Trust Everyone, But Do Not Cut The Cards Yet

“Rising stock prices and low interest rates have been a powerful tonic for lifting business and consumer confidence during economic recoveries. The tendancy after a deep downturn has been to underestimate the impact of economic policy and the business sector’s ability to strengthen. Our bet is that barring significant negative shocks, this recovery will prove to be durable”.

BCA Research March 2010


Below are some interesting articles I have read in the last week:

(Hover mouse over link, hold CTRL and click on links to access)


1. This January investment letter from Josh Berkowitz's global macro hedge fund Woodbine Capital says global rebalancing is the most important macro issue: "The natural adjustment for countries on the wrong side of global imbalances is to live below their means for an extended period of time, reversing the process from the pre-crisis period. Fiscal policy plays a far more important role than monetary policy in that process”. They are long fixed income and long exchange rates in regions that have seen aggressive exit strategies; they have bullish risk positions in countries like Hungary and bearish risk positions in countries like the UK for a fiscal consolidation trade; they are long capital goods providers tied to the emerging world and short companies providing capital to sectors in industrialized countries with excess supply; They have bullish Asian forex positions here and think stronger currencies will be found in countries that will be forced to raise rates. Please leave your email address on the comment page if you'd like a copy.


2. Nouriel Roubini - US Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession are Rising:

- Temporary factors that will boost growth in H1 '10 (2.7% F) will fade in H2 (1.5% F) led by private sector deleveraging;

- This H1 f/c could prove optimistic based on some of the most recent data releases;

- Dismissive of weather as an excuse; same for anyone (he calls them V shapers) using resilience of real consumption in January or the robustness of capex spending in Q4:

“Thus, the macro data are fully consistent with – at best – a U-shaped recovery. But the last two weeks of data are actually suggesting a significant downside risk to even an anemic 2.7% growth forecast for H1 as Q1 looks on a path closer to 2.0-2.5 growth. And if this is the best we get in H2 2009 and Q1 2010, when the effect of the temporary factors is still at their peak, what will happen to growth in H2 when these temporary factors will be faded out? At best a 1.5% growth rate that looks too close for comfort to a tipping point of a double-dip recession".

Please leave your email address on the comment page if you'd like a copy.


3. Betting on the Blind Side: Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession. This is a fantastic read.


4. How to Handle the Sovereign Debt Explosion – another sensible piece from Mohammed El-Erian at PIMCO, cautioning that the fiscal consolidation we are and will see will have what he calls “damaging recognition lags in both the public and private sectors”. He maintains we should expect rather than be surprised by this.


5. The European Union Trap: the latest John Mauldin piece is written by Rob Parenteau, an Austrian economist. The Austrian School holds that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult and advocates a laissez faire approach to the economy. Here’s the summary of his description of how economies will navigate the financial balances map (there’s a subtle common message between his point re blind pursuit of fiscal sustainability and PIMCO’s message above):

"The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation, its father?), so perhaps current account deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer."

Please leave your email address on the comment page if you'd like a copy.


6. Making the Trend Your Friend: AQR Capital's Cliff Asness describes the process driving the Managed Futures Strategy Fund, its strategy versus other absolute return funds, and the timing of its recent launch (his fund is ranked at the top for "absolute return" funds).


7. Macro Man: 20 Questions: he has a list of 20 questions that you should try to answer to see what your absolute view is on each issue. It’s an interesting exercise to reverse-engineer your macro view. Please leave your email address on the comment page if you'd like a copy.


8. BCA Research – Global Investment Strategy: BCA research is excellent - it's interesting to see how much their view of the global recovery conflicts with that of Roubini et al. The main stumbling block is private sector consumption - all previous post war recoveries have been led by a rebound in private consumption. They believe, having looked at patterns of previous recoveries, that the magnitude and speed of consumption recovery matches the average pattern. Please leave your email address on the comment page if you'd like a copy.


9. Varieties of internal devaluation: Peripheral Europe in the Argentine mirror – this Voxeu piece looks at the similarities between Europe's fiscal woes now and those of Argentina in the earlier part of this century and explains why the internal devaluation options explored by Argentina (a "zero deficit rule" and an alternative currency) didn’t work.


10. These two articles - Stiglitz (The Dangers of Deficit Reduction) and Rogoff (Japan’s Slow Motion Crisis) are from a fantastic website that has regular well-informed contributions worth following.