Brevan Howard

There exists a super-Bernanke who proved also a super-Hollande, a gentleman who Japanese Prime Minister Shinzo Abe cannot compete with: his name is Robert Mugabe, the president of Zimbabwe. When he took power, he seized the farmlands of one social group to give them to another social group. Afterwards, in part because the new social group did not manage the farms that well, the economy took a turn for the worse. Therefore, the state issued some bonds to finance its spending and asked the central bank to issue some money to buy this government debt. But they printed big time and turned the printing press into something of a cosmic proportion. According to Professor Steve Hanke from John Hopkins, monthly inflation was 80 billion percent, so per year it is a 65 followed by 107 zeros. This is what we call Mugabenomics, the conjunction of (i) state-forced wealth transfer between two social groups along with (ii) the monetisation of the debt. As we shall see below, Mugabenomics, or at least its mild version implemented now in the Western hemisphere, has drastic consequences on the final episode of the global financial crisis.

"Having faith in policymakers' ability to provide a perpetual put may yet prove to be a serious error; and, with interest rates stuck at zero, investors' ability to easily earn back losses remains severely impaired," is the not so subtle manner in which, Reuters reports, Brevan Howard, which manages $40 billion (and has never had a losing year) describes the current shambles of a market. "Tail risks, which have haunted the markets for the last five years, appear to have receded for the time being, but have by no means disappeared," they go on to say, noting that while policymakers promise to do "whatever it takes," investors betting that actions by policymakers will prop up financial markets indefinitely will face problems as "policy hyperactivity coupled with investor apathy could lead to significant and persistent price moves in multiple capital markets." But that's just an absolute return $40bn fund manager's view as opposed to a day-trading fast money trend masher or asset-gathering index-tracker.

Federal Reserve Bank of New York, Lexington Partners; Tudor Investment, Brevan Howard, Goldman Sachs, UBS, Bank of Korea; BNP Paribas, Fidelity Investments, Deutsche Bank,, Freeman and Co., Bank America, National Bureau of Economic Research, FDIC, Interamerican Development Bank; 4 hedge funds, BTG Pactual, Gavea Investimentos; Reserve Bank of Australia, Federal Reserve Bank of San Francisco, Einaudi Institute, Bank of Italy; Swiss National Bank; Pension Real Estate Association; Goodwin Proctor, Penn State University, Villanova University, Shroeder’s Investment Management, Premiere, Inc, Muira Global, Bidvest, NRUCF, BTG Asset Management, Futures Industry Association, ACLI, Handelsbanken, National Business Travel Association, Urban Land Institute, Deloitte, CME Group; Barclays Capiital, Treasury Mangement Association, International Monetary Fund; Kairos Investments, Deloitte and Touche, Instituto para el Desarrollo Empreserial de lat Argentina, Handelsbanken, Danske Capital, WIPRO, University of Calgary, Pictet & Cie, Zurich Insurance Company, Central Bank of Chile, and many, many more.

Just as the ever soaring Argentina default swaps indicated that a technical default for the Latin American country - one which would eventually morph into a second full blown default in a decade - was all but inevitable (and previews extensively here), the twisting and turning multi-year story of Argentina vs its "vulture" holdout creditors got its latest dramatic installment last night. Shortly after market close, the Second Circuit court of appeals once again override last week's critical order by Judge Griesa that Argentina promptly pay everyone or face monetary exclusions, lumping together any and all agents who facilitated the ongoing isolation of the holdout hedge funds from the broader group which in Griesa's view had pari passu status throughout.

We have discussed the CRIC cycle a number of times - especially with regards Europe - but it seems the never-ending story of Crisis-Response-Improvement-Complacency has struck once again as Morgan Stanley notes when complacency becomes pervasive, it usually gives way to a renewed crisis. Complacent financial markets appear to be looking through the fact that the global economy remains stuck in a 'twilight zone' between expansion and recession. Dismissing weak PMIs in China and EU, markets have feasted in QEternity and OMT and this has, as expected, affected European policy-makers (e.g. ongoing disagreements over the details of the much-anticipated negative-feedback-loop-breaking banking union; and Spain/Italy's 'belief' they can avoid an ESM 'austerity' program). This feels eerily like the March/April period when post-LTRO improvements induced euphoria in traders and governments/ECB to relax prematurely and as Brevan Howard explains below - every major developed economy is facing significant downside risks - no matter how enthusiastic markets appear to be.

• 'Pussy Riot' band members found guilty (Al Jazeera)
• Merkel Says Germany Backs Draghi’s ECB Aid Conditionality (Bloomberg)
• Now, the reverse psychology: Hilsenrath: Fed 'Hawks' Weigh In Against More Action (WSJ)
• London Firings Seen Surging As Finance Firms Add NY Jobs (Bloomberg)
• Facebook Second-Worst IPO Performer After Share Lock-Up (Bloomberg)
• Kocherlakota Says FOMC Goes Too Far With 2014 Rate Pledge (Bloomberg)
• China Said to Order Action by Banks as Developer Loans Sour (Bloomberg)
• Australian Treasury Dismisses AUD Intervention Calls (Dow Jones)
• Brevan Howard Loses Third Founder As Rokos Said To Leave (Bloomberg)
• Japan eyes end to decades long deflation (Reuters)... for 30 years now
• Ex-Morgan Stanley Executive Gets Nine Months in China Case (Bloomberg)

• Investors Shift Money Out of China (WSJ)
• Rajoy Risks Riling ECB in Bid to Avoid Union Ire (Bloomberg)
• Romney-Ryan See Fed QE as Inflation Risk Amid Subdued Prices (Bloomberg)
• Spanish savers offered haircut then money back (FT)
• Must wipe all traces of illegality and settle for $25,000: Standard Chartered Faces Fed Probes After N.Y. Deal (BBG)
• Greece debt report backs cuts plan (FT)
• Greece seeks two-year austerity extension (FT)
• Brevan Howard Looks To U.S. To Raise Money For Currency Fund (Bloomberg)
• Can he please stop buying gold? Paulson, Soros Add Gold as Price Declines Most Since 2008 (Bloomberg)
• BOE Drops Reference to Rate Cut as It Considers Policy Options (Bloomberg)
• EU Banking Plans Asks ECB to Share Power, Documents Show (Bloomberg)

First some German dares to suggest Mario Draghi's ECB should be sued for getting a "bigger than god complex", and now the EU's ombudsman has the temerity to suggest Mario Draghi may have conflicts of interest due to his previous jobs, most notably at Goldman Sachs, a topic beaten to death on these pages... and various other factors.  From Spiegel: "As soon as you took office, there were discussions about his past in the U.S. investment bank Goldman Sachs - now has Mario Draghi, head of the European Central Bank, and problems with the EU ombudsman. It's about the membership of an influential banking lobby organization." What are the "other factors": well, one is Draghi's presence in the Group of 30 which as we have explained previously, is the real behind the scenes central planning group which decides the fate and future of the world (an extended write up here). The other factor? Mario's son Giacomo, who just happens to work as an interest rate trader at Morgan Stanley London.

Two days ago we made the "missing link" connection between traders in Libor manipulating banks (all of which curiously had a hub in Singapore: something else for the media that has been about 4 years too late on this topic to focus on) and hedge funds (most of which curiously centering on the otherwise sleepy bastion of banking: Geneva, Switzerland). The immediate aftermath was the loss of trading privileges of one Michael Zrihen. We are fairly certain this is just the beginning of the hedge fund bust: when all is said and done, many more funds will have terminated traders they hired for reasons (and kickbacks) unknown over the past 2 years as Lie-bor manipulators sought to put a clean firewalled break between their old employer and current one. Because apparently sometimes the regulators are that stupid and can be confused by a simple job change. And while many have assumed (and even calculated based on completely groundless assumptions) that only BBA member banks have benefited from Libor manipulation, the reality is that hedge funds were just as complicit and benefited just as much if not more. What is worse, they took advantage of their whale client status with manipulating banks, and courtesy of Total Return Swap and other leveraged gimmicks, made far more money when they co-opted two or more banks to do their bidding. Impossible you say: hedge funds would never be so stupid. Oh very possible: we present exhibit A - Brevan Howard, a "fund, with assets of $20.8 billion as of Dec. 31, has never had a losing year and returned 14.4 percent annualized from its April 2003 inception through the end of 2008" as Bloomberg said in a made to order profile of the funds recently. Perhaps there is a very simple reason for this trading perfection: "Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg."

About two years ago the Norwegian sovereign wealth fund did something truly remarkable: it invested for infinity: "Norway, which has amassed the world’s second-biggest sovereign wealth fund, says Greece won’t default on its debts. The Nordic nation’s $450 billion Government Pension Fund Global has stocked up on Greek debt, as well as bonds of Spain, Italy and Portugal. Finance Minister Sigbjoern Johnsen says he backs the strategy, which contributed to a 3.4 percent loss on European fixed income in the second quarter, compared with gains on bonds in Asia and the Americas. Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said." Well, we all know how the experiment ended: "Norway Sovereign Wealth Fund Purges All Insolvent Eurozone Debt Holdings." So much for infinity. But that has not stopped others to boldly catch falling knives where so many other have tried to catch falling knives before, and failed. Enter Greylock Capital and various other hedge funds who are positive they have rediscovered the wheel.

Pop quiz: What is the common theme among the following "best of breed" 2 and 20 (at least) hedge funds, whose YTD performance is presented below?

We discussed earlier about the Fed's ZIRP policy and the transmission mechanism through which its free-money ends up in the real-economy (or not as the case in point). Brevan Howard agrees that the outlook for the US is not plain-sailing and that US growth does indeed face cross-currents, with the labor market improving at a steady pace while aggregate demand slows. While the firm remains more stoic, seeing a generally favorable macro backdrop, they note three uncertainties and one certainty that keeps them up at night. The pace of the drop in unemployment against only trend growth leaves its sustainability uncertain; the potentially temporary easing of the European financial crisis seems increasingly uncertain; and the growing tensions in the Middle East and the uncertainty over gas prices derailing the fragile economy. However, it is the one certainty that worries us most (and them, it seems), and that is the enormous fiscal drag the US faces in 2013 which unchecked could reduce real GDP growth by more than 3 percentage points. Even if the President and the new Congress cut this by half it would still be a noticeable drag on growth.

Earlier we shared some perspectives on the just released Ryan 2013 budget. Shortly thereafter it was the turn of Obama aide and National Economic Council director Gene Sperling to give his spin. In what can only be characterized as an epic filibuster of none other than CNBC, Sperling spoke in length, literally, about shared sacrifice, about how math fails to matter in a new normal (and nominal) world, how trillions and trilions in underfunded welfare benefits (which even Goldman sees as untenable) are really just a matter of perspective, but mostly about how net tax revenues running below debt issuance (as reported here yesterday) are 'viable.' We leave our readers to make up their own minds. We just want to add the following highlights from a Bloomberg October 2009 article, which just may provide some more color on where and what Mr. Sperling's true allegienaces are.

While Paulson's star was finally setting in 2011, that of mega macro fund Brevan Howard was rising, and has been rising for years by never posting a negative return since 2003. The $34.2 billion fund, now about double the size of John Paulson's, returned 12.12% in a year marked by abysmal hedge fund performance. But how did it make money? Simple - by taking advantage of the same permabullish market myopia that marked the beginning of 2011, and that has gripped the market once again. "The Fund’s large gains during the third quarter were due predominantly to pressing the thematic view that markets were ignoring clear signs of economic slowdown and were not correctly pricing the probability of central bank accommodation, particularly the reversal of the ECB rate hikes in April and July." Not to mention the €800 billion ECB liquidity accommodation that started in July and has continued since. So yes: those betting again that the market correction is overdue, will once again be proven right Why? Because "we are about to witness an unprecedented policy move. In the US, Eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful." As for looking into the future, "we continue to believe that markets remain at risk of  substantial dislocation."

With the near record October hope rally a distant memory now, the hope that hedge funds participated in it is also just that. Alas, while most hedge funds exhibited a more than 1x beta on the way down in August and September, most were lucky to get half the upside on the way up in October at best. While there are some outlier surprises, unfortunately it is the ones with an abysmal Sharpe Ratio, so for investors who enjoy huge drawdowns and massive month-to-month vol, they probably lucked out in October. Everyone else: better luck next time. Some very notable let downs: Brevan Howard: -1.25%, Tudor: -2.44%, Moore Global: -2.23%, Landsdowne: -0.50%, Bluecrest: 0.43%, Perry: 3.39%, King Street: -0.04%, Blue Mountain: 0.73%, Fortress Macro: -2.19% and last and probably least JAT Capital: -13.7%.