Thursday, January 29, 2015

Extraordinary Fund Manager Myopia

I answered a survey today from a major consulting firm that canvasses senior people in portfolio management and investment analysis.  I won't reveal the firm's name but I will get a copy of the survey upon publication.  The questions addressed investment professionals' expectations to see in the markets over the near term.  I expect a bunch of bad news, unlike many pros who manage serious money.

A whole bunch of obvious risks have not deterred asset managers from seeking safe havens.  Teachers' pension funds are piling into US residential real estate investments at all-time high prices.  Currency arbitrageurs have not been deterred by several trading firms' blowups after the Swiss repriced their currency.  Corporate earnings and P/E ratios at generational high points eventually revert to their historic means.  I could go on about these things but the only people paying attention are on the fringes of the finance sector.  Mainstream thinking among portfolio managers still encourages chasing yield.  The Wall Street crowd assumes central bank puts under asset markets can never fail.

Geopolitical risks should compound any sane money manager's planning.  Russia's diversion of reserve funds from infrastructure investment to bank backstops should signal a low-growth future.  Emerging market stocks that sold dollar-denominated debt will struggle to make higher interest payments while the dollar stays strong.  The enormous potential for instability in Venezuela, Argentina, and Saudi Arabia should throw cold water on any bullish case for those countries in 2015.  Money managers plow ahead anyway, oblivious to contrarian cases.

The hard asset hedge crowd has enough myopia of its own.  Perpetual fans of precious metals don't think about the impracticality of bullion bars in daily transactions.  Stocks in the natural resource sector have cratered since 2014 and will stay low as long as currencies of hard asset producing countries stay weak.  The oil sector shakeout means a lot of so-called bargain buys among junior producers will instead become bankrupt buys as major producers buy out their nonproducing assets.

Watching supposedly smart money managers make increasingly dumb bets is a fun pastime.  I like it when dumb people lose millions after greed and hubris destroy their judgment.  A penultimate day of reckoning awaits investment professionals who assume central banks will never lose control of currencies or yield curves.  Hedge fund managers will learn the hard way how to write farewell letters to their formerly wealthy clients.  I will relish bottom-fishing for cheap assets once myopic fund managers are wiped out.