from Funds Hub:
Markets could be derailed again, warns Soros
Railway porter-turned-billionaire financier George Soros delivered a stark warning last night that the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis.
The man who 'broke' the Bank of England (and who is still able to earn a cool $3.3 bln in a year) said the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned.
Soros, who worked as a porter to pay for his studies at the London School of Economics after emigrating from Hungary, warned us to heed the lesson that modern economics had got it wrong and that markets are not inherently stable.
"The success in bailing out the system on the previous occasion led to a superbubble, except that in 2008 we used the same methods," he told a meeting hosted by The Economist at the City of London's modern and impressive Haberdashers' Hall.
"Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing a yet larger bubble.
"We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount."
One crumb of comfort could be the 10-year period between the 1998 Asian crisis and the 2008 credit crisis. If the pattern is repeated, it should at least mean we have another 8 years to go before the next crash...
from MacroScope:
Press that reset button…
Mohamed El-Erian, CEO and co-CIO of the world's biggest bond fund PIMCO, says 2010 is the beginning of the multi-year resetting of the global economy.
In the period up to the crisis, there were two labels that dominated the world -- Great Moderation and Goldilocks. Not too cold, not too hot. 2009 was about crisis management -- the label was 'whatever it takes'. The 2010 label is post-crisis. It's not just about post-crisis. In our view, 2010 is about multi-year resetting of the global economy. It will be a bumpy journey to the new normal.
Speaking in London ths week, he warned that migration of wealth and growth dynamics of advanced economies to systemically important emerging economies must be on top of investor radar screen in 2010, as well as sovereign risks.
It is the year of sovereign risk. Everyone has to recognise sovereign balance sheets themselves (as) an issue. Sovereigns are called sovereigns for reasons. Everyone gets influenced.
from Raw Japan:
Investing as charity
While Japan took few direct hits in the global credit crisis, the aftershocks have been immense, and long-lasting. The United States and Europe may now be showing some signs of recovery, but the world's second-largest economy is still straggling behind and gasping for air.
Predictably, equity markets reflect Japan's wheezy struggle. The Nikkei 225 is the worst performer among the benchmark indexes of the G7 nations, up just 10 percent so far this year. (The best performer, by the way, is Toronto at nearly 27 percent. The Dow has posted a respectable 17 percent return.)
Some discrepancy between Japan and other advanced industrialised nations is to be expected. Tokyo's top companies are largely exporters reliant on the United States, where consumer spending has been whiplashed by the recession. A resurgent yen, which drives up the price of Japanese goods overseas, hasn't helped either.
Consumer spending in Japan -- which never convincingly recovered from the crash of the asset bubble in the early 1990s -- is only poised to get worse, thanks to the lethal demographic cocktail of an ageing population and a shrinking birthrate.
But the reasons behind the Nikkei's poor performance aren't exclusively economic. Talk to a frustrated fund manager in Tokyo (believe me, they are very easy to find these days) and they'll tell you that even with the lousy earnings and a grim economic outlook, the biggest problem now is a rush of capital raisings that will heavily dilute the holdings of current shareholders.
"This is the biggest factor why Japanese shares lag behind U.S. and European shares," says Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management, referring to the recent rush by Japanese companies to issue new equity.
Japanese firms have already raised $40 billion through issuing common stock and convertible bonds this year, tapping the modest stock rebound for much-needed cash to replenish their reserves, and it doesn't look like it's going to end.
from MacroScope:
SWF 2.0
The easing of the credit crisis is giving way for a new generation of sovereign wealth funds.
Japan, Taiwan, Thailand, Bolivia, Nigeria, Canada are just some of the places where a public debate has begun on establishing some form of sovereign wealth fund. And even Scotland is now looking at establishing such a fund to manage oil wealth.
China is also close to launching an agency to restructure and consolidate state-owned enterprises -- dubbed by Chinese media as CIC 2.0 in reference to the country's $200 bln SWF China Investment Corp.
Ashby Monk, expert on SWFs and research fellow at Oxford University, says the crisis may have highlighted the importance of having SWFs and having extra cash to deal with the emergency.
"There is this appetite for governments to set up new SWFs. Certain countries have taken considerable utility from having SWFs and a pool of cash during the crisis," he says.
"Coming out of this crisis, we are going to see SWFs increase in the same way central bank reserves increased coming out of the 1997 crisis. All these new funds may be the conduits for a real dramatic ramp-up of sovereign wealth funds."
from MacroScope:
Who do you blame for the credit crisis?
Greedy bankers are routinely blamed for the credit crisis but one British-based poll of -- well, financiers -- spreads the blame more widely.
Gary Jenkins, head of fixed income research at Evolution Securities, wanted a more specific scapegoat and ran a poll of about 200 mostly fund managers and investors asking them to pick their credit crisis culprit. Former U.S. Federal Reserve Chairman Alan Greenspan was the clear winner, picking up 35 percent of the votes. He has been widely criticised over the past year for low interest rate policies that helped fuel the credit boom.
Former U.S. president Bill Clinton also figured quite prominently with about 10 percent of votes, and British prime minister Gordon Brown got quite a few.
Some bankers were singled out, including Fred Goodwin, former chief executive of Royal Bank of Scotland and Richard Fuld, the head of collapsed Lehman Brothers.
In a related article in Euroweek, Jenkins also had a unique culprit -- Bill Gates of Microsoft. None of the maths behind structured credit could be done without spreadsheets like Excel, Jenkins reckons.
So who do you think is to blame?
(Reuters photo: Kevin Lamarque)
from Funds Hub:
No defence
Sheltering from the credit crisis in so-called defensive stocks could prove a disappointment to investors and a great opportunity for short-sellers, according to Liontrust hedge fund manager James Inglis-Jones.
Inglis-Jones, who runs a hedge fund for Liontrust and who recently took on the First Income fund after the departure of star manager Jeremy Lang, has short positions in sectors such as tobacco and pharmaceuticals and has recently added more.
"It's an interesting opportunity when something is seen as safe," he told me. "When the company delivers a disappointment the payoff can be pretty good."
In February Hedge Hub reported Crispin Odey saying defensives were becoming "interesting shorts" and that he "certainly wouldn't own them".
However, with markets having bounced so much recently -- the FTSE 100 is up by a quarter since March -- and many defensives having missed out on most of the rally, are defensives still expensive or do they offer better relative value now?
Much of that depends on whether the rally has legs or is a dead cat bounce. Barclays Wealth came out today saying it is "shifting to the tactical offensive", adding, "The big question now is whether the pick-up is temporary or the real thing. We suspect the latter." Several big names have already pointed to a new bull market, but after a 25 percent rally where do we go from here?
from Funds Hub:
Batten down the hatches
It's fashionable now for leading economists and financial wizards to claim that they saw the credit crunch coming and the kind of dislocation it would create. But how many have predicted where the next implosion will occur?
Dr Andrew Lo, founder of hedge fund firm AlphaSimplex, and director of the MIT laboratory for financial engineering, has spent his career studying market behaviour, publishing papers examining why quant funds imploded in August 2007, and trying to reconcile behavioural economics with efficient market theory.
He sees the next big meltdown in commercial mortgages, but this time it's pensions funds that will bear the brunt of the losses rather than banks. Lo points out that commercial mortgages have been packed and sold in the same way as residential mortgages - different levels of risk exposure sliced and diced and wrapped up together in one package with a triple A rating slapped on top.
But commercial mortgage backed securities (CMBS) are facing the same liquidity problems as RMBS following the sub-prime meltdown. When mortgages start to reset at higher rates this year the defaults will pile up and the losses will hit the end-investor - in this case, large pension funds in the US, Europe and Japan, says Lo.
"We are likely to see a number of pension funds having a hard time meeting their liabilities, and the government may have to step in and help out some of these insolvent funds," he says.
Why pension funds rather than banks, which had the greatest exposure to RMBS?
Lo says that large pension funds expanded their programmes into riskier areas like CMBS to capture additional yield during the low volatility, low return years.
Stressed out?
Trying to second guess reaction to news during this financial crisis has been a fraught exercise and the U.S. Treasury may have a few advisers playing game theory to assess the impact of results from bank stress tests.
The tests are an attempt to determine which banks can survive more trouble, and who can’t. And how big any balance sheet holes might be. The results are due out on May 4.
If the results look too good, the process will look like a whitewash. Too negative, and it will destabilise still-jumpy markets. Yet showing up problems at one or a few banks could hang them out to dry.
The plan may have been to keep results secret, but that’s unrealistic. Shares in Britain’s Barclays soared last month when its regulator gave it an all-clear. That boosted all the UK sector, but then Barclays was almost alone in the spotlight — its rivals had either already been bailed out or had comfortable capital positions.
In the U.S., there are 19 banks to handle. It could be a PR nightmare and maybe one policymakers should have seen coming. Tim Geithner may end up on the back foot, just as he tried to get ahead of the crisis.
Or he may just opt to play hardball with the weaker banks. At least a transparent process will remove uncertainty from the stronger names.
Explaining the credit crisis
Los Angeles-based designer Jonathan Jarvis has created a great animated video explaining the credit crisis, produced as his part of his thesis at the Art Center College of Design:
The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
If you prefer your explainers audio-only, you can’t go wrong with “The Giant Pool of Money” and “Bad Bank,” from Alex Blumberg and Adam Davidson of Planet Money.
from Funds Hub:
The new wrong
Most hedge funds agree that the credit crisis has thrown up some interesting assets at bargain-basement prices, particularly in credit markets.
The problem? When you have to report net asset value performance to jittery investors and prices of these cheap assets are getting even cheaper, when do you buy?
That's the dilemma facing many fund managers, some of whom have got burned by snapping up asset-backed securities and other assets too quickly.
After all, a security that has fallen 90 percent is one that has dropped 80 percent and then halved.
Chris Woods, chief investment officer at Man Global Strategies, speaking at Wednesday's Euromoney bond conference in Westminster, helps us out.
"Just as 50 is the new par, so early is the new wrong," he says.
As investors have found, it may be cheap, but it could get a lot cheaper.
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