Sunday, December 5, 2010

Fearing Global Macro Gods?

A few years ago, when I was allocating money to directional hedge funds (L/S Equity, Global Macro and Commodity Trading Advisors), I just loved conference calls and reading interesting monthly letters.

Not all managers had a flair for writing interesting comments. Indeed, most didn't, and some of the best hedge funds in the world hardly put out any information (except for the basics) in their monthly comments. But there were others who had a gift for writing interesting comments that made me think outside the box. One of my favorite monthly comments came from a global macro manager who unfortunately ended up closing his fund. He was extremely intelligent and articulated his thoughts well, but making money consistently is a lot harder than analyzing the markets properly. He's now a prop trader for a major European bank and doing very well.

I got a chance to speak with him in September after I met up with the 300 billion euro man in Athens. He doesn' write any monthly comments now, and misses them sorely, but he did offer me some scary insights into what is going on. According to him, the ECB is once again way behind the curve, and the binary nature of monetary policy in Europe is going to kill the periphery economies. "We are going to see massive unemployment and another exodus from these countries because when you don't control your currency, the only adjustment comes from wage deflation and high structural unemployment". He was also worried that the Fed is creating another massive bubble which will ultimately pop and wreak havoc in the financial and real economy for years to come.

Why am I bringing this up? Am I not an optimist? By nature I am an optimist. No choice. I've been through a lot of ups and downs and realize that no matter how bad things get, if you don't maintain a positive mindset, you're not only going to lose the battles, you're going to lose the war and miss out on life.

But as a consummate analyst of markets, I always worry about the next shoe to drop -- and there will plenty of shoes dropping over the next few years. The world is wonky and full of surprises. From Bolivia nationalizing pensions, to Ireland using its national pension fund to support its banks and possibly its debt markets, we are witnessing unprecedented policy responses (however misguided some may be) to shore up confidence in global markets.

Now, let's say you're the president of a major pension fund. You're going into year-end and you summon up your senior managers to discuss what's going on in the world and how it will impact your portfolio over the next year and next five years. It's early December, most people are tired and their minds are on the upcoming holiday season and the Christmas party, not on global macro issues. But as the president of a major pension fund, you want the troops to gather as much information as possible from internal and external sources to be prepared once you enter 2011. Pension funds should be doing this on a regular basis, but this year is especially critical given the landscape is fraught with risks and uncertainties.

Where do you begin? You first have to identify the major issues that can impact your fund. I will not enter into a long discussion here, but will shift your attention to some interesting comments I read this weekend. First, I direct you to Niels Jensen's December comment from Absolute Return Partners, The Dirty Dozen. Mr. Jensen outlines 12 factors that he believes will shape the markets going forward:
  1. High yield priced for perfection?
  2. The risk of double dipping
  3. The sinking ship of Japan
  4. Beggar thy neighbour mentality
  5. Capital flows too hot to handle
  6. Chinese inflation out of control?
  7. Food inflation induced civil unrest
  8. Is India an accident waiting to happen?
  9. European contagion and solvency risk
  10. Massive refinancing programme
  11. Premature withdrawal of monetary support
  12. Israel launching a preemptive strike on Iran’s nuclear facilities
I leave you to carefully read the entire comment and will only tell you that I'm not as concerned as Mr. Jensen is on some of these factors. The biggest risks I see are geopolitical risks, which can escalate quickly (not just Iran; look at Korea too).

The second comment I direct your attention to comes from Hugh Hendry, manager of the Eclectica Fund, posted on Zero Hedge (click here to read it). Mr. Hendry believes there are no policy remedies for debt deflation and concludes by stating that when it comes to the credit bubble, China and Germany -- the two most successful creditor nations might be seeking "if not a purge of rottenness, then certainly its moderation".

This brings me to my final comment, written by Stephanie Flanders, the BBC's economics editor, If Germany left the eurozone:

It may be unthinkable, but I'm not the only one thinking about it. Since my last post, both Capital Economics and Graham Turner of GFC Economics have independently put some numbers together to see what we'd be talking about if Germany took the high road out of the euro. The results are suggestive, to say the least.

As I discussed before, there would be a big upfront financial and an economic cost of Germany leaving the single currency - not to mention an enormous political price for walking away from a project in which so much has been invested.

The major economic cost would be the hit to competitiveness, because the new German currency would surely go up. It's up for debate how much this would force the much talked about rebalancing of the German economy. Listening to Germany's politicians and industrialists, you would expect it to have very little impact: in the world market, they tend to argue, German companies compete on quality, not price.

But there is no debate about what a revaluation against the rest of the world would do to Germany's national balance sheet. It would hurt.
You should read Ms. Flanders entire post to get the details, but there is another, simpler reason why Germany won't leave the Eurozone: it is profiting off all these bailouts:

The masks have fallen and megalomania knows no shame. Klaus Regling, Chief of multi-billion heavy “European Financial Stability Facility” (EFSF) admits that Germany makes profit out of the bailout to Greece.

In an interview to German newspaper BILD-Zeitung German Klaus Regling says it out loud that bailout to Greece does not affect the German taxpayer as Germany makes profit € 600 million per year!

BILD: The more countries take advantage of the rescue, the greater the cost to the other states. Is Germany the paymaster of the euro crisis ?

REGLING: Paymaster is wrong. It’s all about guarantees, not really flowing money. No one takes away something the German taxpayer. On the contrary. With its contribution to the rescue fund Germany will most probably make win. Alone from Greece that would be up to € 600 million per year because the Greeks have to pay a kind of interest rate to the bailout loans.

Unfortunately Regling does not reveal what will be the German profit out of the Irish bailout. Nor what will be the total profit in millions and billions for Germany after Chancellor Angela Merkels’ efforts to keep pushing the Euro into split and the PIIGS into default

No wonder, Klaus Regling claims there is No Danger for the Euro! Germany will keep feeding the PIIGS!

Finally, Tyler Durden of Zero Hedge posted the humorous skit below discussing the possible manipulation of the silver market by JP Morgan. The skit is funny, but the subject matter is serious and if there is any truth to this, the fallout will wreak havoc on financial markets and the global economy.

No comments:

Post a Comment