Recovery Will Mirror the Decline?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Treasury Secretary Timothy Geithner testified on Capitol Hill on Thursday before the Congressional Oversight Panel stating that confidence has returned to markets:
emerging financial sector stability, Treasury Secretary Timothy
Geithner said Thursday that a number of government rescue efforts in
place since the Wall Street crisis are no longer needed and that banks
will repay $50 billion in rescue funds over the next 18 months.
testifying before a congressional watchdog panel, said the nation still
has a ways to go before "true recovery takes hold." But he said
improved conditions in the banking industry have prompted Treasury to
begin winding down emergency support programs implemented after the
collapse of Lehman Brothers last year.
"The financial system is
showing very important signs of repair," Geithner said. He added later:
"I would not want anyone to be left with the impression that we're not
still facing really substantial enormous challenges throughout the US
The cautious but upbeat tone reflects a
growing push by the administration to present the government financial
rescue efforts as a success amid lingering public apprehension about
Earlier today, Federal Reserve
Bank of Atlanta President Dennis Lockhart said the U.S. economic
recovery will probably be “lackluster,” hobbled by strains in financial markets and weak consumer spending:
the medium term, I see a slow recovery with ongoing repair of the
financial sector,” Lockhart said today in remarks prepared for a speech
in Jacksonville, Florida.
“There are risks to even this lackluster
The Fed said yesterday that 11 of its 12
regional banks, including Atlanta’s, reported signs of a stable or
improving economy in July and August, adding anecdotal evidence that
the worst U.S. recession in seven decades is over. The number of
Americans filing first-time claims for jobless benefits dropped last
week to the lowest level since July, the Labor Department reported
Policy makers said last month the economy
appeared to be “leveling out,” with a “gradual” resumption in growth
likely. Still, consumer spending was expected to be constrained by “job
losses, sluggish income growth, lower housing wealth and tight credit.”
“Although consumer confidence is rising, actual
consumption has remained muted overall,” Lockhart said. “Consumers
remain cautious because of employment concerns and wealth loss.
Households continue to deleverage, that is, pay down debt.”
market participants are much more optimistic about the recovery. Jeff
Matthews of the hedge fund RAM Partners appeared on Tech Ticker stating
that this is a normal cyclical recovery and in all recoveries, the recovery mirrors the decline:
way to make big money on Wall Street is to stick your neck out and take
a position when everyone else thinks you're a nutcase.
Jeff Matthews of hedge fund RAM Partners did just that earlier this
year when he said the economy was headed for a standard cyclical
recovery. At the time, most people thought the world was still on the
verge of collapse.
Now the economy argument is usually between
those who think we're headed for "double-dip" recovery (a short, happy
boom followed by another bust) or a "square-root-shaped" recovery (a
short, happy boom followed by years of treading water). Our guest Liz
Ann Sonders of Schwab, who was also an early bull, made the latter case earlier this week.
Matthews thinks both views are wrong. He thinks this will be a
"v-shaped" recovery, in which the economy recovers far more sharply
than most people think. He thinks those who keep bleating about a
"jobless" or "shallow" recovery like those in the early 1990s and 2000s
are missing a key point:
The slope of the economic recovery, Jeff
says, mirrors the slope of the economic drop. We had a sharp collapse.
So we're going to have a sharp recovery.
I suggest you listen carefully to the interview (click here
to watch it), especially when he talks about cognitive dissonance and
taking the emotions out of it ("stock markets are not a reflection of
So is Mr. Matthews right or is he wearing
some rosy glasses? The hardest thing for me to explain to people is
that the stock market is a beast on its own. Right now, the market is
pricing in a recovery. Whether it is a V-shaped or W-shaped recovery is
immaterial, it's a recovery.
And as we head into the last quarter of the year, there are a lot of anxious portfolio managers who are suffering performance anxiety.
What does that tell me? They're going to go long risk assets like high
yield bonds, emerging market equities and bonds, commodity currencies,
commodities and high beta stocks.
I have been writing and
telling everyone to keep buying the dips. There is a lot of
liquidity in the system and we have not seen anything yet. When things
really take off, there will still be naysayers and skeptics out there,
but even they will eventually throw in the towel.
Now, let me
stop here for a second and talk about the economy. Unlike the markets,
the recovery in the economy will not be V-shaped. In particular, those
millions of job losses will not come roaring back. This will be another
jobless recovery, just like the last recessions, but there are signs
that the U.S. labor market is improving.
Importantly, companies managed to boost their workers' productivity and their own profits in the spring mainly by slashing costs and capping their employees' pay:
— the amount of output per hour of work — rose at an annual rate of 6.6
percent in the April-June quarter, the Labor Department said. That's
the largest advance since the summer of 2003. And it's slightly better
than the 6.4 percent productivity increase the government had estimated
At the same time, labor
costs fell at an annual rate of 5.9 percent — the sharpest drop since
2000 and slightly more than the 5.8 percent drop estimated a month ago.
said the rising productivity and lower labor costs supported their view
that the longest recession since World War II is coming to an end.
Mark Zandi, chief economist at Moody's Economy.com, said it's "very typical" for productivity to surge at the end of a recession as businesses aggressively cut costs.
say they don't expect productivity to keep surging. But they said the
productivity jump in the second quarter, combined with falling labor
costs, might persuade employers to slow their pace of layoffs and
eventually resume hiring.
That is critical because until the
labor market heals, consumers probably won't step up their spending.
And consumer spending, which accounts for about 70 percent of economic
activity, is a vital ingredient in any sustained rebound from the
recession. A dismal job market makes that prospect uncertain.
Surging productivity means that Q3 and Q4 growth will surprise to the upside. As profits increase, stocks will head higher.
are other signs of recovery worth mentioning here. The WSJ reported
that the Man Group is launching an onshore version of its AHL product,
one of the largest single hedge funds with some $20 billion assets
under management, in a further sign of the company's confidence in boosting sales to private investors:
AHL Diversity is a managed-futures trading program, which means it
follows and seeks to exploit persistent market trends. It will be
managed by Man Investments, the asset management arm of Man Group, and
marketed by hedge fund advisory company Dexion Capital Group.
The world's largest listed hedge fund aims to attract sophisticated
investors who will be able to buy in with a minimum initial investment
of just GBP100 from its launch in October.
performance of trend following managers has tended to be uncorrelated
to traditional stock and bond markets," said Tim Wong, chief executive
"We saw that with
AHL's highly impressive performance last year when its best performing
fund delivered 33% at the same time as some equity markets fell 40%,"
Man Group has successfully wooed private
investors even as withdrawals by institutional investors have
continued. In July the company reported strong sales to private
individuals, posting a rebound to $3.4 billion in its first fiscal
quarter to June 30.
The introduction of Man AHL Diversity
onshore will give individuals exposure to more than 90 global markets
and 29 international exchanges trading continuously which makes for a
highly liquid product following trends in everything from currencies
and interest rates to agricultural assets and metals.
the London-based alternative investment manager is yet to be fully
convinced about the early turnaround in the global economy, so it stays
conservative on equity investments, said John Rowsell, managing director of Man Investments:
are still very cautious in terms of where we think the risks are and
how much normalcy or rebound there has been in the economy," Rowsell
told Reuters in an interview in Hong Kong.
have not come back as strongly as expected. More importantly,
consumer's access to credit has been severely curtailed and their
appetite for credit has been affected."
Man's assets under management had dipped to $43.3 billion by the end of the June quarter.
PREFERS CREDIT OVER EQUITIES
hedge fund managers are still clawing back from a wave of redemptions
which saw investors pull out more than $150 billion from funds of
funds, amid the financial crisis, according to Hedge Fund Research.
fund managers started to put "risk on/risk off" trading strategies in
practice this year as global markets recovered, but Rowsell said it was
not yet a good time to leverage risks.
Man's fund strategies, convertible bond arbitrage has put up a strong
showing for Man after its rocky performance in 2008, while its credit
strategies have also done well but returns from macro have been
subdued, Rowsell said.
have also been making money without necessarily going long on them.
Basically, you can make very attractive returns without having a lot of
beta in your portfolio at this juncture," said Rowsell, a former
director at the Chicago Mercantile Exchange.
said Man preferred to invest in markets which have higher "dispersion"
such as Japan and the Western markets over China, which many other
asset managers regard a top pick.
the wake of the Lehman Brothers debacle, Man has been adjusting its
business model to better manage risks by transferring a part of its
investments into managed accounts from co-mingled accounts.
a managed account the hedge fund manager's role is limited to the right
to make investment decisions while clients have control over the assets
of the fund being managed.
are not doing this simply for transparency but for control over the
assets. We also can then control the relationships with the prime
brokers which is a potential area of risk," said Rowsell.
Rowsell said Man had been increasing the number of managed accounts as
well as the proportion of its assets in these accounts and aims to move
well over half its investments to managed accounts eventually.
half its investments to managed accounts? That means they will be
focusing on liquid strategies that are easier to get out of if things
blow up again. Institutions should be paying attention to what this
giant in the hedge fund industry is doing because that is exactly what
I wrote about in hedge fund heave-ho. Stick to liquid strategies using managed accounts and forget highly leveraged illiquid strategies.
of hedge funds, Bloomberg reports that according to Eurekahedge, hedge
funds returned 1.1 percent in August, the sixth straight monthly gain,
as managers investing in Europe and distressed debt outperformed:
Eurekahedge Hedge Fund Index, tracking more than 2,000 funds, gained 13
percent this year, according to the Singapore- based data provider’s
preliminary report based on 30 percent of the funds that reported
August performances. Net inflows to the industry totaled $4.5 billion
last month with over 50 percent of the reporting funds attracting
capital, the report showed.
funds are benefiting as stock markets rebound on signs economies are
recovering from the first global recession since World War II, and
managers investing in distressed assets are finding opportunities in
the wake of the financial crisis. The MSCI World Index of 23 developed
nations jumped 3.9 percent in August, bringing its year-to-date advance
to 18 percent.
“Hedge funds have benefited greatly from
the global stock- market recovery,” said Masaharu Ito, a senior analyst
at Daiwa Institute of Research Ltd.’s capital market research
department in Tokyo. “Given how many of the funds still have some sort
of exposure to the equity market, their performance going forward will
largely depend on the direction of stock markets globally.”
More than 300 funds have started while 400 fund-closures were confirmed this year, Eurekahedge said.
Six of Eurekahedge’s seven regional indexes rose last month. The measure tracking Asia-focused hedge funds declined.
gauge tracking European managers advanced 2.6 percent, making it the
best performer in August, as funds benefited from gains in regional
equities, Eurekahedge said. Eurekahedge’s North American Hedge Fund
Index climbed 1.8 percent as the Standard & Poor’s 500 Index rose
for a sixth-straight month.
Managers in Asia excluding
Japan underperformed, with the Eurekahedge Asian Hedge Fund Index
losing 0.4 percent, as stocks in China, Hong Kong and Taiwan fell.
China’s Shanghai Composite Index tumbled 22 percent in August, its
biggest slide since October 2008, pushing the benchmark into a
so-called bear market.
The measure tracking Japan’s
hedge funds added 0.7 percent as the benchmark Nikkei 225 Stock Average
rounded off a six-month, 39 percent advance.
nine Eurekahedge measures tracking different hedge-fund strategies
rose. An index of managers investing in distressed debt jumped 6.2
percent, making it the best performer, largely driven by a few
emerging-market-focused funds, Eurekahedge said.
securities are mostly loans and low-rated, high- yield bonds of
companies that have trouble meeting interest and principal payments.
Investors can profit if prices rebound or the securities are swapped
for equity in a restructuring. Distressed loans usually trade below 90
cents on the dollar and bonds below 70 cents.
global index last year slid 11 percent, the most since the firm began
tracking data in 2000. In July, hedge- fund assets increased by $10.6
billion, bringing total assets under management to $1.35 trillion,
Eurekahedge said last month.
Hedge funds are mostly
private pools of capital whose managers participate substantially in
the profits from their speculation on whether asset prices will rise or
Does all this mean the W-recovery
is off the table? Not necessarily. What it means is that there is a lot
of liquidity in the system that will spur another asset bubble. And we
all know that asset bubbles do not end well.