Monday, October 29, 2012

Preparing For The Ultimate Disaster?

Before I proceed to my comment, wanted to bring to your attention a new blog that Jean-Pierre Desloges, a former fixed income trader at the Caisse de dépôt et placement du Québec, recently created. It's called Financial Iceberg and it's mainly geared toward institutional traders looking for quick and in-depth market information often ignored in mainstream media. All you need is to create a password and log in for free.

Jean-Pierre trades bond, currency and equity futures. In his blog, he covers charts, markets, technicals, top news and even posts short blog comments. Today he posted a link to a BNN article stating that Moody’s could cut the credit ratings of six Canadian banks and an analysis of Spanish retail sales from the Instituto Nacional de Estadistica (report in English).

A few weeks ago, Jean-Pierre contacted me to work together on a blog. Told him that I'm a lone wolf, fiercely independent, and warned him that a blog requires a lot of unpaid work, but promised to support him in his venture. Enjoy our conversations as he often brings to my attention stories that I overlook, like how companies like Coca-Cola are announcing record buybacks to boost shares, a trend that other cash-rich companies are following during these uncertain times.

Of course, as the title of his blog suggests, Jean-Pierre is highly skeptical that global policymakers will be able to navigate through uncharted terrain, but he's a trader who uses technical and fundamental analysis to trade around the news. He knows that being married to any one view is the road to ruin.

That brings me to my topic, preparing for disaster. Most logical people are hunkering down as Hurricane Sandy nears the eastern United States. Unfortunately, there are plenty of idiots ignoring the dire warnings, putting their lives and the lives of first responders at risk.

As the US deals with the 'storm of the century', over in Europe, they are adding fuel to the flames of another storm, the endless debt crisis. Any logical analyst looking at the situation in Greece, Spain, Portugal and Italy would conclude that austerity has been a colossal failure, exacerbating the debt crisis, threatening global peace and prosperity.

Elite hedge funds are navigating around this storm, but few are hitting home runs and some are suffering massive redemptions as losses pile on. It's an insanely tough environment for all active managers trying to work through the deflationary forces of the European debt crisis and the inflationary forces of unprecedented quantitative easing from global central banks.

My views haven't changed much in the last couple of years. I still maintain the 'power elite' will do whatever it takes to prop up the global financial system, reflate risk assets in an attempt to raise inflation expectations and squelch a Japanese-style deflation scenario, or even worse, a prolonged and dangerous debt deflation spiral.

Will central banks succeed or are they sewing the seeds of the next crisis? That remains to be seen but many hedge funds preparing for disaster are quickly realizing that the most powerful hedge funds in the world are run by Ben Bernanke and his global counterparts, and fighting them, betting on disaster, can lead to the road to ruin.

In fact, right now, think pension funds have a leg up on hedge funds, mutual funds and private equity funds. Why? Because they have a much longer investment horizon and can sit through this global storm, waiting for a recovery to realize gains on their public and private investments.

That's why pension funds are betting big on global real estate. The Canada Pension Plan Investment Board recently paid $445 million to acquire stakes in two major shopping malls in Australia that are undergoing transformations.

The manager of Canada Pension Plan’s investment portfolio also unveiled two deals on Friday – a 39-per cent-stake in Dorna, a Madrid-based marketer of motorbike racing, and a $400-million financing for Formula One Group, the company behind F1 auto racing.

Obviously, CPPIB isn't worried about Grexit, the end of Europe, a hard landing in China, or the US fiscal cliff.  They are investing huge sums in these private investments because they are confident that these deals will benefit their members over the long-term.

Are there reasons to be concerned? You bet. As the Fed basically handcuffs itself to a zero-rate policy until employment picks up significantly, I'm seeing the hunt for yield  lead to the resurgence of structured credit hedge funds and soaring dividend recapitalizations in private equity. All this leverage is creating systemic risk and if central banks don't pay attention, another financial disaster will strike, ensuring decades of deflation.

That's why it's crucial that European policymakers stop dithering and realize that their policies have hitherto been a total failure. Below, leave you with an RT interview with William Engdahl, who says all the measures the EU leaders are imposing are failing to address the core problems on the continent, paving the way to the Third Reich.

Also embedded a clip from a Guardian article discussing how in austerity-ravaged Greece, the neo-Nazi party Golden Dawn is on the rise. Think this is gross sensationalism, far from depicting reality in Greece where most people despise neo-Nazis and what they stand for, but the clip below shows the ugly side of austerity.

Finally, Hurricane Sandy barreled toward southern New Jersey after bringing a region with 60 million residents to virtual standstill and upending the US presidential race eight days before Election Day. For anyone who thinks this storm isn't serious, watch the clip below.