What the hedge fund manager who played the mortgage mess better than anyone thinks about where we're headed
Even though I do not have a Bloomberg terminal, I subscribe to Bloomberg Magazine. It's very well done. While perusing the new issue at lunch today I came across a fascinating article about Paolo Pellegrini. A native Italian who attended Harvard business school, Pellegrini was one of the key people at John Paulson's hedge fund when it made its staggeringly successful bet against sub-prime mortgages that propelled Paulson's Credit Opportunities fund to a 589.6% gain in 2007.
Mr. Pellegrini has since left Paulson's fund to work on his own hedge fund, PSQR. It's always difficult to tell if someone is a one-hit wonder as many of the perma-bears who had been calling for the demise of the markets for decades were...even a stopped clock is right twice per day, but the PSQR macro fund has produced extremely strong returns thus far (2008 and 2009 YTD) so that lends even more credibility to Pellegrini.
Here's what he has to say about where he thinks things are headed:
Today, Pellegrini’s economic outlook for the next 5 to 10 years is a sobering one. He says the U.S. economy will groan under the weight of budget deficits, increased regulation and household debt. Europe will perform only slightly better, and Asian economic growth will outstrip that of the developed world. “There are going to be huge shifts in wealth around the globe,” he says. “I want to invest in that.”
Pellegrini says the U.S. stock market is likely to generate negative returns when adjusted for inflation. And the U.S. dollar will flag as an unrestrained Federal Reserve dispenses more money.
“In the U.S., there is limited interest among those in power in the stability of the dollar,” he says...
Meanwhile, the price of scarce commodities such as oil will surge as global competition for them heats up, Pellegrini says. Accordingly, he expects U.S. Treasuries to fall in price in the long term, and he’s buying oil futures. In September, he owned Norwegian kroner and said he believed the Australian dollar would benefit from that resource-rich country’s geographic proximity to Asia...
“People were pretending they were earning a living, and they were not,” he says. “Banks lent them the money so they could live beyond their means.”
There is a corollary to that imbalance in the global economy, Pellegrini says. Massive consumption has turned the U.S. into a debtor nation, which will ultimately lead to the devaluation of the dollar, a scenario PSQR is betting on through its long-term short position on Treasury futures and its long position on commodities.
The massive stimulus programs and the resulting deficits will only make matters worse, Pellegrini says.
The article is definitely worth a read. At the very least it is an interesting tale about how Paulson and Co came to make a fortune by betting against mortgages and it may even be a solid prediction of what's to come.
I have been a firm believer that the U.S. dollar will lose value in an orderly fashion as time progresses. This belief caused me to hang on to a large portion of my stock in foreign, dividend paying oil companies even at the apex of the financial crisis.
If the dollar does continue to fall, it doesn't necessarily spell doom for America...much to many posters' chagrin. A weaker dollar will ease the U.S. debt burden and encourage an increase in domestic production, reducing the trade deficit, creating jobs, etc...
On a related side note, I heard yesterday that Bloomberg bought Business Week Magazine. Very interesting. As someone who has a tremendous amount of respect for the Bloomberg organization (not the individual who started the company) I will be very interested in seeing what they do with the historically popular publication. My father's copy of Business Week was a fixture on my family's living room table during my youth, so I've always had sort of a soft spot for the magazine...despite the fact that I do not currently subscribe to it myself.