Fearing Global Macro Gods?
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.
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
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.
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.
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:
- High yield priced for perfection?
- The risk of double dipping
- The sinking ship of Japan
- Beggar thy neighbour mentality
- Capital flows too hot to handle
- Chinese inflation out of control?
- Food inflation induced civil unrest
- Is India an accident waiting to happen?
- European contagion and solvency risk
- Massive refinancing programme
- Premature withdrawal of monetary support
- 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
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.
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.
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.
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!
The more countries take advantage of the rescue, the greater the cost
to the other states. Is Germany the paymaster of the euro crisis ?
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.
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