who made two billion dollars for hedge fund clients in the highly leveraged natural gas futures market. Then, in just two weeks, he lost six and a half billion dollars with his technique. Amaranth Partners, a hedge fund, suffered the consequences.
On October 1, Amaranth suspended redemptions by its clients. They are now locked in. Their capital is no longer accessible to them. Redemption is by grace – the grace of the directors. The directors giveth, and the directors taketh away.
The clients thought, "I’m a genius. I got into Amaranth Partners." They are all ex-geniuses this month.
Genius is a rising market.
But go read the whole thing.
When the Yield Curve Flips. . . . [LewRockwell.com]