End of the road for hedge funds

[xchrom]

http://www.atimes.com/atimes/Global_Economy/MH09Dj02.html

There's something deeply anomalous about a stock market crash at the peak of United States corporate profitability. Nothing like this ever has happened before. Nonetheless, judging from overnight moves in Asian markets, last week's plunge in world stock markets will be repeated in Europe and America on Monday morning - although recent intraday moves have been so extreme that one is loath to guess.

Standard and Poor's downgrade of American sovereign debt from the highest, triple-A rating may be the silliest pretext for a stock


market crash in world history. America is the only big industrial country in the world that will have more taxpayers rather than fewer when a newly-issued 30-year bond matures.

In Asian trading, the US 10-year note lost about a point and a half, a modest response to S&P's action. But the 3% to 4% declines in regional stock markets and a parallel fall in US stock futures, is harder to explain. Stock markets never have undergone this sort of crash when corporate earnings outpaced the alternatives by such an extreme margin. The earnings yield on stocks is a full 5 percentage points higher than the yield on 10-year US Treasuries, something we have not seen for a generation.

[aquart]

1. You left out the important part:

There is, however, a bubble in the world economy. Anecdotal evidence points to hedge funds as the bubble that has popped. With equity hedge funds down 10.72% year-to-date on the Hedge Fund Research Index as of August 3, investors are demanding their money back. The debt-ceiling cliffhanger in Washington may have provoked the redemption calls, and the S&P downgrade might provoke more.

But the reason for the downgrades is that hedge funds have crippled out. Hedge funds can't earn the 15%-20% returns they promise investors in a world of 3% bond yields and 2% gross domestic product (GDP) growth. Investors desperate for higher returns, including pension funds, returned to the hedges during 2010 and 2011, and are now suffering spasms of buyers' remorse.
That prompted an across-the-board liquidation of all assets, including commodities and emerging market equities most favored by the hedges. The nearly $2.6 trillion of hedge fund assets constitute the system's only real bubble: too much money chasing too few returns, with a lot of fingers on the recall button. As of May, equity hedge funds with $1.25 trillion in assets had strongly net bullish positions.

They are stampeding to get out. Their overwhelmingly bullish bias left them vulnerable to a wave of redemptions, what has happened to the real-money investors who require the income that only the equity market can provide? No-one can fund a retirement on Treasuries yielding 2.4%, or a corporate bond index yielding less than 3.5%.

[xchrom]

2. +1

[FreakinDJ]

4. Oil going down = Hedge funds can't manipulate oil

They never stopped the oil price manipulators and I wonder how many had to sell short and pull out of oil

[WhiteTara]

3. and this is the part why we are in pain.

The problem is that most Americans approaching retirement age in 2007 had most of their net worth in non-financial assets.


Apart from real estate, the next-largest component of middle class wealth was in the form of equity in small businesses. Small business has had no share in the recovery. A rough gauge of small business income is non-farm proprietors' income as reported in the GDP tables. As the table below indicates, corporate profits have soared to a record, but proprietors' income remains below the pre-recession peak.

Judging from the surveys published by the National Federation of Independent Business and other organizations, small business remains in a slump. That is not surprising, for reasons spelled out in a recent study by New York Federal Reserve economists. Most small business growth during the past decade followed the housing bubble.

[1776Forever]

5. Oh yes - What comes around goes around - Remember Boehner's biggest funders? Here....

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=1577996&mesg_id=1577996

Wall Street workers lift Boehner campaign
July 26, 2011

WASHINGTON - Since January, House Speaker John Boehner has raised $6.6 million for his campaign committee, six times more than the Ohio Republican received during the same period two years ago when he was the chamber’s minority leader.

Three of the five biggest sources of Boehner’s campaign cash this year are employees of three Wall Street investment houses, a shift from the 2010 election cycle, when such contributors were not ranked among his top 10 donors.

Employees at the New York hedge fund Paulson & Co. contributed $61,050 to Boehner’s campaign account, more than any other company. Moore Capital Management of New York employees gave $53,000, while those at Cantor Fitzgerald donated $45,000.

http://articles.boston.com/2011-07-26/news/29817379_1_fund-raisers-campaign-donations-house-speaker-john-boehner

[bemildred]

6. Marx is smiling and eating popcorn in Hell.

:popcorn: