Gundlach on the signs of the market being ready to pull back

The investor, who was crowned by Barron's as the new "King of Bonds" a year ago, said in an interview that he thinks the recent rally in stocks, which this week drove the Dow Jones industrial average above 13,000 points for the first time since May 2008, has gone too far.

Gundlach, the chief executive officer and chief investment officer of the $28 billion DoubleLine Capital LP, said he is still concerned about the euro zone crisis and deepening tensions in the Middle East.

The United Nations' nuclear agency said on Friday that Iran has sharply stepped up its uranium enrichment drive in a report that will further inflame Israeli and Western fears that Tehran is pushing ahead with an atomic weapons program.

"It's an awfully easy decision right now to not be making further investments in risk assets," Gundlach said.

"The pricing of the market has returned to the levels prior to the scales falling from investors' eyes regarding the global financial crisis, and I really don't think that's appropriate," he said.

The Dow has gained 8 percent since December and the broader S&P 500 index is up roughly 10 percent.

The size of the gain leaves no cushion of safety given all the dangers in the world economy and leaves the stock market as priced for disaster as it was when the financial crisis hit in 2008, Gundlach argued.

"When I look at the pricing in the market today, I see a good chance of downside movement of some significance," he said.

Such predictions reinforce Gundlach's status as a bit of an outlier given the optimism among many in the U.S. markets prompted by some stronger economic figures in recent months.

Gundlach, whose prescient call to buy U.S. Treasuries last year boosted his DoubleLine funds, said he was concerned about "schizophrenic" investor psychology that had flipped to over-confidence because of some stronger economic data and market gains when only five months ago people felt a new recession was imminent.

He said a decline in stock market volume was a worrying signal. Average daily volume on U.S. exchanges last year was 7.84 billion shares but so far in 2012, average daily trading has been 6.95 billion shares.

Gundlach's investment track record has been very strong. Last year, for example, the DoubleLine Core Fixed-Income fund, Gundlach's multi-sector bond fund which can invest in corporate bonds, mortgage-backed securities, Treasuries, and emerging-market debt, posted returns of 11.5 percent.

In comparison, the Barclays Capital U.S. Aggregate bond index - the fixed-income market's equivalent of the S&P 500 index - posted returns of 7.8 percent.

Gundlach's view clashes with that of many money managers, who cite low Treasury rates, strong corporate balance sheets, and worldwide liquidity programs as reasons to allocate money to riskier assets such as stocks.

When asked why few other money managers agreed with his views, Gundlach said: "I'd say that's because the great majority of money managers never say, 'take money out'."

Like Wall Street analysts who "never have a sell signal on anything," managers tend to only go public with buy or hold sentiments, he said.

Investors that concede that the market may not rally further but still expect to earn their high-yield coupon are the biggest red flag to flee the risk sector, Gundlach said.

"That's usually about as negative as the consensus gets, and usually I warn my clients that when you start hearing a predominance of that method of thinking it's about as close as you're going to come to a sell signal."

Coupons for BBB-rated companies hit a record low this week, according to IFR, a unit of Thomson Reuters. CSX Corp (Baa3/BBB) set a record for the lowest 30-year triple-B coupon with its $300 million 4.4 percent deal at just 133 basis points over Treasuries.

Rising oil prices, tensions in the Middle East, and deficit policies to be announced in the U.S. elections in November are just three possible catalysts to burst the rally, Gundlach said.

"When you see volume decline and you see insider selling at a high level, you're already seeing the market showing cracks, and it's already there," he said. He added that positive economic surprises "can only, at some moment, disappoint."

Gundlach also said that worsening government finances in the United States and much of the developed world were "completely unsustainable" but that once politicians tried to really deal with them, there were major risks of a recession.

"You might also at some point have a well-meaning attempt to address this absurd amount of government borrowing to fund the spending outlays. If you do that, you will go into a recession immediately," he said.

Gundlach said a mix of Ginnie Mae and non-guaranteed mortgage-backed securities is "the best fixed-income strategy right now," since the risks of both, when blended, can be positioned to offset each other. This blend can also yield about five percentage points above a generic Treasury portfolio, he said.

"I've been at this game for about 30 years, and what I've learned is that in the world of finance you tend to make money slowly and lose money quickly, and the idea is to not be there when you have potential for downside movement," he said.

(source: Reuters, Feb 24, 2012)

Solution to Deficit: Global Fiscal Adjustment

Goldman Sachs Global ECS Research stresses that large fiscal adjustments are required around the world, particularly in the advanced economies. The IMF projects an average primary deficit (excluding interest) of 5.3% of GDP in the advanced economies in 2011...

GS Global Econ Paper Aug19 2011

Factory activity plummeted in August

New data suggests that the US will soon enter recession, if it has not done so already. The figures for the East Coast region shows that factory activity plummeted in August to a level never seen before without the economy being in recession.

Philadelphia leads the way

The index from the Federal Reserve Bank of Philadelphia shows manufacturing output in the Mid-Atlantic region of the US East Coast stood at minus 30.7 in August compared with a gain of 3.2 in July.

The survey was conducted during August 8-16.

The data shows that this month's key purchasing data index from the National Institute for Supply Management could sink as low as 42 from the current figure of 50.9. The close relationship between the two data points is illustrated by the attached graphic. Economists had expected a 1.5 rise in the Philadelphia reading for August.

Any figure of below 50 for the ISM index, due to be released at the beginning of September, indicates the economy is contracting.

That, in turn, would be likely to push down equities. Deutsche Bank strategists said. “Using our often-used relationship between the change in the S&P500 and the ISM this would point to a year on year fall of 22% in US equities. On September 1 last year the S&P 500 was at around 1080 and 22% below this would take us to around 860.”

Things may not get that bad. Deutsche points out that the index hit a low last July and August. A fairer 2010 starting point to calculate a drop could be the beginning of year. This would imply a less frightening drop in the S&P500 to 1000.

Other analysts say the fall in the US equities over the last fortnight has already partly discounted the arrival of recession.

Economists at Germany's Berenberg Bank said current reactions to bad news, or expected bad news, are overdone: "It is the nature of panics and manias that they drive asset prices away from fundamental valuations. For a while, such exaggerations reinforce themselves as investors are inclined to pay more attention to facts, events or mere rumours that seem to justify their current concerns than to longer-run fundamentals.

The Wall Street Journal quotes Eric Green, head of rates research at TD Securities, as expecting a less severe fall in the ISM to between 46 and 47. He said: “We were looking for more weakness on the ISM but nothing like this.”

(Financial News, August 19, 2011)

Jan Hatzius of Goldman Sachs and Richard Berner of Morgan Stanley Differ Sharply on Risk of Deflation

Michael Falco for The New York Times

Left, Jan Hatzius of Goldman Sachs; right, Richard Berner of Morgan Stanley.

By NELSON D. SCHWARTZ

When the latest unemployment figures are announced on Friday, all of Wall Street will be watching. But for Richard Berner of Morgan Stanley and Jan Hatzius of Goldman Sachs, the results will be more than just another marker in an avalanche of data.

The New York Times

Contrasting Forecasts

Instead, the numbers will be a clue as to which of the two economists is right about where the American economy is headed. Their sharp disagreement over that question adds yet another twist to the fierce rivalry between the firms, Wall Street’s version of the New York Yankees and the Boston Red Sox.

Mr. Hatzius is arguably Wall Street’s most prominent pessimist. He warns that the American economy is poised for a sharp slowdown in the second half of the year. That would send unemployment higher again and raise the risk of deflation. A rare occurrence, deflation can have a devastating effect on a struggling economy as prices and wages fall. He says he may be compelled to downgrade his already anemic growth predictions for the economy.

For months, Mr. Berner has been sticking to a more optimistic forecast, despite growing evidence in favor of Mr. Hatzius’s view. Last week, Mr. Berner was caught by surprise when the federal government reported that the economy grew at a 2..4 percent pace in the second quarter, well below the 3.8 percent he had forecast a month before. Mr. Hatzius came closer to hitting the mark, having projected a 2 percent growth rate.

Mr. Berner and his deputy, David Greenlaw, still expect a pickup in the second half of the year, which would help gradually bring down unemployment. They play down the danger posed by deflation, the malady that deepened the Great Depression and contributed to Japan’s lost decade of the 1990s.

“I’d say at this point the data and the sentiment in the marketplace have certainly gone more Jan’s way than mine,” Mr. Berner said. Some people, he added, “think I’m out of my mind. But I have a conviction in my beliefs that’s based on my analysis.”

Mr. Hatzius, a 41-year-old native of Germany who was 3 when Mr. Berner started out as an economist, is more restrained. He can afford to be, having snagged the top spot in a recent ranking of Wall Street economists as well as an award from Arizona State University honoring his “uncanny economic forecasting that anticipated the global financial crisis.”

On Wall Street, both men were among a very small group that accurately predicted the recent recession. Mr. Berner’s long résumé includes stints at the Federal Reserve in Washington and Mellon Bank in Pittsburgh. “I’ve seen plenty of ups and downs,” said Mr. Berner, 64, sitting in a corner office overlooking the Manhattan skyline at Morgan Stanley’s Midtown headquarters.

Showing not even a hint of doubt, Mr. Hatzius said, “The prospect of substantial inflation seems very remote, but the prospect for deflation is far from remote. A double dip is certainly possible but not likely.”

Mr. Berner does not expect substantial inflation, but he is predicting inflation will run 1 to 2 percent annually rather than the near-zero level Mr. Hatzius sees by the end of next year.

“There is still a one in 10 chance of deflation,” Mr. Berner calculates. “But we already have been much more aggressive and proactive in dealing with the problem than Japan was,” he said, referring to the Federal Reserve’s decision to quickly cut rates and aggressively buy government securities.

The split between the chief economists, whose work helps inform trading strategies recommended to investors by their firms, echoes a broader and sometimes fiercer debate among academic economists and commentators about the threat posed by deflation and what the government’s response should be.

According to the deflationistas, as they are nicknamed, a new round of stimulus spending by Washington is urgently required to stave off a Depression-like cycle of falling prices and wages that is difficult to reverse once it is set in motion.

Inflationistas, by contrast, worry more about the effect that additional government borrowing could have on the recovery. With the budget deficit expected to hover around $1 trillion a year for the next decade, they say, interest rates could eventually surge, making borrowing — and goods — more expensive. A double dip, they say, is highly unlikely.

Mr. Hatzius’s gloomy outlook is owed centrally to Americans’ slowdown in spending. Recent data suggest that consumers are using any extra cash they have to pay down debt or put into savings. That places a strain on an American economy that has become hugely dependent on consumer spending.

On Tuesday, the Commerce Department reported that Americans saved 6.4 percent of their after-tax income in June, in contrast to the years before the recession, when savings rates stood at 1 to 2 percent.

Last month, the Federal Reserve reported that consumer debt dropped by 4.5 percent in May, a $9 billion decline. It was the 20th consecutive month that figure has dropped. In 2007, consumer debt jumped by 5.7 percent, or nearly $40 billion.

“We had a housing and credit boom that was unsustainable, and now this boom has turned into a bust,” Mr. Hatzius said. “There was too much debt, and the deleveraging process has still got a ways to go. It’s going to keep private demand weak.”

Another big factor is the amount of slack in the economy. According to a recent report by Nomura, “The U.S. economy continues to operate with a staggering amount of spare capacity — unemployed workers, idle trucks and factories, etc.”

Mr. Hatzius agrees, adding that all this extra capacity will restrict the ability of companies to raise prices, thus raising the risk of deflation. “It’s plain to see there’s a ton of slack in the economy,” he said. “We’re not managing to generate enough demand to absorb all these productive resources in the economy.”

Mr. Berner is also studying the role that slack and deleveraging are playing, but he draws very different conclusions from Mr. Hatzius. Excess capacity is being reduced more quickly than Mr. Hatzius believes, Mr. Berner said. That will help businesses raise prices and improve profits, thus heading off the threat of deflation.

What is more, Mr. Berner argues that the deleveraging process is much further along than Mr. Hatzius contends, which will encourage consumers to start spending again. He expects economic growth in the second half of 2010 to run at more than 3 percent, roughly twice the 1.5 percent rate Mr. Hatzius projects.

If Mr. Hatzius is right, unemployment will still stand at 9.7 percent at the end of next year, slightly higher than it is now. Mr. Berner says he believes unemployment should sink to 8.7 percent by then. As for Friday’s numbers, Mr. Berner is calling for a private sector gain of 145,000 jobs versus Mr. Hatzius’s prediction of 75,000 new jobs.

Either way, both predict unemployment will remain at uncomfortably high levels for several years.

One answer, Mr. Hatzius says, is another round of stimulus spending by Washington to fend off the deflation risk he worries about.

Mr. Berner was skeptical of the stimulus bill passed in 2009, and he still “doubts that traditional fiscal stimulus is the right tool for the job.”

Instead, he and his colleague Mr. Greenlaw argue for new mortgage rules that would reduce foreclosures and steady the housing market, payroll tax credits to encourage hiring and a new job training corps for unemployed workers.

“Friday’s number is just one tile in a mosaic,” Mr. Berner said. “From time to time, it’ll be like I’m winning, from time to time Jan will be winning.”

“The truth is that it’s just a crummy moderate recovery,” Mr. Berner added, hedging his bets. “We’ll both testify to that.”

(source: NYT, August 5, 2010)

Reflection Series: Jim Walker's 2010 prediction

Planning Alert: Predicting the Next 12 Months
by Dr. Jim Walker, Asianomics Limited, 19 January 2010
Gold, Unemployment and Inflation

• Gold will increasingly be viewed as a safe haven and a store of value. Despite no emergence of consumer price inflation it will rally hard as physical demand increases and subjective valuations rise. The current system of central banking is fatally flawed and gold is one of the few acceptable prospects as an anchor for a new world financial system.
  
• Over the next few months, before the financial crisis reasserts itself in a meaningful way, regulators will be busy enforcing costly new prudential regulations and restrictions on banks and financial services companies. Along with the removal of easy money injections these will weigh heavily on bank profitability. Expect a sector de-rating.
  
• Global growth will disappoint as the private sector in developed and emerging countries does not recover as expected. The weakest link in the demand chain will not be the consumer (who will be subdued) but business investment. Interest-rate signals are too confusing, capacity too plentiful and the outlook too uncertain (both in terms of demand and taxation) for capital spending to revive.
  
• Unemployment in the U.S. and Europe will continue to rise with the headline rate exceeding 11% by end 2010 in the U.S. Consumer demand in the global economy has reset to much lower levels than pre-crisis.
  
• Monetary inflation in China will cause major problems in overcapacity and asset prices. Generalised consumer price increases in non-tradable goods and services will rise sharply in 2010. A crackdown in monetary expansion will lead to the re-emergence of recessionary signals in the near term.
  
• By the end of 2010 world growth will again be contracting as the credit contraction in Western economies intensifies and the Asian domestic demand story disappears. Only India truly has a domestic demand-led economy in the region. Commodity prices (industrial metals in particular) and commodity currencies will be in general retreat as a result.

Global Recession

In short, after eight months of market rallies and the most extraordinary experiment in monetary and fiscal policy ever, we are more concerned about the market and economic growth outlook today than we were 12 months ago.

Could markets hang on in there for another year? Yes, it is possible. However, it is not our central scenario. Markets and taxpayers are pushing central banks and governments to normalise policies. The process of doing so will show the world that we are not even in the third innings of this crisis. Money can paper over the cracks in economies and financial systems for a while but it cannot cure the underlying cause of the malaise: the distortions and misallocations of capital that built up in the preceding boom. These can only be addressed by liquidation and by time.

2009 has been the eye of the storm in the global financial crisis. In 2010 the constraints to public policy will become apparent. We expect global GDP growth of no more than 2% in 2010 – effectively a recession, if we follow the IMF’s definition pre-crisis of global recession as 3% GDP growth.

About the Author

Dr. Jim Walker is founder and managing director of Asianomics Limited, an economic research and consultancy company servicing principally the fund management industry. Formerly chief economist at CLSA Asia-Pacific Markets, he was one of the few economists who correctly predicted the 1997 Asian financial crisis and the current global recession. This article is excerpted from “Green Planet: State of the World,” a 76-page Asianomics report published in December 2009. Asianomics Limited is a subscription only service. For further details please visit the Asianomics website at www.asianom.com.

(from http://www.cfoinnovation.com/, January 19, 2010)

Congress should cut taxes

... quoting David Rosenberg:

“While there will be many economists touting today’s [February 5, 2010] report as some inflection point, and it could well be argued that we are entering some sort of healing phase in the jobs market just by mere virtue of inertia, the reality is that the level of employment today, at 129.5 million, is the exact same level it was in 1999. And, during this 11-year span of Japanese-like labour market stagnation, the working-age population has risen 29 million. Contemplate that for a moment; fully 29 million people competing for the same number of jobs that existed more than a decade ago. That sounds like pretty deflationary stuff from our standpoint.

“Not only that, but consideration must be taken that in 2009, we had a zero policy rate, a $2.2 trillion Fed balance sheet and an epic 10% deficit-to-GDP ratio. You could not have asked for more government stimulus. Yet employment tumbled nearly 5 million in 2009.”

Finally, a very sad chart, courtesy of David. Those in the 25-54 year-old male category have seen their total number of jobs fall back to the level it was in 1996. Fourteen years later, and the “breadwinners” who are supposedly in their prime have seen an almost 10% drop in employment.

As noted above, January employment numbers are very volatile, and are likely to be adjusted either up or down by a lot in coming months. But this report was not the disaster of December. It still shows a very weak economy that certainly does not need a large tax hike next year. I hope we start seeing some positive numbers soon, but I am not optimistic that we are going to see the 200,000-plus new jobs per month we need to really start denting the unemployment numbers, for some time. Not when the National Federation of Independent Business says 71% of small businesses do not plan to hire this year.

The Fed is taking away quantitative easing. Stimulus spending is exiting in the last half of the year. States and communities are having to either raise taxes or cut spending by $350 billion! I heard on the radio coming back from the gym (I think it was my friend Steve Liesman on CNBC) that there are now 55,000 fewer teachers than a few years ago.

And again from the NFIB, small businesses see very tight credit conditions, which makes it hard for them to expand (see chart below). The headlines this week from the Fed banking survey said that banks were prone to be less tight, but the NFIB writers went deep into the report. What they found is that very large banks are willing to be less tight in their lending standards. Smaller banks were in fact not as easy. Loan demand is falling. Consumer credit actually declined slightly in December, after plunging in November. If you can’t count on Americans to buy during Christmas, the world is in fact moving to the New Frugal.

All this is not the stuff that robust recoveries are made of. We drift back into Muddle Through the last half of the year, I think. And if Congress does not act to postpone or mitigate the enormous tax increases due in 2011, we slip back into recession. It will be a policy error of major magnitude to raise taxes with 10% unemployment and a weak economy.

(from TheStreet.com, February 5, 2010)

Reflection Series: Niall Ferguson at Carnegie Council

"Chimerica is a fantasy country that I dreamt up a couple of years ago. It's the economy you get when you add together China plus America. Chimerica has been, in many ways, the key to the way in which the world economy has worked in the past ten years," says Niall Ferguson.
This Carnegie Council event took place on November 20, 2008. For the full video, audio, and transcript, go to http://www.cceia.org

Damien Cleusix's thoughts on Commodities

"Global growth (China tightening could take the upper hand given investors obsession with the story…) will be the referee with regard to the timing as continued robust growth could mask some of those dynamics for some time but ultimately we will have a correction to be remembered...Observers have focused too much on what happened to financial markets to explain the rapid slowdown we witnessed in 2008-early 2009... our contention is that even without it, we would probably have a "commodity price too high" induced mild recession..."

Full pdf here

Attachment	Size

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First_Quarter_2010_GTAA_Commodities.pdf	1.67 MB

"Inflate or die"

"Inflate or die." That's been the story for years. But today if you continue to inflate you're dealing with a global market and powerful creditors. Our number one creditor is China. China holds a staggering $2.3 trillion in reserves, 70% of which are US securities. China is looking at US money creation (inflation), and wondering what to do about it. Here's an idea - why doesn't China buy up the US with China's ever-growing hoard of US dollars? Wait, maybe they're doing it - this year, for the first time in history, China spent more buying US assets than the US spent buying Chinese assets. Ah well, as one jokester put it, it's going to be tough when Chinese families have American house-boys.

Below is the dire picture from the viewpoint of Austrian economics.

The Austrian Monetary Theory of the Trade Cycle offers a political-economic explanation of why an economy's debt-to-GDP ratio may rise over time. Output gains fall short of the government-sponsored circulation credit growth rate. With this in mind, it might be insightful to briefly recall the so-called "debt dynamics."

If an economy's debt-to-Gross Domestic Product (GDP) ratio is allowed to rise further and further, interest rates must keep declining so that borrowers do not default on their debt. In the short-run, lower rates might prevent widespread bankruptcy. However, a policy of pushing interest rates down would by no means offer a solution to the underlying problem.

In fact, an artificial lowering of interest rates through the central bank would represent the very process that Austrians consider a perpetuation of the fateful expansion of circulation credit that must end in a collapse of the monetary system.

Russell's Comment - For the sake of argument, let's say the Austrians are correct, and in the future we face a collapse of the monetary system. What then? If the current monetary system collapses, nobody will know what any currency is worth. In that event, I'd want to be 100% in gold. The reason is - as the monetary system moves ever-closer to collapse (distrust), people will turn to the one currency that has been trusted and hoarded since Biblical times, and, of course, I'm referring to gold.

If your nation's currency is losing purchasing power and is being devalued, how much is gold worth in terms of your currency? The answer is, in that case, the price of gold is open-ended in your currency, since you will pay any amount in your fading currency to obtain money of unchallenged value. What's a life-saver worth to a drowning man? Answer - It's worth everything he owns.

Comments - There's no question about it, the stock averages are pushing higher. In view of that, there are two questions that might be asked. (1) Take the move at face value. Is the market correctly discounting better times ahead? I believe this is the widely-held view. The market's function is to discount. Therefore, the market is now discounting better times ahead.

But what if we are experiencing a bear market advance? Following the 1929 market crash, which ended in November 1929, a huge rally occurred. By April 27, 1930, the rally had recovered over 50% of the ground lost during the 1929 crash. Many investors bought the '29-'30 rally on the thesis that "the worst is over" and that better times lie ahead. Many thought it a resumption of the bull market.

(2) The great counter-trend rally ended in April 1930 at 294 in the Dow. Following the rally, the market turned down and the Great Depression began. The lesson - rallies in bear markets don't necessarily reflect good times ahead. And that's about where we are now.

When life is a puzzle, I like to go back to fundamentals. The most basic of fundamentals (Dow Theory) is that the market runs from extremes of overvaluation (where I believe it is now) to extremes of undervaluation, a place where it has not been since the early 1980s.

And the question is - are we now on the long winding path to extreme undervaluation? I really think that's what's happening now. And I ask myself, how does this help us with positioning ourselves for the coming years?

First, if equities are headed (over time) toward undervaluation, I don't want to be loaded with common stocks. I'm not a trader so holding stocks, even top-grade blue chips, is not the way I want to go.

As for money instruments (bonds, notes, bills), I think as the dollar sinks over time, interest rates (now abnormally low) will head higher. That leaves out bonds as an investment as far as I'm concerned. Besides, if I hold a bond yielding 4%, and over the next year the dollar drops 5%, I'm out money, and I'm out purchasing power.

So where does that leave me? It leaves me holding as much in the way of precious metals (particularly gold) as I'm comfortable with. So half of all my liquid assets are in gold. But I don't want to put all my liquid assets in gold, because in investing nothing is guaranteed. The other half of my liquid assets I'm going to leave in dollars, because that will give me time to think, and hopefully, over the next six months to a year the situation will clarify.

This may be the time to repeat an old Russell aphorism. "In a primary bear market, everyone loses, and the winner is the one who loses the least."

A final thought. As I read my voluminous daily and weekly material, it occurs to me that most investors and most analysts are viewing the current situation as a "bothersome, temporary patch" that should, within a few years, give way to normalcy, and I'm talking about the "old normal." In other words, after a year or so "this too shall pass" and stocks should be heading higher again as they usually do once we return to the good old normal days.

I think almost everybody's on that side of the boat. But it's not going to happen. That's the Warren Buffett optimistic view, "Don't sell America short. Stocks go up over the long haul."

I believe too many people are on the optimistic side of the boat. The boat is about to list the other way. The unexpected trend would be a long journey towards deleveraging, devaluation and deflation, all leading to an even more recession or depression.

You say "it can't happen here." Maybe so, but I'm not playing it that way. In the investment business anything can happen, and it's been almost three decades since we've experienced a great bear market bottom, during which stocks sell at extreme undervaluation. As far as I know, there's never been a period this long without the appearance of a great bear market bottom.

(from ww2.dowtheoryletters.com, January 23, 2010)

Pension Funds And Recession

Participating in the meeting with CalPERS in February 2009, I learned how CalPERS work with hedge fund managers. The hedge fund strategy is written into the contract and serves as an input into the calculation of the entire CalPERS risk management model. To change the strategy, the fund manager must have the approval from the CalPERS. Understandingly, the fund manager strives to maintain CalPERS funds under the management and faces the dilemma of achieving the best performance versus maintaining the funds.

I felt that hedge fund managers don't have enough flexibility to adjust to the market conditions and take advantage of fast changes to maximize their performance. New CalPERS CIO Joseph Dear proposes to revisit the structure of management fees to achieve better alignment between the CalPERS partners and investors interests. He also agrees with the need for the market regulation and stresses, that the believe in markets self regulation is colossally expensive mistake.

Nouriel Roubini Discusses U.S. Banks, Recession and Risks

Nouriel Roubini has a firm opinion on how US government should handle banks. He expressed it in his interview with Bloomberg.