Fund Manager's Career Risk,

 or Why the Stock Market Acts Irrationally Every so Often

The following is an excerpt from a September 2011 essay by Dylan Grice, formerly of Societe Generale.

Early in my career as an economist , I remember being taken around to see clients with a certain gloomy strategist known as Albert Edwards. It was early in the spring of 2000 and tech hysteria was fever pitched. Talk was of a “new paradigm” and madness masqueraded as wisdom. Albert had been going around, with me in tow, arguing that the madness was, well … mad … but most meetings were hostile and Albert’s views were felt to be too extreme. But one meeting stands out in my mind, making a deep impression on me ...

The fund manager who’d taken this breakfast meeting listened to Albert begin his argument but seemed agitated. Then, after only a few minutes he interrupted. “Look,” he gasped, “I know it’s all crazy, but what do you want me to do? If the bubble inflates like this for even one quarter and we don’t participate, we’ll lose half our assets. I’ll be out of a job!” [Highlight added after the fact.] Here was someone who could see the fraud all around him but felt powerless to resist. Bad fund management practice was driving out good.

Reference: http://www.scribd.com/fullscreen/123487201, pp. 157-158, January 2013.

[Side note: This time in history, i.e. May 2013, is a rare instance of a US equity market that is overvalued, overbought, and overbullish, according to quantitative fund manager John Hussman. Its cause, according to many, is QE (quantitative easing). Investors are being driven into risky assets because the yield on safer assets is so low because the yield on US treasuries is so low because the Fed is buying assets to the tune of $85 billion a month in order to encourage economic growth.]

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Ailing Copper Price,

 or Disconnect Between Stock Markets and Economic Reality

The fund management section of the Financial Times had an interesting article on May 13, 2013 discussing the disconnect between the stock markets and economic reality.

It took the view that the markets are in thrall to the unconventional measures pursued by the developed world's central banks, which have encouraged investors to take on more risk and hunt for yield.

As an example, Rwanda attracted orders worth nearly half of its $6.8 Bn gross domestic product for its recent $400 Mn bond issue. The yield on this 10-year bond was 6.875%. [Side note: the 10 year US Treasury bond is yielding 1.9% as of May 15, 2013.]

The reliably bearish Albert Edwards, strategist at Societe Generale, argues that the ailing copper price has been giving early warning that central bank liquidity will not save risk assets. He suggests bailing out of equities now and being overweight in government bonds on a short-term cyclical view that recessionary forces remain powerful. His longer-term argument is that we are only one short recession away from outright Japanese-style deflation, which will prompt further central bank hyperactivity and ultimately, rapid inflation.

Warren Buffet declared at the recent Berkshire Hathaway annual meeting that all this quantitative easing has been very clever policy, "but the unwind of it has got to be more difficult than buying."

For fund managers, the question is where to be. In equities the least bad place remains the US. Meanwhile, valuations in real estate look less stretched than in equities and most bonds, according to the article.

See full text of article here:  http://on.ft.com/19dSXph (I learnt after the fact that FT may restrict access to non-subscribers ...)

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Hedge Fund Bears

 as reported in the Financial Times on May 10, 2013

In the week of May 10, 2013, some of the biggest names in the hedge fund world met to share investment tips at the Ira Sohn Conference, a high-profile gathering in New York.

The differences between the fund managers were in their degree of pessimism.

Underlying the various calls was one theme: the effects of emergency action taken by governments and central banks since the global financial crisis erupted five years ago.

Ben Bernanke, chairman of the US Federal Reserve, loomed large as the greatest distorter of markets. His bond-buying programs have boosted prices for government debt, the effects of which, according to the speakers, had trickled into asset markets of all types.

Stanley Druckenmiller, lieutenant to George Soros and head of Duquesne Capital Management and without a losing year in 30 years, opined that the recent retracement in commodities markets was no mere cyclical swing. "The commodity supercycle is over. It is not a correction; it's the beginning of a trend."

Jeffrey Gundlach of Doubline had an ominous warning: "I recommend you take all the money out of any bank account you have."

Pointing to Cyprus - where depositors saw 40-60% of their savings used to pay for a bank bailout - he said such a move was unlikely in the US, but why take the chance? "Many are likely to say Cyprus is just one country, to which I say the Lusitania was just one small boat." [Side note: Lusitania was one of the largest passenger carrying ships of its time. It was a British ship sunk by the Germans in WWI.]

Paul Singer of Elliott Management, notorious for his attempt to impound an Argentine ship amid a battle with Buenos Aires, said, "Everyone wants a safe haven. There is no such thing in today's markets, and that's one of the elements of the distortion."

There was also a consensus that it was foolish to challenge the Fed. Mr. Gundlach said that investors must realize there would be no end to quantitative easing, at least in the near term.

Kyle Bass of Hayman Capital, however, has bet against the Bank of Japan. He sees in its recent actions signs of stress that he has been predicting for three years. "The beginning of the end has begun."

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Japan, On Path to Inflation or Hyperinflation?

On March 21, 2013, the Financial Times featured an article by Scott Minerd, chief investment officer at Guggenheim Partners. 

In that article, he speculated as to what would happen if rising domestic inflation, which Japanese authorities have recently worked into policy, runs amock.

Link to that article which is entitled "Japan risks sliding down slippery slope to hyperinflation". ((I learnt after the fact that FT may restrict access to non-subscribers ...)

If capital were to flee Japan, which is what he suggests, there's always the US where it could flee to -- the ultimate safe haven. The bigger question is the following: If capital were to flee the US, where would it flee to?

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