Vishaal B. Bhuyan's  Instablog

I am all in, aligning my business and investment activities to reflect what I believe the world will look like over the next five to ten years. What I believe is this:

•  Runaway inflation will hit the United States due to poor fiscal and monetary policy. The government will simply not be able to fund social security and Medicare let alone the multitude of other government run programs.

• At some point, US Treasuries (by way of a brand name) will stop being a “get out of jail free card”. China and Japan are going to want their money back at some point, one way or another.

• The Baby Boomers will trigger the next major financial crisis – Pensions, followed by an UNDER-population problem when they all eventually die.

• Underfunded social security, Medicare, and corporate pensions hurt by the credit crisis coupled with volatile equities markets and a depressed real estate market will result in a boom in the life settlement, reverse mortgage, and synthetic longevity/mortality markets as seniors will need to generate liquidity from SOMEWHERE.

• The aging crisis in developed nations such as Japan, across Europe, and the US will have a severe impact on their respective economies and labor forces. Immigration policy will need to become more lax, especially in Italy, France, the UK and the US.

• China and India (although India will lag) will take center stage as the world’s new economic nerve center. Demographics will play a very large role in Asia’s success relative to the US, UK, and Western Europe

• Globally, there will be a reversion to value creation and the need for specialized skills within the labor markets, in academia, and especially in the business world.  The world is simply getting too competitive for anyone to simply float by. This will have its most profound effect in the US where students have some of the lowest Math and Science test scores among most of the world. India and China are “poor, smart, and hungry” as Gordon Gekko would say.

Market participants, as well as the broader economy, take cues from the U-3 “official” unemployment rate which currently stands at 9.5%. This metric is an inaccurate gauge of the labor markets however, as U-3 does not account for marginally attached workers, discouraged workers, and the number of part-time employees.

·         Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. 

·         Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. 

·         Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. 

 The data that should be used is the U-6 number which incorporates these substantial groups of Americans. According to U-6 data, the true unemployment rate is currently hovering around 16.5% (a seven percentage point difference!). Unfortunately, some believe that even the U-6 estimate is inaccurate as U-6 does not reflect all of the discouraged workers in the country. These analysts peg “real” unemployment over 20%.

A former Deutsche Bank arbitrage trader has left to start ROC Capital Management with an estimated $1b of capital, $400 million  of which was invested by former employer DB who invested the capital in lieu of a bonus.

The interesting thing about the deal is that it illustrates an emerging trend in the money management industry - 'managed accounts'. As oppose to tying up investor's capital for 2 years (sometimes for as long as 10 years in a private equity structure), investors are demanding access to their capital and requesting that their capital be held in a segregated account. This is exactly what DB demanded of ROC, and this is exactly what DB got.

Over the past two years hedge funds experienced a record number of investor redemptions, which resulted in "gates" and other barriers being executed to ensure fund liquidity. I don't think there would have been this many redemptions, despite the losses suffered by the majority of funds, if investors had increased transparency and access to their capital. Investors want to know they CAN take their money out if they want to. The driving factor behind the record number of redemptions in 2007 and 2008 was more a poduct of fear than necessity. Investors will have more leverage with fund managers moving forward, especially after the Madoff and Stanford scandals have damaged the trust and reputation of Wall St.

It is important to consider what will happen to more illiquid strategies if such a major shift was to occur. It may be difficult to manage a portfolio of loans, life settlements, or asset backed notes across a wide number of accounts. Although, such a model  may be necessary for fund of funds, endowments, and pension funds to get comfortable with alternative investments once again, especially if there is even the slightest liquidity mismatch between the root institutional investor and the underlying asset class.