Hedge Fund Directors Provide Global Macro Clues to the Future

Includes: DIA, SPY
by: Daniel Moser

In an interesting roundtable discussion led by swissHEDGE featuring a managing director of D.E. Shaw, CEO of Pequot Capital Management, and the CEO of Marshall Wace LLP, some very interesting insights were given regarding the future outlook for investments.

They were asked if they believe that the market has bottomed and how they see future quarters playing out. The CEO of Pequot Capital Management responded by saying:

I think the global economy is in for an extended period of very slow growth. The odds are that the market has bottomed, but nothing is certain as we unwind almost two decades of irresponsibly increasing leverage.

The CEO of Marshall Wace LLP continued on by saying:

This is not an inventory-based recession or an adjustment after overheating. It is a balance sheet recession; and the worst such recession since the 1930s. Given the level of indebtedness, notably in the US, the balance sheet work out will take a number of years and could lead to sub-trend growth for up to a decade. Any sign of recovery will be met with government retrenchment as they seek to restore some order to their finances. Against this background, markets are likely to trend sideways, with potential bouts of weakness, linked both to disappointments about growth and concerns about currency stability. In contrast to the developed world, Asian economies are generally in good shape and China in particular should be in a position to continue acting as a locomotive. Most of the growth in the global economy in the next few years will come from Asia and developing economies and this should be reflected in the relative performance of prices and stock markets.

I found these comments very insightful especially after reading an interesting article written by Robertson Morrow of Clarium Capital Management in which Morrow explains how there are bull and bear markets in politics and those trends have direct implications on financial markets. Morrow explains that:

[t]he US is embarking upon another bull market in politics. The major impetus is not the conflict in Iraq or a response to terrorism (as commonly believed), but the more prosaic vehicle of global competition: China, India, Japan, and Europe challenge American industry and labor, and the US is finally awakening to the implications. And so investors must now account not only for a resurgence in the importance of politics, but a political bull market whose genesis and consequences are explicitly economic.

Morrow goes on to argue that free trade and immigration will be the primary policy manifestations of this political bull market. While I believe Mr. Morrow’s article is very thought provoking, I must respectful disagree on the particular policy areas at the forefront. Although I must candidly admit I believe Morrow wrote this article in the Q2 of 2008 (using nothing but foresight, whereas I have the advantage of 6 months of post Obama hindsight). I believe healthcare reform and alternative energy are the policy areas in which the political bull market will most likely drive its horns.

I unfortunately do not know enough about healthcare in general to comment on tentative implications given various scenarios of healthcare reform proposals. So I simply must acknowledge that healthcare reform will have implications for healthcare stocks specifically and business generally. I therefore must turn to others to speculate as ideas, facts, and policy proposals for healthcare reform come to light and the thus the most probable implications for financial markets.

On the alternative energy front, I do happen to have a little bit of knowledge. My initial thoughts on this topic are that the politics in America are so disgustingly corrupt that American business will be squeezed by bad energy policy to the benefit of various political groups, certain U.S. politicians, and most certainly emerging market economies. Although I don’t intend to go into a huge policy article on alternative energy, I simply must say that until nuclear energy is meaningfully expanded in this country…cap and trade policy will do nothing but reduce the return on invested capital for several key industries and consumer spending will likely follow with additional declines as energy costs rise for everybody in the United States. Unless the U.S. acts in concert with the emerging market countries to curb so called green house gas emissions, the U.S. economic losses related to energy policy will be emerging economy gains–think of this as a zero sum game in which someone’s gain is the direct result of somebody else’s loss.

The moral of this story…look for compelling investments outside the United States. The theme is Asia so look for companies and countries that are in the Chinese growth supply chain.

Disclosure: Long PCU, VALE, NUE, PSEC, HERO, ETV, VLO (calls), Short SPY.