hh5>Until recently, John Burbank’s Passport Capital was one of the top 15 performing hedge funds in 2015.

Recent events have only led to an even higher YTD P&L making Burbank one of the top performing managers of 2015: the $2.1bn Passport Global fund was up 14.6% at the end of August and the concentrated “special opportunities” fund was up 30.6%. The reason: in recent months Passport placed numerous commodity and emerging market shorts: trades which have generated substantial returns even as the rest of the “hedge” fund peanut gallery blamed either Bridgewater, or – in the case of Bridgewater – blamed the Fed.

Burbank did not blame anyone, and instead shorted the one company we said in March of 2014 would be the best bet on China’s collapse:Glencore. He has made a killing since, with both GLEN CDS soaring, and its stock price crashing 55% in 2015 alone to all time lows.

More apropos, having accurately foreseen the current events instead of just levering up on even more beta and praying the BTFDers return and bail out his underwater positions, Burbank’s opinion actually matters as does his outlook on what happens next.

What he foresees is not pleasant.

In an interview with the FT,  Burbank said years of QE had caused a misallocation of capital across the world, while the end of QE last year triggered a dollar rally with consequences that were only now beginning to be realized.

“The wrong people got the capital — emerging markets countries and corporates and a lot of cyclical companies like mining and energy, particularly shale companies — and this is now a major problem for the credit markets,” he said.

Thank the Fed for that: it was so obvious that 7 years of ZIRP and QE would lead to epic capital misallocation we have been warning about it year after year, most explicitly in April 2012 when we previewed the surge in buybacks and M&A at the expense of capex spending and actual organic growth. Eventually, when enough capital flooded the entire world, even Saudi Arabia had no choice but to directly engage the US shale sector which, ironically, is the main reason why the US is on the verge of a recession.

Back to Burbank who warns that “the world economy is locked on a course towards an emerging markets crisis and a renewed slowdown in the US, regardless of the Federal Reserve holding off on a rise in rates last week.” He adds “that the Fed would eventually be forced into a fourth round of quantitative easing to shore up the economy.”

So with commodity prices dead-cat bouncing in mid 2015 only to tumble anew, alongside the S&P which fell after the Fed decision, are emerging markets, whose MSCI EM index is up 9% since the Black Monday lows, out of the woods?

Not at all: according to Burbank investors are “not recognising the risks… and Passport was not pulling out of its bearish bets.”

The dollar rally caused by “asynchronous QE” — the early end of money printing in the US relative to Japan and the eurozone — and the economic fallout from a slowing China guaranteed a financial crisis in emerging markets that would rebound on the US, he said.

Burbank’s conclusion:

“All of that turmoil around the world will come back and slow down capex and hiring and consumer buying in the US, and that will make the Fed realise they should be easing and not hiking,” he said. “I think we are on the precipice of a liquidation in emerging markets, and this feels the way that the fourth quarter of 1997 felt.

But more QE will not only not fix anything, it will only make the EM bubble – currently in its pre-bursting phase – even bigger as it promptly crushes the dollar, which just shows how terrified everyone truly is of just biting the bullet and finally undoing years and decades of central bank-driven capital inefficiencies and the biggest global asset bubble in history. No wonder hedge funders around the globe, both the worthless and the successful ones, are desperate for more Fed generosity.

Of course, there is what the Fed “should” do, and what it will do. We completely agree that the Fed will ultimately unleash QE4 – we have said it since December 2013 when the Fed first announced the tapering of QE3.

The only question is with QE4 (and/or NIRP) inevitable, what is the right trade: if the Fed has indeed lost its credibility, more QE4 would be the final nail in the market’s coffin, and lead to a collapse in the dollar and the commencement of helicopter money. To be sure, it may result in a brief spike in stocks, but just like last Thursday, that “briefness” lasted all of 60 minutes. Alternatively, the spike may last, just like in Venezuela – the Caracas stock market has been vertical for years now; sadly the problem is that courtesy of local hyperinflation, there is no economy in which to use the proceeds from selling stocks.

So with faith in the Fed and fiat about to evaporate, we only wonder: is Burbank buying GLD… or actual gold.


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