On October 21st of 2010, John Paul Tudor Jones II sent a letter to his clients titled “A Tale of Two Policies” (I included a link to that letter just above). I remember seeing a reference to the letter a few months back in social media, glancing at some highlights of the letter, and moving on. I read the letter again today, but more thoroughly, and I think it is timely for us all to read this letter again, if not read it for the first time.
I loved the letter for two reasons. First he used an anecdote of how a new-age alternative-medicine man cured a painful sore on his foot by immediately noting that the sore was a symptom. It was a symptom of a larger structural problem: his incorrect posture near his hips. Treating the sore without treating the structural issue leading to the sore would do nothing!
I loved the analogy, as we at Themis see such structural flaws in our equity market structure. We have presented the issues to our regulatory authorities, to our clients, and to the media, as well as remedies designed to correct the problems at the core. Specifically we have highlighted conflicts of interest in the system (maker taker models, routing conflicts, etc) that should be addressed if we ever want out market to be fair, correctly price assets, and encourage long term investors.
I loved the letter for a second reason, as well. PTJ recalled the massive liquidity that Greenspan and the Fed introduced into the US economy in the 4th quarter of 1999, in order to head off the insane and horrific threat of Y2K, and how the world might grind to a halt because of a digit.
(Sorry for the interjection, but please read Matt Taibbi’s Griftopia, and specifically his chapter on Greenspan, titled “The Biggest Asshole In The Universe”)
The ensuing melt-up had the NASDAQ doubling in value, and subsequently crashing. PTJ likens that period to the period we are in now, where the never-before-seen liquidity injections of the FED are again at work. PTJ compared the two periods (1999-2000 and 2010-2011), and discussed what he thought were ways to take advantage of the liquidity silliness.
Read his letter. It is relevant! Then look at asset prices at the current moment.