Thursday, April 22, 2010

Louis Bacon's Moore Capital Management Warns of Euro-Zone Breakdown

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While not as famous to the general investing public as some of his hedge fund peers, Louis Bacon of Moore Capital Management has one of the best track records on the planet since 1990 with annualized returns of roughly 20%.  [Forbes Article from 2004 on Moore here

Bacon runs a style called "global macro" which in English means... go anywhere, do anything.  But his specialized skill set is risk management and capital preservation.  Which in theory is what a hedge fund is supposed to be about, but as we saw in 2008-early 2009, many hedge funds are only that in name.
  • Moore's main hedge fund has generated annual returns of more than 20% over two decades. It suffered only small losses in 2008 and returned more than 22% last year.

With this sort of track record, this CBSMarketwatch title "Moore Capital Warns of EuroZone Breakdown" certainly caught the eye - now as always, even if this does some day come to pass, the timing of it all will be of upmost importance.  As we've said many times, sovereign debt issues [Feb 5, 2010: Sovereign Risk Chart - Where Would the US Fit in, on Europe's Scale?] will not be a 1 year, or 18 month issue but something that will overhang like a dark cloud for a very long time - when specific countries flare up enough to "matter" is something that is impossible to tell.
  • Moore Capital, a leading global macro hedge-fund firm run by Louis Moore Bacon, warned of a "potential breakdown" of the European Monetary Union and criticized plans to bail out Greece, according to a recent investor letter obtained by MarketWatch on Wednesday.  "Perhaps the most interesting area for the foreseeable future is in the potential breakdown of the European Monetary Union," Bacon wrote in the letter, dated April 16.
  • "Instead of punishing the Greeks for their free-rider and fraudulent gaming of the Maastricht rules -- either by ejecting Greece from the Union to propel them to reform and come back at a competitive exchange rate or by forcing them to restructure their debt within the confines of monetary union, either of which would have eventually strengthened and solidified the euro -- the European leaders have decided to reward the prodigal Greeks with a bailout, socializing their ills and taxing once again the prodigious Northern European workers," he said.  (replace "banking oligarchs" with "Greeks" and you have the same situation in the US)  The bailout could have "disastrous consequences" for the European Union and Europe, Bacon warned.
  • Sovereign-wealth funds have bought trillions of euros to diversify away from U.S. dollars. That's supported the euro and allowed European investors to "flee their debauched currency," he wrote.  When sovereign-wealth funds "finally realize what they own, they may stand aside," Bacon went on. "The euro will find a new level while these large funds instead seek currencies in the emerging markets where solvency is not such an issue."

As for other general thoughts - he is riding the Ben Bernanke Express for now but expressed concerns for the Kool Aid to peter out by end of year.
  • Moore Capital is currently playing what Bacon called a cyclical rebound in the U.S. economy, which is being driven by companies rebuilding inventories and the positive effect of huge fiscal and monetary stimulus.  However, Bacon said he's "wary of long-term investment commitments." 
  • The U.S. economy could reach "escape velocity" this summer, but markets could be worrying about "stall speed" by the end of the year, he wrote. "We should see a resumption of a bearish market amid the secular softening of U.S. economic might. The fiscal erosion in the developed markets will be a constant market negative that will upend any strong recoveries."

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