What do Richard Branson, Hank Paulson, Stephen Schwarzman and Jon Hunt all have in common? They all sold out of businesses at the peak of the business cycle (Virgin Records, Goldmans, Blackstone and Foxtons respectively) which at the time offered great insights into what expert industry practitioners were thinking about the state of their respective businesses. Does the activity of current financial world titans give us any insight into what lies ahead for the markets in 2009? John Paulson has set up a private equity (PE) property fund targeting the US market and this is no doubt encouraging, but I think there is a hint of him expanding on the back of his reputation here and PE wasnt how he made his money in the first place.
Another more comical development comes from Dwight Anderson who is re-launching a commodities fund at his Ospraie hedge fund unit, following much reflection and with a number of lessons learned. Considering his performance last year (down nearly 40% and losing 27% in August alone) the critical lessons learnt here are for hedge fund (HF) investors fees have to come down and new entrants should have fees waived until performance recoups losses incurred in last years blowout. But the lesson for the wider financial landscape should be to highlight the risk of lemming-like investors herding into appealing investment themes. The HF universe is actually receiving inflows for the first time in many months and this may be a prelude to renewed debate about the impact upon asset markets by investor inflows. This issue has struck commodities markets in recent years; underdeveloped markets with participants more versed in physical trading than paper derivative management had to absorb huge financial inflows. Bubbles were seen from crude oil to uranium. Current price action indicates the bottom has been seen and with reflationary policies and concerns over the dollar causing investors to rush back into hard assets, this could be one tinderbox ready to spark soon.
It staggers me how so many across the market spectrum confidently predict strong inflation due to current quantitative easing policies. Money supply (MS) and inflation are highly complex concepts and best left to inflation specialists, who as far as I can read, are not predicting high inflation and the inflation markets themselves (e.g. US 5 year breakevens, which reflect implied inflation rate from difference in 5 year treasuries and 5 year TIPs) are still pricing in inflation lower than before this crisis kicked off. There are several reasons why I do not think quantitative easing (QE) will lead to inflation (notwithstanding criticism of those who are not qualified to comment) 1) Japan precendet of QE there but no inflation let alone high inflation 2) Boom in MS has been overstated by people monetizing equity investments into cash 3) Once inflation returns to normal the Fed has a variety of tools to curb MS growth, including the interest rate on deposits of excess reserves (a new development since Sept 08).