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Bridgewater’s view on Toxic Asset Plan

Source: Reuters

Hedge fund Bridgewater mulls U.S toxic asset plan

NEW YORK (Reuters) – Bridgewater Associates Inc, one of the world's biggest hedge-fund managers, said on Tuesday it might be interested in participating in the U.S. Treasury's public-private investment program, calling it a "big transfer of money from the government to the banks and to the buyers."

Bridgewater manages roughly $80 billion in global investments for a wide array of institutional clients, including foreign governments and central banks.

In a letter to clients, Bridgewater said its interest in buying the distressed assets under the terms being offered would depend on the pricing and on "whether we can get over our fears of partnering with the government."

Last week's political furor surrounding the American International Group Inc bonus payments raised the risks for private capital firms thinking about partnering with the Treasury. Many have expressed reservations regarding retroactive curbs on compensation and profits.

But investors' concerns were muted after Federal Reserve Chairman's Ben Bernanke's statement to a congressional hearing on Tuesday in which he said: "I do think we have to provide assurances to participants" in the Term Asset-Backed Securities Loan Facility and the Public-Private Investment Fund, for example, "that their involvement will not be retroactively penalized in some way."

Ray Dalio, the founder of Bridgewater, is considered one of the world's most successful investors. Bridgewater's Pure Alpha fund returned 8.68 percent last year, according to Absolute Return magazine, while many hedge funds posted double-digit losses for the same period.

In August 2007 when markets were in near free-fall, Bernanke held discussions with financial experts, including Dalio.

In the letter, Bridgewater said: "From a macro perspective, this is a big transfer of money from the government to the banks (who are getting the higher prices for their assets) and to the buyers (who are probably going to get a heck of a deal because of the non-recourse loan and the easy access to leverage).

"If the government was operating in an economic way, it would not do this deal — it would deal with the banks' finances separately and sell this insurance (i.e. the implied put arising from the non-recourse loan) for what it's worth," Bridgewater said in the letter.

"But, politics being what they are, this route is probably motivating this non-economic behavior. We are eager to see how it is received on the Hill," it said.

Has the economy turned the corner? Part 2

“We’ve passed the period where every indicator is plummeting, and that’s good news,” he said. “We may not be exactly at the turning point, but we’re getting pretty close to it.”

Read this full report on possible bottoming out of the economy. The highlights are mine. Keep watching.

Economy Raises Tentative Hopes a Trough Is Finally in Sight

Just as the U.S. recession is set to become the longest since the Great Depression, some economic signs are encouraging, if tentative.

April will mark the 17th month of the recession that began in December 2007, making it the lengthiest downturn of the post-Depression era. For the most part, forecasters don’t see U.S. economic growth turning positive until early autumn, and even then, expect the unemployment rate to hit double digits this year or next.

This week, though, has brought a spate of good economic news. Consumer spending rose marginally in February, the Commerce Department said Friday, as did consumer sentiment in a household survey by Reuters and the University of Michigan. The housing market also appears to have stabilized from its free fall, and an uptick in orders for big-ticket items is helping raise hopes of a future pickup in manufacturing.

During a meeting with President Barack Obama and other bank executives Friday at the White House, Bank of America Corp. Chief Executive Ken Lewis and Northern Trust Corp. CEO Rick Waddell expressed cautious optimism that the economic downturn was either at or near the bottom of the cycle, according to people at the meeting.

“There’s growing evidence supporting the optimists’ view, and I am surprised at that,” said Robert J. Gordon, an economist at Northwestern University and a member of the National Bureau of Economic Research committee that is the official arbiter of when recessions begin and end. “I was sort of in the pessimists’ camp until I started looking at things.”

He points to one indicator in particular with a remarkable track record: the number of Americans filing new claims for unemployment benefits. In past recessions, it has hit its peak about four weeks before the economy hit a trough and began to grow again. As of right now, the four-week average of new claims hit its peak of 650,000 in the week ended March 14. Based on the model, “if there’s no further rise, we’re looking at a trough coming in April or May,” he said, which is far earlier than most forecasts currently anticipate.

But a turn toward positive growth is not the same as a recovery, particularly now with the current 8.1% unemployment rate at a quarter-century high and marching higher by the month. Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass., says unemployment could hit 10.5% by late next year, even if the economy is growing at a 3% rate by that point.

“What comes next, I’m afraid, will be the mother of all jobless recoveries,” said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, N.J. “While we may emerge from recession from a statistical standpoint later this year, most Americans will be hard-pressed to tell the difference between a recession and recovery the next 12 months.”

In a reflection perhaps of households’ angst, the personal saving rate in February was 4.2% of disposable income, compared with the near-zero rates seen during the boom. A survey to be released Saturday by AlixPartners, a business-advisory firm, shows Americans’ “new normal” spending levels will return to just 86% of pre-recession levels in the next 10 years.

Income growth is showing signs of weakness after a decent performance in the past year. The Commerce Department said personal after-tax income fell 0.1% in February, its third decline in four months, and a reflection of U.S. companies’ aggressive cost-cutting amid a difficult business environment. But aggressive efforts by the government and the Federal Reserve to counteract the financial-market meltdown are seen as kicking in to help offset that.

The Dow Jones Industrial Average has rebounded by some 20% from its lows, though it lost some ground on Friday, and credit markets have calmed as well. The $8,000 tax credit included in the stimulus package for those who purchase a home before Dec. 1 is helping to draw buyers into the market, while mortgage applications to purchase or refinance a home jumped 32% last week, boosted by the Fed’s efforts to drive down mortgage rates.

Even so, IHS Global Insight estimates GDP fell at a 7%-8% annualized rate in the first quarter, topping the fourth quarter of 2008’s steep 6.3% drop, as weakness shifts from consumers to businesses. Business investment and exports could both post nearly 30% annualized declines, Mr. Behravesh said, a severe restraint on growth, even if the largest component of GDP — consumer spending — is flat or shows modest growth.

The reserve currency and its obligations

It is true that there is no successor to the US Dollar as international reserve currency. Not now, nor in next 30 years. But being reserve currency also carries its obligations, i.e., US monetary policy must be responsible not only to the US, but to the world. The policy of inflating US dollar to get out the current mess will only produce more dissatisfied neighbors. The consensus assumes China won’t choose to diversify away from the US dollar because the attempt to do so will hurt China’s foreign reserve portfolio when the value of US dollar plummets. But China also faces its own domestic pressure at home. What will happen when China and her nationalistic-prone citizens feel cheated? Countries, as individuals, may well act irrationally, some times. Ben Bernanke, be warned.

Opinion piece from WSJ:

China and the Dollar

As if the dollar didn’t have enough problems, Timothy Geithner took China’s bait yesterday and said he was “quite open” to its suggestion this week to displace the greenback with an “international reserve currency.” The dollar promptly fell and stocks followed, before the Treasury Secretary re-emerged to say “the dollar remains the world’s dominant reserve currency. I think that’s likely to continue for a long time.”

[Review & Outlook]

Mr. Geithner is learning on the job, and yesterday’s lesson is that it isn’t smart to fool with currency markets when you are already tempting fate with a gigantic U.S. reflation. Treasury and the Federal Reserve are flooding the world with dollars to break the recession, and the world is rightly getting nervous. The solution floated by Chinese central bank governor Zhou Xiaochuan — an increased role for the International Monetary Fund — isn’t desirable. But his warning about the dangers of dollar weakness and exchange-rate instability is still worth heeding.

Since the collapse of Bretton Woods in 1971, the global economy has tried to function with floating exchange rates, in which the “market” is said to set currency prices. As the world discovered in the 1970s and the Bush Treasury forgot, however, the market for currencies isn’t the same as for apples or copper. Central banks control the supply of currencies through their monopoly on money creation. Often, as at the Alan Greenspan-Ben Bernanke-Donald Kohn Federal Reserve this decade, they get policy wrong, with disastrous consequences. Amid the global economic downturn, some central banks, like Vietnam’s, are also turning to currency devaluation for a trade advantage.

Mr. Zhou may want to head off this potential train wreck. On Monday he proposed an international reserve currency “anchored to a stable benchmark and issued according to a clear set of rules.” He wants the supply of money to allow for “timely adjustment” to “changing demand,” and those adjustments to be “disconnected from economic conditions and sovereign interests of any single country.” And he thinks the IMF can create a global currency by expanding the use of its already-existing Special Drawing Rights (SDRs), a synthetic currency linked to the underlying currencies of IMF states.

Yet who would determine the “right price” of the SDR — the IMF? The multilateral institution’s economic prescriptions have sent numerous nations into tailspins, particularly in Asia. There’s nothing to say, too, that national monetary authorities wouldn’t cheat and adjust their domestic money supplies as they saw fit — or apply political pressure on the IMF to change the SDR’s currency weightings in their favor.

But the main problem with the SDR is that it can’t be used for anything in the real world. When the IMF allocates SDRs, recipient countries exchange them for local currencies at local central banks. That money is then used to buy real assets and facilitate trade. That exchange inflates the money supply of the domestic country that’s accepting the SDRs in exchange for local currency.

There isn’t consensus within China’s central bank on the idea of empowering the IMF, though Beijing is eager to have more say at the institution. Hu Xiaolian, a vice governor of the bank, said Monday that “investing in U.S. Treasury bonds is an important component of China’s foreign currency reserve investments.” She added: “We are naturally relatively concerned with the safety and profitability of U.S. government bonds.”

Ms. Hu isn’t alone, and we only wish the Treasury, the White House and the Fed were equally as concerned. The dollar’s status as a reserve currency gives the U.S. enormous advantages, and it should be protected ferociously by our public officials. It means we don’t have to repay our debts in foreign currency and that our borrowing costs are cheaper. To the extent that the rest of the world follows a dollar standard, it also gives us far greater global sway.

It is this influence that Russia, China and others sometimes resent and would like to see displaced. The problem is that there really isn’t an obvious successor to the dollar. No other economy is large enough, with deep enough capital markets. The euro might become an alternative down the road, but it remains too new and lacks the necessary underpinning of political cohesion.

Yet Mr. Zhou’s demarche is also a warning that reserve currency status carries special obligations. It means the U.S. isn’t conducting monetary policy only for itself but for much of the world. And it means that when the U.S. falls for the temptation to debase its currency, it sends shocks through the entire global trading system. The dollar’s sharp but needless gyrations during this decade are in our view one of the major causes of the housing and commodity asset bubbles that led to the financial panic and global recession.

If Mr. Geithner meant yesterday that he is “open” to broader monetary and exchange-rate cooperation, that could be a step forward. But instead of abdicating to IMF bureaucrats, this would mean working with the world’s most important governments and central banks — for starters, the Fed, ECB, and the Banks of England, Japan and China. The world could use monetary reform, but the goal should be to reduce currency fluctuations and enhance price stability and world trade. In the meantime, the dollar’s special status is an asset worth preserving.

Claw-back in hedge funds

The right way to set compensation is to link the pay to longer-term performance, not a single year. This should apply to both CEO pay and the fees received by hedge fund managers. The alternative compensation scheme, which is based on a five-year average investment performance, for example, is a much better solution than the current one.

Report from WSJ on big pension funds forcing hedge funds to change fee terms:

Calpers, the California public pension fund that is one of the biggest investors in hedge funds, is demanding better terms from funds, including lower prices and “clawbacks” of fees if performance weakens.

The $172 billion pension fund is a bellwether in the money-management business. A Calpers investment can help money managers like hedge funds attract other clients.

The move by the California Public Employees’ Retirement System underscores the changing dynamics between hedge funds and their clients. Just two years ago, investors clamored to get into highflying funds, agreeing to pay fees that in some cases reached 3% of assets and 30% of profits. Lately, hedge funds have come under fire for failing to live up to their promise to perform in good and bad markets.

While other investors are pushing for fee cuts, Calpers, which has $5.9 billion in hedge-fund investments, holds significant clout. “Calpers is the 800-pound gorilla, pushing so much money through the system,” said Eric Roper, chairman of the hedge-fund practice at New York law firm Gersten Savage LLP.

Calpers’s demands were outlined in a March 11 memo sent to the 26 hedge funds and nine funds of hedge funds that do business with Calpers; it was reviewed by The Wall Street Journal.

Some of the hedge funds that manage Calpers money include Tremblant Capital, Atticus Capital and Och-Ziff Capital Management, according to Calpers records and people familiar with the investments. Spokesmen for the funds didn’t comment.

Besides pressure on fees, hedge funds are likely to face closer scrutiny from regulators, threats of higher taxes and more constraints on their trading strategies, after a year of broad-based losses.

Calpers said the changes are “extremely important” and required of “managers wishing to become, or remain” in Calpers’s stable of managers. The pension fund said every hedge fund won’t face the same demands and that it is willing to listen to counterproposals.

One area Calpers is focusing on includes performance fees. Typically they are collected at the end of each year, but Calpers instead wants fees spread out over several years. Calpers also wants clawbacks, which allow clients to recoup fees from previous profitable years after a period of poor performance.

The pension fund also seeks greater control of its investment funds, saying it would explore opening managed accounts. In that scenario, hedge funds would place Calpers’s assets in a separate bucket from other investors’ assets, so if a fund faces an exodus of investors and sought to freeze redemptions, Calpers wouldn’t be limited from withdrawing its funds.

Calpers also wants money managers to disclose every security held in a fund. “The only issue that keeps hedge funds from providing security transparency is their lack of cooperation,” Calpers spokeswoman Pat Macht said in an interview Friday. She said that detailed fund information won’t be made public.

Calpers is basically trying to wield its investment clout to shape its relationship with hedge funds. The memo says Calpers “will no longer invest in managers” that adhere to industry standards with no regard for individual situations. At the same time, Calpers bills the directives as good for hedge funds as well as for institutional investors — a means to “improving the relationship” for the long term.

The sought-after changes would apply to new money added to existing funds and money put into new hedge funds, and will take about a year to implement, Calpers said. None of its hedge funds have formally agreed to the new terms, though discussions have started with most and cooperation appears to be widespread, Ms. Macht says.

Calpers’s demands come as other institutional investors are issuing similar requests in an effort to upend industry protocols. In January, the Utah Retirement Systems circulated a four-page letter to 40 hedge fund managers, and to many like-minded investors, that called for similar changes.

“We clearly are on the same page with regards to most issues,” said Larry Powell, deputy chief investment officer for the Utah fund, referring to the Calpers memo.

Bank Executives’ Game

Under current TARP/TALF/PPIF program, the best ‘move’ for American bank executives is to return TARP money and not to lend to the broader economy. This will postpone recovery and lead to a lose-lose situation. Why so?

If bank executives were to keep TARP money, the U.S. government will have rights to cap executive pay or force them to accept ‘sacrifice’ on compensation. But we know “moral persuasion” seldom works (don’t dream on that). Bank executives will return TARP money even they know a huge mess is still waiting on their balance sheets to deal with. This is the classic principal-agent problem in economics.

So what are the solutions? There are only two alternatives out of this:

1. Obama government temporarily leaves bank executives alone and postpones the plan to cap executive’s pay. This will be very difficult in the current anti-Wall Street environment, but it can be done.

2. Obama government overcomes the taboo of nationalization, i.e., take over those “too-big-to-fail” banks and remove bank executives from deciding on their own compensation or even fire them. Government then will force banks to lend to the broader economy. But be reminded the nationalization has to be temporary —government can never replace private banks in financial markets.

We are living through a period of, I call, “mother of all moral hazards”. Government should make a quick calculation on their rescue strategy. Failing to do so will put American economy into real danger and possibly onto the path of Japan-like malaise.

Watch this video from Fortune:

Mama Bear: where do we stand now?

An update on the trend of the current mama bear market.

I am not a technical charter, not a believer either. But the remarkable similarity between the current bear market and the Great Depression really makes me nervous.

Let’s hope for the best.

(click to enlarge; source: dshort.com)