By Nick Evans
Well that didnt last long. After an unexpectedly sunny
and bright start to the year, markets have turned cloudy and
stormy again in the last few weeks. Far from looking like a
possible repeat of 2009, 2012 now looks a good deal more likely
to be like 2011 all over again.
Normal service has been resumed in the eurozone, with
Spains mounting financial and financing difficulties
putting a dampener on the earlier euphoria that had been
triggered by the the ECBs LTRO operation at the end of
Just as the Fed, the Bank of England, the Bank of Japan and
other major central banks have been doing, the ECB scheme
a wily way to introduce QE in Europe without enraging
the inflation-phobic German public or provoking the outright
opposition of the Bundesbank was aimed at flooding the
markets with liquidity.
It seemed to work, for a while at least in terms of
propping up the continents insolvent banks and giving
investors and market participants some degree of comfort that
the financial system in Europe was not about to collapse.
But, like most of the developed world with the possible
exception of the US, it does not appear to be working in terms
of fuelling any kind of durable economic recovery or genuine
return of business confidence.
And it is certainly not working and is unlikely to do
so for a long while yet in terms of tackling the
devastating levels of sovereign and financial sector debt that
remain the prime danger in the eurozone, just as they are in
the US, Japan and the UK.
So the quandary remains. Do policy-makers in the major
developed economies continue to operate for the foreseeable
future a life support mechanism of what some have termed
perma-QE rewarding debtors, punishing savers
and creating an artificial economic environment in the hope
that the day of reckoning can be postponed indefinitely?
Or do they switch off the machine, allow the economic and
business cycle to run its natural course and in all
probability trigger a tidal wave of deleveraging about
which they are happy to talk and theorise, but at whose likely
severity and scale they can only guess?
Not an easy call and certainly not one that anyone
looking to get re-elected is likely to want to make. And it is
thus difficult to see how economics and markets can be detached
again from politics anytime soon, especially in a year when
there are so many major political events, elections and
transitions looming (in France, in the US and even in
So where does that leave hedge fund managers and investors?
In a quandary too anxious not to miss out on any rallies
(even if they may be bear ones) and outbreaks of optimism, but
equally anxious to protect against (or profit from) any major
downward moves and tail risk events.
Throw in rising oil and energy prices, geo-political
instability in the Middle East, uncertainty over soft or hard
landings in China and the likelihood of a very different
economic and fiscal picture in the US once the interminable
election is over and it is hard to see why markets in
2012 should be any less macro-obsessed or politics-driven than
they were in 2011.
About the only two certainties in the current climate are 1)
there will be more regulation most of it ill-conceived,
wrongly motivated, unnecessary, onerous, overly complex (even
to its own creators), self-contradictory and
counter-productive; and 2) there will be more taxes most
of them ill-conceived, wrongly motivated, unnecessary, onerous,
overly complex etc.
And the over-riding worry is, of course, inflation
which the policy-makers seem to believe they can control, but
which (if history is any guide) is more likely to be out of
control long before they are prepared to admit it and long
after they are able to do anything about it.
All in all, it is an interesting backdrop for our annual
EuroHedge Summit on 24-26 April where the
industrys leaders will gather once again to discuss the
key issues, risks and opportunities facing hedge funds under
the title of Strategies for a Challenging
The challenges are certainly there and it will be
revealing to hear what strategies the assembled managers,
investors and counterparties have for dealing with them. So let
us hope that, despite all the gathering clouds, the sun shines
on Paris in the spring. And let us also hope, given this
columns usually unerring gift for getting things wrong,
that this rather gloomy offering is a sure harbinger of bright