On the other hand, the mania with hedge funds is sowing the seeds of the next financial crisis. It won't happen anytime soon, but when billions are being poured into hedge funds, regulators better pay attention to macro systemic risk. The role that large hedge funds and large bank prop desks played during the last credit crisis is still poorly understood. Economists still can't figure out the linkage between hedge fund asset growth, liquidity, credit conditions, financial leverage, asset bubbles, financial crisis and their effect on the real economy.
Over the last two and half years, I've been getting blasted on Zero Hedge for telling investors to keep buying the dips. My view remains that the financial oligarchs will do whatever it takes to reflate risk assets and introduce some inflation in the system. By allocating more and more assets into hedge funds, public pension funds are able to bypass the leverage constraints they have in their traditional assets and they are also introducing a boom in liquidity into the global financial system, thus helping the financial oligarchs achieve their goal of relating risk assets and introducing inflation in the economic system. Absolutely nothing has changed, which is one reason why I expect a lot less volatility going forward (less, not more because everyone will be bidding up risk assets).
Eventually the music will stop, most likely when the Fed signals the start of a rate hike campaign, but there is so much liquidity and leverage in the financial system that it will take several rate hikes before we see speculative activity tapering off in any meaningful way. In the meantime, global pensions and sovereign wealth funds will keep pouring billions into hedge funds and other alternative asset classes.
No comments:
Post a Comment