onsdag den 2. juli 2008

There cannot be a crisis next week. My schedule is already full. - Henry Kissinger

Some parting notes as this fund manager swaps the office chair with the hammock for real - the theme on all my presentations since July/August has been: Why this crisis is good - now it is the time to change both the presentations but also some of the outlook.

I was extremely bearish on the credit bubble, the central banks and the process' driving the capital markets - later on better and more well spoken people have done better jobs of explaining the issues at hand;

It's now well established that we are in a crisis, some countries, including the happiest place on earth Denmark, even have confirmed recession (two quarters in row with negative growth), but what is waiting for us, when I/we return from the holiday?

I have, as I always make clear, no predicitive powers -but I feel there is a need to change some of the outlook from here. To this end I read about 600-700 pages of good research and articles yesterday and this morning;

Bob Rodriquez, First Pacific Advisor(votes best fund manager this century!) put its extremely elegantly @ http://www.fpafunds.com/news_06232008_buyers_strike.asp

His main points:

  • We continue buyer's strike of long term bond and high quality bonds
  • Our yield "hurdle" has been raised to 5% from 4% before we will deplore long term capital
  • "..one does not reward a borrower with a lower interest rate when that borrower has degraded their balance sheet" (Think: mortgage crap; Bear Stearns, TAF, tax rebate, morgage subsidies)
  • There will be major pressue on fiscal policies next five years as baby-boom generation become eligible for Social Securit, Medicare Hospital Insurance Layout, and from 2011 to Medicare - which leads to 2017 where annual social security will exceed cash income in the program"...

Bob and his team write brilliantly - when on his website reading; Crossing Rubicon is a must for anyone.

The next piece which got my attention was the leaving notes from Dr. Bill White, BIS. There is so many classic qoutes in his report: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/ccbis130.xml

  • I note his causal link: Credit bubble ==> Temporary Inflation ==> Deflation
  • Do not count on fiscal rescue: Explicit and implict debts of governments are already so high as to raise doubts about whether non-contractual commitments will be fully honored"
  • There have always been excesses in booms - what made this so bad is that governments set the price of money too low, enticing the banks into self-destruction
  • The Central reaction function of lowering rates has only put off the day of reckoning - It worked due to low inflation imports...
  • BIS suggest a mix of "systemic indicators" The objective to slow credit growth - make sure punchbowl is taken away before the drunk run riot - we need policy measures to lean against credit excess

WOW! I thought I was "clear speaking"!

Then I read Lawrence Summers four action points needed (I hate qouting a Socialdemocrat but....): http://www.ft.com/cms/s/0/8342ea3e-463c-11dd-9009-0000779fd2ac.html

  1. Pass Housing Bill
  2. Pass further fiscal measures to respond to economic difficulties
  3. Reform misguided ethanol subsidies, use Strategic Petroleum Reserves
  4. Recognise financial failues will happen

and here comes why I did qoute him: ".....Unfortunately we are in environment where we have more to fear than fear itself, but that's not excuse for fatalism"... Thank you President Kennedy, sorry Mr. Summers.

Mr Bill Gross also add his volume to the deflation camp: http://tinyurl.com/4mf5um

have already bottomed and will gradually rise throughout your (Obama being adressed) first and perhaps second administration. Your term will not go down in history as investor friendly".


  1. The world best bond investors tells me(and you) that yield in medium- and long term should be around 5% (10 year @ 4.00 now) before value.
  2. The next big theme post this inflation scare is DEFLATION (http://en.wikipedia.org/wiki/Deflation)
  3. Inflation is "temporary" - even Fed believes this deep down - making short-end US yield December 2008- 2y notes VERY cheap
  4. Banking sector will go from weakness to weakenss
  5. Construction loans next phase of this deleveraging of credit. 45 bln of 632 bln. of construction loans outstanding were deliquent in June according to FDCI (WSJ today)
  6. This is L-shaped "recovery" - down in growth -and staying down
  7. There is NO FISCAL room for governments to panic - if so they will crowd-out investors
  8. Read up on the Japanese experience - its must know information for everyone next three- five years
  9. Margin still still 200-400 bps too high vs 10 yr average (Goldman analysis)
  10. Consumption in Europe weakens considerably with inflation spikes
  11. The best performing sectors since 1966 in environment of high inflation/low growth has been; Technology(+14% p.a), Basic materials(++9.1%), Telecom(+7.8%) and worst Chemicals(-0.8%) and Media(-1.4%)

Long list, and more is coming as my "Hammock time" increases - my outlook picture is still very positive - this credit crisis cud make or break the financial system, but like a forest fire, what is left will flourish into a bigger and better forest.

The bottom line is: Recession is good, as its the counterweight to excess.

Excess has been plenty the last two decades now is the time for stringent discipline, good fundamentals and as ever adopting to a world where inflation is imported, where central bank have used the full tool box, a desperate US President will take office in early 2009 and the tail-wind of early Europe have moved into gail-force headwind...2010 for break up?

Strategy postions

FX: Long EURGBP, Long JPY vs GBP, looking to go long NOK vs SEK

FI: Long EUR dec, long Bunds calls...

EQ: Long Steel, mining, drug - short: banks

Good luck my friend - over-and-out from here.

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