Thursday, August 19, 2010

From JPMorgan:

In light of the recent string of weak economic data, including today's further rise in initial jobless claims, the forecast for U.S. real GDP growth is being revised down to 1.5% for third quarter 2010 (from 2.5%) and 2.0% for fourth quarter 2010 (from 3.0%). This is the second downward revision to growth in second half 2010 and the most important one. The new forecast looks for subpar growth through the second half of this year and for a rise in the unemployment rate toward 10%.

This morning Credit Suisse directly addresses the "U.S. is like Japan" debate:

The U.S. is not Japan 15 years ago. We find many more differences than similarities between the U.S. today and Japan 15 years ago:

1. The U.S. has had far more proactive fiscal/monetary policy. (Japanese monetary conditions were tight until 1995. Unlike the U.S. today, Japan fiscal easing was small.)

2. Japan had falling wages since 1997 and negative inflation expectations since 1993. (U.S. wage growth and inflation expectations are >2%.) Falling wages creates sustained deflation.

3. Asset deflation was more acute in Japan, with house prices declining by almost 80% in the big cities.

4. The U.S. moved to recapitalize banks quickly and has already written down 85% of their estimated losses (Japan needed 13 years.)

5. Japan was very slow to deregulate, and hence the price of labor fell as opposes to the quantity. With companies having little incentive to maximize return on equity, the return on capital is one-third that of the U.S.

6. Deflation became economically and politically acceptable because Japanese households have net financial assets of 41% of GDP, so they benefit from deflation.

Today's weak claims report should increase the possibility of a more focused policy response from the administration.

I have written about the 'decade of the temporary worker' - today's elevated jobless claims underscores my theme.

Yesterday marked the surprise announcement by Stanley Druckenmiller that he is shutting down his hedge fund. In a release, he cited how difficult it was to perform over the past three years.

I have admired him for his macro visions and his ability and his willingness to take outsized bets.

From my perch, the decision by Stanley Druckenmiller reflects, in part, how difficult it is to deliver superior investment returns in a world driven by the uncertainty of policy and economic/investment outcomes superimposed by the destabilizing effect of an algorithm-based world of short-term momentum strategies and, perhaps even more importantly, short-term-oriented investors. It is especially difficult when you reach $10 billion in capital, as Stanley had at Duquesne Capital.

The investment world has grown increasingly less predictable, and the ability to deliver superior investment returns has been challenged (in part by some of the factors mentioned above). It is an environment in which portfolio managers and investors are dually frustrated. To many, it is "getting to the point where it is no fun anymore."

Stanley's exit yesterday is reminiscent of when value was out of favor and the glittering hedge fund manager, Julian Robertson, quit in the early 2000s, so I suppose you can say that history rhymes!

No comments: