Nassim Taleb: "The Fed does not understand risk!"

 

 (Distressed Volatility)

PIMCO | Mohamed El-Erian - We've Voted. What's Next For the Economy?

We've Voted. What's Next For the Economy?

• With the two chambers of Congress split between Democrats and Republicans, the conventional wisdom likely to be repeated over the next few weeks is that political gridlock is good for the economy. While often true, that is not the case today.
• Democrats and Republicans must meet in the middle to implement policies to deal with debt overhangs and structural rigidities.
• The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society.

via pimco.com

Mohamed El-Erian, Co-CIO/CEO of PIMCO and the voice on the street that I trust utmost in times of uncertainty, casts a veil of uncertainty over the seemingly decisive electoral mandate claimed by the GOP in yesterday's triumph at the polls. The insurgent nature of the GOP movement, spearheaded by the Tea Baggers (Party), does not inspire hope in the prospects of overcoming the policy gridlock in DC that must be addressed before any fundamental changes can be made to the country's rapidly deteriorating long-term fiscal health with an aging population and public pension liabilities light-years beyond the tipping point of permanent insolvency.

Due to the "great age" of leverage, debt and credit entitlement, and the related surge in structural unemployment, the private sector is not in a position to control its own destiny. Emerging markets are rapidly eroding traditional economic and political competitive advantages enjoyed by the US. It is hard to disagree with El-Erian in his conclusion - the extreme nature of today's political discourse is ill-suited to tackling the pressing issues of our time.

Posted via email from Global Macro Blog

Mid-term elections, QE and the markets: Tea and QE | The Economist

But there is also a nice irony at work. The tea party is opposed to massive government spending and bailouts. But QE is a way for the central bank to finance that government spending and to pump money into the banking sector. So on the day that the tea partiers may be celebrating, an unelected central bank will be carrying out a programme, probably totalling several hundred billion dollars, that will cut against everything the partiers stand for.

via economist.com

Buttonwood accurately foresaw the overwhelming victory of the Tea Baggers and we are now mere hours from the likely Federal Reserve announcement of QE2 and the resumption of the printing press. The irony observed in the above excerpt - that the Fed is poised to undermine everything the Tea Baggers fundamentally stand on through its independent monetary authority - is unlikely to be fully appreciated by the media as the day progresses. It will be interesting to see the response of the freshly invigorated GOP activists in the coming weeks leading up to their inauguration early next year. I suspect the radical tone will be subdued by political realities and market uncertainty, not to mention the radical shift in mindset that accompanies a transition from insurgent to incumbent.

Posted via email from Global Macro Blog

PIMCO's Bill Gross | Investment Outlook - Run Turkey, Run

Run Turkey, Run

• The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued.
• We are in a “liquidity trap,” where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there.
• The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.

Each party’s campaign tactics remind me of airport terminals pre-9/11 when solicitors only yards apart would compete for the attention and dollars of travelers. “Save the Whales,” one would demand, while the other would pose as its evil twin – “Eat Whale Blubber,” the makeshift sign would read. It didn’t matter which slogan grabbed you, the end of the day’s results always produced a pot of money for them and the whales were neither saved nor eaten. American politics resemble an airline terminal with a huckster’s bowl waiting to be filled every two years.

And the paramount problem is not that we contribute so willingly or even so cluelessly, but that there are only two bowls to choose from. Thomas Friedman, the respected author of The World Is Flat, and a weekly New York Times Op-Ed author, recently suggested “ripping open this two-party duopoly and having it challenged by a serious third party” unencumbered by special interest megabucks. “We basically have two bankrupt parties, bankrupting the country,” was the explicit sentiment of his article, and I couldn’t agree more – whales or no whales. Was it relevant in 2004 that John Kerry was or was not an admirable “swift boat” commander? Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal? Shame on them and of course, shame on us. We’re getting what we deserve. Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.

There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”

Whatever the conclusion, not only investors, but the American people should recognize that Wednesday, even more than Tuesday, represents a critical inflection point in determining our future prosperity. Of course we’ve tried it before, most recently in the aftermath of the Lehman crisis, during which the Fed wrote $1.5 trillion or so in “checks” to purchase Agency mortgages and a smattering of Treasuries. It might seem a tad dramatic then, to label QEII as “critical,” sort of like those airport hucksters, I suppose, that sold whale blubber for a living. But two years ago, there was the implicit assumption that the U.S. and its associated G-7 economies needed just an espresso or perhaps an Adderall or two to get back to normal. Normal just hasn’t happened yet, and economic historians such as Kenneth Rogoff and Carmen Reinhart have since alerted us that countries in the throes of delevering can take many, not several, years to return to a steady state.

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

Still, as I’ve indicated, a Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion. Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?

We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter. You may not be strutting around the barnyard as briskly as you used to – those near 10% annualized yields in stocks and bonds are a thing of the past – but you’re gonna be around next year, and then the next, and the next. Interest rates may be rock bottom, but there are other ways – what we call “safe spread” ways –to beat the axe without taking a lot of risk: developing/emerging market debt with higher yields and non-dollar denominations is one way; high quality global corporate bonds are another. Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as “safe spreads.” While our “safe spread” terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility. The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

If a country gets the politicians it deserves, then the same can be said of an investor – you’re gonna get what you deserve. Vote No to Republican and Democratic turkeys on Tuesday and Yes to PIMCO on Wednesday. We hope to be your global investment authority for a new era of “SAFE spread” with lower interest rate duration and price risk, and still reasonably high potential returns. For us, and hopefully you, Turkey Day may have to be postponed indefinitely.

William H. Gross
Managing Director

via pimco.com

Bill Gross goes off on the FOMC and the federal government generally in his monthly newsletter, blasting the imminent "QEII" as the largest Ponzi Scheme in history, offering up the new term of "Sammy Scheme" to describe the Federal Reserve's strategy for pumping new life into the economy.

The most important point Gross is making, in my opinion, is that QE is really code for "writing checks", and check writing in the trillions is in fact inflationary. As the manager of the world's largest bond fund, Gross makes very clear that QE is not the bondholder's friend, because it raises bond prices to create the illusion of high returns. However, prices will eventually reach a point where they can no longer rise any further, at which point the market offers near 0% returns and "picking of the creditor's pocket via inflation and negative real interest rates."

Posted via email from Brian T. Edwards Posterous

Currency War Digest

Best Commentary

• John Taylor Parallel's Current Situation to WWII, Predicts Global Debt Structure Could Collapse (Zero Hedge)
• Risk Lightens Amid Latest Shots in Currency War (FT)
• General Bernanke and the Currency War of 2010 (Forbes)
• The Most Dangerous Effect of a Currency War is not Hyperinflation or Hyperdeflation (BusinessInsider)
• Who Would Win a Currency War? (Time Magazine)
• Martin Wolf: US Victory in Currency War Assured (IPEZone)
• Too much focus on the Yuan? (VoxEU)
• A currency war the US can't win (VoxEU)

A Satirist's View

• The Novelist Who Predicted the Currency War (Reformed Broker)

The book is called Super Sad True Love Story and it was written by Gary Shteyngart.  If the name sounds familiar, he is the brilliant and hilarious writer who gave us Absurdistan a few years back, one of my favorite books of the last decade. In SSTLS, Shteyngart introduces us to our own world a few years into the futur e.  The US dollar has been devalued (several times) and citizens keep up with the state of our decaying empire on CrisisNet, a news service available on the mobile devices that have become almost like actual human appendages.  The nation is seemingly held hostage while awaiting a visit from the Chinese Central Banker, a reviled figure who is essentially superior to our President.

Related articles

• Deutsche Bank: There Will Be No Currency War, Everyone Has Too Much To Lose (businessinsider.com)
• How to end the currency war (financialpost.com)
• Analyst Compares Bernanke To Hitler, And Currency War To WWII (businessinsider.com)
• 3 Potential Consequences of 'Currency War' (thestreet.com)
• Weird: China Sharply Weakened Its Currency Tonight (businessinsider.com)
• ECB's Stark hits out at "currency war" rhetoric (reuters.com)
• Currency War to the Fore in G20 Ministerial Meeting (blogcritics.org)

And Then There Was One: Tiny Tim All Alone...

Image via Wikipedia

Bloomberg just broke the news that Larry Summers, Director of the National Economic Council, is expected to leave the White House following the November elections. This leaves Timothy Geithner as the sole remaining member of the original foursome guiding the Administration's economic policy.

Poor Timothy. Its never fun being the last person standing when the music stops, but something tells me that Mr Geithner will do his boy scout best to continue throwing bucket after bucket overboard as the Titanic (US Government) continues is
slow decent permanently underwater.

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• Obama Hints at Changes to His Economic Team (foxnews.com)
• Obama Raises Prospects of New Economic Team (blogs.wsj.com)
• Obama praises economic adviser Summers, Geithner (reuters.com)
• Boehner: Geithner and Summers should go (marketwatch.com)

Global Macro News 9.20.2010

Asia-Pacific
Japan intervenes to devalue the Yen (FT.com)
In Depth Report: Japanese Intervention (FT.com)
USD/JPY Weekly Outlook Sept 20-24 (Forex Crunch)
China: What do the "good" trade numbers tell us? (China Financial Markets)
Are There More Middle-Class Households in India or in China? (Next Big Future)


EU
Poland Ready To Take "Brutal" Steps on Foreign Currency Loans (Bloomberg)
Hungarian Forint Touches Record Low (ForexBlog)
Hungary faces downgrade of debt to junk status (Bloomberg)


US
Federal Reserve Resumes Open Market Operations (Federal Reserve Bank of New York)
End of Recession / No End of Private Sector Deleveraging (EconompicData)
The Only Part That Mattered In  Obama's Telethon (Market Ticker)
Ask Not Whether Governments Will Default, but How (Safe Haven)
El-Erian on the interesting week ahead (FT Alphaville)
Entitlements, Taxes, Inequality and Three-Way Class Warfare (Of Two Minds)

Related articles by Zemanta

• El-Erian: How to read Bernanke's Jackson Hole Speech (ftalphaville.ft.com)
• Still stubbornly inverted (ftalphaville.ft.com)
• ECB's Nowotny warns on Hungary fx mortgages (reuters.com)
• US manufacturing: now what? (ftalphaville.ft.com)

Signet Launches Global UCITS Fund of Funds (via @citywire) #ucits

Signet makes a very wise move launching a fund of ucits hedge funds based in Dublin. The Signet Multi-Strategy Fund is a UCITS III fund and will compete with Morgan Stanley, which recent launched its own ucits fund of funds (FoFs) platform, which intends to launch 1-2 new sub-funds every few weeks for the indefinite future. Domiciles like Ireland, Luxembourg and Malta are offering onshore funds a virtually cost-free environment for launching sub-funds. In Lux it costs approximately $2000 in regulatory fees for the first 25 sub-funds setup funds and about $1400 for all funds after 25 without limitation. There is a clear opportunity for an innovative FoFs to do exciting things in the retail UCITS space...

Amplify’d from citywire.co.uk

Signet Launches Global UCITS Fund of Funds

by Matthew Goodburn on Sep 02, 2010 at 19:07

Fund-of-hedge-funds management and advisory group Signet is launching its first UCITS-compliant fund of funds for its institutional and private-bank clients.

The London and Switzerland-based group which runs some $1.4 billion of assets, said the Signet Multi-Strategy Fund would offer  weekly liquidity amd would be able to allocate to around 15 hedge funds globally, in line with the limits set under UCITS III guidelines.

The Dublin-domiciled fund is intended for investors in the UK, continental Europe and Asia.

As with Signet’s other funds of funds, the new fund will aim to produce consistent, low-volatility returns largely uncorrelated with traditional markets.

Tim Gardner, Signet’s global head of sales, said: 'Our clients have asked for, and we have delivered, a genuine fund of UCITS hedge funds - not a wrapper or an index. Because the underlying funds will be UCITS-regulated, they will be subject to strict limits on leverage and liquidity.'

obert Marquardt, said: 'As the number of UCITS hedge funds has increased

The firm's founder, Robert Marquardt, said: 'As the number of UCITS hedge funds has increased exponentially, research and risk management have become critically important, and the best funds-of-funds distinguish themselves in both these areas. Our experienced team performs precisely the same thorough due diligence on these funds as it does for our other funds.'

He added: 'The fund will be flexible in terms of strategy. It will allocate mainly to long/short equity and fixed income, but also to multi-strategy, global macro, and other strategies – always keeping UCITS guidelines in mind.'

Citywire Principal launches risk-rated model portfolio service Standard Life to cut 500 jobs Gervais Williams quits Gartmore Read more at citywire.co.uk

 

See this Amp at http://bit.ly/bkXRIS

Israel stands on the brink of seriously irrational behavior

Israel may have agreed to return to peace talks with the PLO on neutral territory, but that should give little comfort to those fearing the Netanyahu government is prepping for a large-scale offensive on the Iranian nuclear program and anyone that stands between them and their objectives. There is no threat posed to the Jewish state by the Lebanese military, which was largely shelled into total submission during the last irrational Israeli aggression. I would not be surprised at all to wake up to a war between Iran and Israel with the US Marines caught between the two in Baghdad, which is not something our amateurish president is even close to capable of managing...

Amplify’d from www.jpost.com

'Israel ready to destroy Lebanese Army in four hours'

By JPOST.COM STAFF

08/27/2010 14:19

Report: Lebanese paper claims US envoy told LAF chief that if border incident occurred again IDF would enact plan to destroy Lebanese military within four hours.

The US warned Lebanon that if it did not prevent any recurrence of the border-fire incident that occurred earlier this month, the IDF would destroy the Lebanese Armed Forces within four hours, Israel Radio cited a report by Lebanese newspaper A-Liwaa on Friday. According to the report, Frederick Hoff, assistant to US Middle East Peace Envoy George Mitchell, told Lebanese Army chief of staff Jean Kahwaji that Israel was ready to implement a plan to destroy within four hours all Lebanese military infrastructure, including army bases and offices, should a similar confrontation occur in the future. RELATED: 'France to sell HOT missiles to LAF' Opinion: Israel’s American-made foes IDF Lt.-Col. (res.) Dov Harari, 45, was killed and Capt. (res.) Ezra Lakia was seriously wounded, as well three LAF soldiers and one Lebanese journalist killed, when both sides exchanged fire after IDF soldiers attempted to cut down a tree on the Israeli side of the border. The IDF had informed the UNIFIL peacekeeping force along the border ahead of time of the intended tree-clearing operation. UNIFIL later confirmed that the IDF troops were on the Israeli side of the border when the incident occurred, contradicting LAF claims that Lebanese sniper fire directed at the Israeli troops had been justified by an incursion upon Lebanese territory.

See more at www.jpost.com

 

See this Amp at http://amplify.com/u/9bel

Forbes.com - Say Yes to the Yen - Shawn Baldwin

Say Yes To The Yen
Shawn Baldwin 08.17.10, 4:55 AM ET

The Japanese yen recently rallied to 15-year highs against the U.S. dollar along with hitting highs against other major currencies. Throughout the economic crisis, the yen has continued to display strength; while other currencies have seen their gains reduced significantly, the yen has gained over 40% since the economic crisis began--almost 8% of that has been over the last 2 months.

Why does the yen continue to rise?

Because of narrowing interest rate differentials, concerns about the world economic outlook and the possibility of intervention.

Japan's finance minister has allayed those fears, stating that the yen's rise continues to be set by the markets. It is easy to understand why some feel that the Minister would want to intervene. The rising yen against the dollar makes Japanese goods considerably more expensive for American consumers--Japan Inc.’s largest export customer.

The continued strengthening of the yen makes the revenue earned from Japanese companies' U.S. subsidiaries worth less when the repatriated revenues are converted from dollars into yen. This has already caused Japan's business groups to cry out for a reduction in tax rates--but surprisingly, to be steadfast in supporting no intervention.

The currency’s strength certainly isn’t due to Japanese domestic economic strength. Instead, the yen's strength is a by-product of private sector recycling of the current account surplus and international purchases of Japanese assets. U.S. dollar weakness is a strong factor, and that suggests that intervention on the bilateral pair may not be successful.

This makes it highly unlikely that the Bank of Japan will intervene. The last time that the BOJ intervened to weaken the yen was in 2003, when over the course of 126 days the Ministry of Finance sold yen in the open market to purchase $315 billion. These measures eventually sent the yen 11% lower.

However, overall success of interventions in changing the long-term path of a currency is less certain--and they only seem to work when nations coordinate their efforts--highly unlikely in this environment. From a historical basis, the G-8 industrialized countries have not intervened in the foreign exchange markets throughout the economic crisis, making intervention impractical and not politically feasible.

So do not expect Japan's Minister of Finance to intervene--unless the yen strengthens beyond 84.8, the multiyear high set last November after the Dubai sovereign debt shock.

Because the yen's strength may aggravate existing disinflationary forces, the prudent course of action would be to increase Japanese government bond purchases in combination with an expansion of policies to accelerate international buying of the instruments.

For all the latest headlines visit Forbes Asia.

---

One more reason the yen may continue to appreciate: China's activity. Recent data from Japan shows that China has increased its holdings of Japanese Government Bonds (JGBs) by $6.2 billion in the first trimester of 2010, more than double its previous record in 2005. China bought more JGBs than it sold for the first half of the year, the biggest annual increase since 2005. China then purchased a net 456.4 billion yen ($5.3 billion) of JGB’s in June, following record net buying of 735.2 billion yen in May, according to the Japanese Ministry of Finance.

Japan has also reported large purchases of yen money-market accounts by nonresidents--a total of $10.7 billion from July 11to 17. It would be prudent to assume that a number of these purchases are being made by the Chinese. Because China now says that it pegs its currency to a basket of currencies and not the U.S. dollar, this could tactically be an ideal time for China to readjust its $2.5 trillion dollar reserve portfolio away from the greenback.

China isn’t the largest holder of yen--the U.K. is, and London bought over 26.3 trillion yen last year and have invested another 18.3 trillion yen this year, further powering the currency. Given the weakening U.S. dollar in a soft economy, this creates an opportunity for traders. Expect investors to fuel the yen’s rally and continue to propel the currency to record highs.

Shawn Baldwin is chairman of Capital Management Group, an investment advisory and research firm based in Chicago. Neither he nor his family nor CMG own Japanese government bonds.

For all the latest headlines visit Forbes Asia.

via forbes.com

Posted via email from Global Macro Blog

Michael Novogratz of Fortress Investments on Opalesque.TV (Part 3)

Michael Novogratz of Fortress Investments on OpalesqueTV (Part II)

Malta continues to grow market share in ucits hedge funds - Hedge Funds Review

Malta is considered the newcomer to Ucits hedge funds, although the country’s service providers were well acquainted with the products before EU membership in 2004. Joining up gave Malta’s financial services industry a stamp of approval. This also meant Ucits funds could be passported to other EU member states.

Malta implemented the Ucits III regime immediately on accession. Malta’s choice as a domicile for a Ucits hedge fund is usually based on several factors including the efficiency and flexibility of the Malta Financial Services Authority (MFSA), quality support services available in the jurisdiction, relatively low set-up and maintenance costs and an exemption from income tax and capital gains tax at fund level and at non-resident investor level, irrespective of the legal form adopted. There is a possibility to set up self-managed funds and fund managers may be established as a Maltese company which allows tax refunds on distribution of dividends. Finally Malta, like other jurisdictions, offers the possibility to redomicile a fund from elsewhere relatively easily. A fund can migrate to Malta without having to be wound up, subject to certain relatively straightforward conditions.

Since EU accession Malta has also built up its hedge funds business. Dermot Butler at Custom House Global Fund Services, the Malta-based parent company of Custom House Group of Companies, says the jurisdiction is basically in the same place Ireland was 15-20 years ago when it first started its funds business. Then people said Ireland had little chance of challenging Luxembourg, remembers Butler, but Ireland went after the alternative sides and built up what has become the leading jurisdiction for fund administration of hedge funds and other alternatives products.

Malta has built up its hedge fund business primarily by attracting the smaller start-ups and emerging managers. The attraction is not just price, although some aspects of Malta’s offering may be cost competitive compared with Ireland and Luxembourg. One of its main selling points, if not the key one, is the regulator. The MFSA has a reputation for having the time to listen to ideas from managers thinking of setting up a fund structure in Malta. It is universally acclaimed to be open and approachable, flexible yet firm. This is a regulator, say those operating in Malta, that takes a sensible no--nonsense approach to regulation.

When applied to Ucits, MFSA is seen as keen to adhere to the spirit as well as the letter of the law. This is important. Some regulators in the EU, say many in Malta, tend to bend the rules in order to allow hedge fund strategies to use a Ucits wrapper even though there is more than a question mark about their suitability as a Ucits product.

The MFSA is still flexible in discussing terms with funds looking to set up a Ucits structure. However, it will seek “comfort” from other regulators or informally consult the committee of European securities regulators (Cesr) if it has questions over the suitability of the structure. “The MFSA is not afraid of referring or consulting. It doesn’t just approve a fund and let the operator face the music,” says Andre Zerafa, a partner at Ganado & Associates.

If there is any doubt that another regulator might not agree with the interpretation of Ucits being used, Zerafa believes there is an obligation to ensure other regulators in the EU will accept the structure. Otherwise, points out Zerafa, a fund could find it is rejected in another jurisdiction and that could cause problems. “The regulator should ensure that if a fund is given a licence it can be passported without any problem,” he says. There have been cases of a jurisdiction giving the green light to a suspect structure only to have other jurisdictions reject it.

Some like Zerafa wonder whether Ucits is a structure suitable for the majority of hedge funds. “Most hedge fund mangers would find it difficult to convert their hedge funds into Ucits hedge funds. It imposes conditions and restrictions they are not used to. At the moment hedge funds are not used to restrictions on how they managing their portfolios. Opening a Ucits hedge fund is a bit like a sex change operation for them. It is not something they do lightly,” notes Zerafa.

Joseph Saliba at law firm MAMO TCV agrees: “There is a question of Ucits hedge funds. To us it is a strange animal.” He says that some hedge fund strategies clearly cannot be made to fit within Ucits: “Ucits hedge funds still need to be tested by the MFSA to ensure the promoter is following the directive’s rules and there are no hiccups.” He points out that the MFSA also is proactive in issuing guidelines and notes to explain its reasoning when implementing directives as well as Maltese regulations.

Zerafa thinks the reason funds are looking at Ucits products reflects the uncertainty over the alternative investment fund managers (AIFM) directive stuck in Brussels. Under Ucits there is at least some certainty, he admits, compared with the uncertainty of whether offshore funds or even onshore regulated funds like Malta’s professional investor funds (PIFs) will be allowed when AIFM finally hits the statute books. PIFs are not regulated as tightly as Ucits funds and are targeted at financially literate investors. Hedge funds, private equity funds and property funds are normally structured as PIFs. These funds can be set up as standard or self-managed schemes.

He points out that if AIFM allows funds that comply with the -directive to be passported across the EU, that could be a better alternative to Ucits, particularly if the fund can operate under a less restrictive regime.

Simon Tortell of Simon Tortell & Associates thinks under Ucits IV, Malta. like others, may find that a master/feeder structure becomes the norm, particularly for US-based hedge fund managers. Under this the master would remain Cayman or -Delaware--domiciled with a feeder fund that is Ucits compliant to allow easier access by European investors.

Tortell also thinks Malta will be well-placed to take advantage of other aspects of Ucits IV, particularly as the country has always allowed hedge funds to outsource services to other EU jurisdictions. This means, for example, that a management company set up under Ucits IV in Malta could keep its fund administration in Luxembourg or Ireland.

Something everyone agrees on in Malta is the lack of choice of custodian. Without a wider selection beyond the two main providers – local domestic Bank of Valletta and international HSBC – few believe Malta will be able to attract a large number of Ucits hedge funds or platforms offering a quick route to a Ucits structure.

While HSBC is recognised worldwide, Bank of Valletta is less well known. “It is a question of a chicken and egg situation,” explains Saliba. “In this case the first step is the custodian which is the chicken. You have them and the eggs, the Ucits funds, will follow.”

Negotiations with a number of global custodians are underway with Malta and many confidently expect at least small operations by a few of them to open before the end of the year. The idea would be to have a relatively small presence and gear up once the business comes in.

via hedgefundsreview.com

Ucits funds are the new black in the Hedge Fund universe. Malta is the the forgotten treasure of Europe, and it has Ucits too.

Posted via email from Global Macro Blog

Say Yes To The Yen - Forbes.com

Japan's currency will continue its climb.

Shawn Baldwin

The Japanese yen recently rallied to 15-year highs against the U.S. dollar along with hitting highs against other major currencies. Throughout the economic crisis, the yen has continued to display strength; while other currencies have seen their gains reduced significantly, the yen has gained over 40% since the economic crisis began--almost 8% of that has been over the last 2 months.

Why does the yen continue to rise?

via forbes.com

See the full article at http://www.forbes.com/2010/08/17/yen-currency-foreign-exchange-markets-econom....

Posted via email from Global Macro Blog

Michael Novogratz of Fortress Investments on OpalesqueTV

Fed's Kocherlakota: Markets misinterpreted FOMC’s decision

From Minneapolis Fed President Narayana Kocherlakota: Inside the FOMC

The FOMC’s decision has had a larger impact on financial markets than I would have anticipated. My own interpretation is that the FOMC action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted. The FOMC’s decisions were largely predicated on publicly available data about real GDP, its various components, unemployment, and inflation. I would say that there is no new information about the current state of the economy to be learned from the FOMC’s actions or its statement.

Kocherlakota points out that the Fed's balance sheet was falling quicker than anticipated because of the high level of refinancing as mortgage rates have declined.

But Kocherlakota fails to note that the mortgage rates have declined because of the weaker economy - and the Fed appears to be behind the curve in adjusting their views lower.

Kocherlakota is forecasting that real GDP growth in the 2nd half of 2010 will be about the same as in the first half:

Based on estimates from our Minneapolis forecasting model, I expect GDP growth to be around 2.5 percent in the second half of 2010 and close to 3.0 percent in 2011. There is a recovery under way in the United States, and I expect it to continue.

Although Kocherlakota forecast is possible - and is a weak recovery - I think the economy will slow in the 2nd half.

And I think the growing view isn't that the economy is worse than investors had imagined, but that the Fed is once again behind the curve on the economic outlook.

via feedproxy.google.com

Has the market been overreacting to the FOMC's most recent announcement that it will be freezing its balance sheet at current $2.5T by using returns from mortgage-backed securities bought following the collapse of Bear, Lehman and AIG to buy 5- and 10-year treasuries, maintaining its loosy-goosy monetary policy?

Dubbed QE2-lite the FOMC announcement outlined a hybrid of the more radical and oft predicted 'QE2' expansion of the Fed balance sheet, which presumably would have grown to $5T, all in an effort to fight off deflation and unfreeze long-suffering credit markets in the western world. If this sounds like its a 'last-resort' strategy, that's because it is precisely that.

I believe the markets are beginning to prove that the LARGE fundamental underlying problems suffering the international economic and political systems are no longer distant matters for another generation, they are immediate mortal threats to mankind and we are stuck with the current crop of partisan-obsessed talking heads who we all know are bound to fail us terribly whether tomorrow or a year from now..

Posted via email from Global Macro Blog

And Then There Were Two: Rumor Romer Resigning From Obama Economic Think Tank | zero hedge

First Orszag, now Romer? If the latest rumor about the imminent defection of one of the three remaining policy stalwarts is true, it means the administration's economic policy is on the verge of collapse. Hotline Oncall reports: "Christina Romer, chairwoman of Pres. Obama's Council of Economic Advisers, has decided to resign, according to a source familiar with her plans. Romer, an economics professor at the University of California (Berkeley) before taking the key admin post, did not respond to repeated calls to her office." The sad reality is that Romer's (who has largely been a mere figurehead and staffed to provide soundbites to CNBCs how every worsening NFP report is in reality a dramatic improvement, a job which even Steve Liesman can do with a passing grade) departure will only make the remaining two people in Obama's economic circle, Tim Geithner and Larry Summers, even more powerful. Why couldn't those two leave? Surely both have by now earned their $2.5 million a year job at Goldman... We now anticipate the 8-K from Whitehouse Corp announcing the appointment of Paul Krugman and Mark Zandi to fill the newly vacant positions.

More from Hotline Oncall:

"She has been frustrated," a source with insight into the WH economics team said. "She doesn't feel that she has a direct line to the president. She would be giving different advice than Larry Summers [director of the National Economic Council], who does have a direct line to the president."
"She is ostensibly the chief economic adviser, but she doesn't seem to be playing that role," the source said. The WH has been pounded for its faulty forecast that unemployment would not top 8% after its economic stimulus proposal passed.
Instead, the jobless rate is 9.5%, after exceeding 10% last year. It was "a horribly inaccurate forecast," said Bert Ely, a banking consultant. "You have to wonder why Summers isn't the one that should be taking the fall. But Larry is a pretty good bureaucratic infighter."

via zerohedge.com

Another abrupt exit from the West Wing economic team has left the Obama Administration scrambling for excuses and Ms Romer verbalizing very familiar frustrations to her colleague Peter Orzag, recently retired Budget Czar. Unfortunately, we are stuck with tweedle-dee (Tiny Tim) and tweedle-dumbo (Summers) now and their dominance over the presidents thought on economic policy has only been buffeted by Romer's abrupt exit.

Posted via email from Global Macro Blog

CMG's @shawndbaldwin presents his global macro outlook for Japan in Forbes

There is no country truly immune from the distress caused by the ongoing global financial crisis, but most agree that Japan stands out as one developed nation that exists under extreme statistical duress. Will there be a great Japanese death spiral? Or will the Japanese continue to preserver in the face of huge fundamental pressure?

Amplify’d from www.forbes.com

Japan: Land Of The Rising Sum

Shawn D. Baldwin

07.21.10, 8:00 AM ET

Sensitivity to the sovereign debt crisis has brought scrutiny to Japan. The nation's already high debt has continued to escalate. In the 1990's the debt was 86% of GDP, and now it has reached nearly 200% --twice the size of its $5 trillion economy. The budget deficit will continue at 5% until 2021. The country is referred to as the land of the rising "sum" and many speculate on its demise. The combination of an aging population, low tax revenue and rising debt make these fears palpable. Japan is positioned by size of its debt to be at risk of de-leveraging, but this is unlikely to happen in the immediate future. The government's debt is offset by financial assets and girded by domestic household savings in the banks which buy Japanese Government Bonds (JGB's)--of which 95% are held by domestic investors. Japanese debt is unique to other countries because Japan has been indebted for the past two decades, its leverage didn't increase rapidly and the gap between Japan and others declined because other countries' debt-to-GDP ratio increased. The country has proven to be adept at managing debt. From 1980 through 1990, private sector debt increased at 5% CAGR, government debt has grown at about 7% since 1990 (at 5% CAGR since 2000), Bloomberg statistics show. There isn't a high risk, there has been no significant de-leveraging since the 1990's. Unlike the U.S., Japan saved excessively instead of spending excessively. The stated debt is deceiving because in real terms Japan only owes the equivalent of 100% of GDP--Japan has Y1,000,000 billion in foreign exchange reserves and owns part of its debt, it doesn't offset debt for reporting purposes. There is still reason for alarm due to the nation's demographics and low tax revenue which will constrain capacity for debt absorption, create increasing cash outflows and create future concerns about market instability. However, just because the market hasn't imploded doesn't mean that it can't. Will it? A comparison with the Greek situation suggests we shouldn't worry about Japan. Japan's debt is larger than Greece's and it has government bond issues that exceed tax revenues--however Japan is less susceptible to speculator pressure.Unlike Greece, Japan is a surplus nation--it holds $149.7 billion while Greece has a deficit of $31.5 billion. And Japan has extraordinarily high cash on company balance sheets. Additional factors are low unemployment, great social standards and a growing economy in the global recession. Japan announced it would create spending caps but will stick to issuance of ¥44.3 trillion ($507 billion). Economists expect GDP growth for the nation should reach 2.4% in 2010 then dip to 1.8% next year.

The government has begun initiatives to increase foreign investors through tax incentives. By proxy Japan's deflation is understated by dated CPI calculations and effectively generates a tax-free gain to the holders of Japan's cash and bonds. The currency in Japan performed well during the global financial crisis. The yen has appreciated 16% since the collapse of Lehman Brothers, with demand accelerating: China has increased its holdings and in May bought a record $735.2 million JGB's after buying $5.8 billion in the first quarter. The yen has strengthened 5% against the dollar, hitting a high of Y86.94--20% higher than the euro and 12% stronger than sterling. The JGB's 10-year yields rose to a five-month high of 1.48, signaling that the market seems to value Japanese credit. The volatility has been in the "swaptions" market and was due to influential relative value (RV) hedge fund managers who were operating in Japan's markets, ringing the alarm. There will be a tremendous rollover of debt within the year. Spreads have widened in Japanese corporate bonds. The corporate market has been buy-and-hold, which created a lack of secondary market liquidity. Long positions at the CME are over $5 billion and are a clear indication that more hedge funds are placing bets. What is the path for reinvigoration? A simple reduction of state debt will not be enough. Japan needs spending cuts in combination with tax increases and nominal growth--which could come from the energy sector. Potentially, health care could boom after deregulation. Reflation of the economy through monetary policy is needed, and that will mean higher interest rates, which will create opportunities for traders. Shawn Baldwin is Chairman of Capital Management Group, an investment advisory and research firm based in Chicago. Neither he nor his family nor CMB own Japanese government bonds. For all the latest headlines visit Forbes Asia.

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Japan's appetite for investment in emerging markets proves to be strong across all major sectors

Much like the energy joint venture for nuclear power investment in emerging markets profiled on PolyMac in the previous post, the Japanese auto and steel industries also seem very bullish on unloading some of their cash hoards into riskier long-term, but very high yield, investments the US would be keen to watch closely.

Amplify’d from www.ft.com

Japan’s appetite for emerging markets soars By Michiyo Nakamoto and Lindsay Whipp Published: July 18 2010 23:31 | Last updated: July 18 2010 23:31 Japanese companies are showing a growing passion for emerging markets as highlighted by Toyota and Nissan announcing on Friday that they plan to invest a combined $1.2bn in Latin America. Those moves follow in the footsteps of Sumitomo, the large Japanese trading company, which said this month it would take a 30 per cent stake in Brazil’s Mineração Usiminas, an iron ore mining subsidiary of steelmaker Usinas Siderúrgicas de Minas Gerais, for $1.9bn. The value of mergers and acquisitions by Japanese companies in emerging markets has this year exceeded the $7.9bn total for 2009, rising to $8.58bn, according to Dealogic. It is not just the so-called Bric countries, Brazil, India and China that are attracting investment. Japanese companies are seeking markets in ever more exotic lands as an ageing population and changing consumer behaviour continue to cloud growth prospects at home. Chile, Peru and Turkey are among countries that have enjoyed Japanese investment. Shiseido becomes the first Japanese cosmetics group to enter the Balkan countries of Albania, Kosovo and Macedonia when it starts selling its products there from mid-July. Japan’s cosmetics leader has launched an effort to globalise its operations and seeks to raise its overseas sales from 38 per cent of total in the year to March 2009 to more than 50 per cent by 2017. This year, Shiseido entered the Mongolian market. While Mongolia’s population is 2.7m, about one-fifth that of Tokyo alone, the market for prestige cosmetics has nearly doubled in the six years since 2003, Shiseido said. Yasuhiko Harada, Shiseido’s corporate senior executive officer, said: “It takes a very long time to develop brand recognition so we have to start as early as possible.” Mr Harada added that the first stage of the market entry process was not necessarily an expensive step since it usually involved a distribution deal with a local company. Once the market develops, Shiseido will then move to the next step of setting up its own 100 per cent-owned subsidiary, which is a bigger commitment but can bring greater rewards. In Russia, after Shiseido set up its own subsidiary that covers Moscow and St Petersburg, sales doubled, Mr Harada said. Makers of consumer products and companies tapping natural resources are not the only Japanese companies targeting markets beyond the Brics. NKSJ, Japan’s second-largest non-life insurance group by premiums, is splashing out about Y28bn ($323m) to acquire Fiba Sigorta Anonim Sirketi, a Turkish insurer, in the Japanese group’s largest acquisition to date. Meanwhile, NTT is acquiring Dimension Data, an IT services company based in South Africa with a London listing and global operations, for $3.2bn . “It’s fair to say Japanese companies are not shy about investing in diverse geographies if the opportunity is right,” said Steven Thomas, co-head of mergers and acquisitions at UBS in Tokyo. The trend could accelerate if corporate Japan agrees with a study group set up by the ministry of economy, trade and industry that is encouraging the private sector to step up activities in developing countries, including among low-income earners. Those consumers “are attracting attention as a promising market” worth an estimated Y5,000bn, or about the size of Japan’s gross domestic product, the study group said in a report.

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Japanese consortium takes strategic gamble on nuclear power for the developing world

Japan is totally devoid of domestic sources of natural energy reserves, ensuring an ever expanding, innovating and exploring energy sector.

There are currently 55 operating nuclear power plants in Japan, as compared to a mere 65 in the US. Ten keiretsu companies own and operate 52 Light Water Reactors (LWR). Private contractor Japan Atomic Power Corporation (JAPC) operates three more LWRs. Two nuclear plants are currently under construction, and another 11 that are in advanced planning stages.

Six Japanese companies have announced an office in preparation for a new company to support Japanese involvement in new nuclear projects around the world. The powerful consortium comprises utilities Tokyo Electric Power Co (Tepco), Chubu Electric Power Co and Kansai Electric Power Co, and plant manufacturers Toshiba Corporation, Hitachi and Mitsubishi Heavy Industries (MHI). The new office is being established in preparation for the launch of a new company, tentatively named International Nuclear Energy Development of Japan, which the consortium says will be engaged in activities to establish proposals for nuclear power plants in so-called ‘emerging countries’. Considering its been nearly thirty years since the United States completed construction on its youngest nuclear reactor, which may well qualify us to be considered an ‘emerging country’

Tokyo Electric, Chubu Electric and Kansai Electric all trade on the Nikkei, basically moving in concert with each other since the fall from market peaks in early 2007. Since April 2010, these three have outperformed the Nikkei 225 considerably, though are still lagging heavily since the highs. Mitsubishi, Hitachi and Toshiba are perhaps the three most powerful keiretsu, each with several subsidiaries listed on exchanges all around the world. These companies can be bought on the NYSE, though as mega-conglomerates, their stock price will not see a sustained rally on news of a long-term infrastructure consortium.

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• Japan shares climb as power firms strengthen (marketwatch.com)
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• Japan to start nuclear power talks with India (reuters.com)

PolyMac Global Macro Fund Review | 7.9.10

FT.com | Paulson's flagship funds hit by volatility The world's greatest hedge fund manager, John Paulson, and the largest beneficiary of the global financial crisis to this point has seen tougher times thus far in 2010. Flagship Paulson & Co Advantage Fund is down -5.8% year to date, and the Paulson Recovery Fund lost -9/9% in May and -12.39% June. The only fund up on the year to date is the Gold Fund (+13% ytd). Other global macro icons have struggled in the current environment as well, with Louis Bacon's Moore Capital down -6.9% ytd, while Paul Tudor Jones' BVI Global fund has fallen -1.8% ytd.

Reuters | Oakley backs macro hedge funds in volatile environment According to Teun Johnston of the Oakley Opportunities fund of hedge funds, which launched last week, global macro funds should do well under current market conditions. So far Oakley has allocated 20-percent of its $250mm AUM in macro funds. 

HedgeCo.net | Galtene Ltd expands, opens fund in Europe NYC fund specializing in commodity-based global macro strategies with over $1B AUM has hired Werner Schnenemann to manage their new Giltene AG fund, which will be based out of Switzerland. 

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• Paulson Funds Said Hit by Steep Losses in June (dealbook.blogs.nytimes.com)
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• Oakley Backs Macro Hedge Funds in Volatile Markets (dealbook.blogs.nytimes.com)
• Hedge funds lose money in June, some stars suffer (reuters.com)