Hedge Funds See The Economic Collapse Coming

The titans see trouble approaching:

Speaking at the SALT Conference in Las Vegas on Wednesday, Bass said: “If I was to draw an analogy to where we are today, comparatively speaking, to where we’ve been in the past, I think we’re in March or April 2007 in the context of the credit and equity markets…”

A number of hedge fund managers have been raising concerns about liquidity, or the lack of it. The idea is that if the market sells off, there won’t be enough participants to take the other side of the trade, exacerbating the falling prices.

Fellow panelist Leon Cooperman, the founder of Omega Advisors, said earlier during the discussion that he thinks the market is not well.

“My observation is the market is reasonably fully valued, but the market is broken. The market structure that my father dealt with is different from the market structure I’m dealing with,” Cooperman said…

Macro fund manager Paul Brewer, the CIO of Rubicon Fund Management, said on the panel that liquidity for them has been fine, but they have seen some “peculiar air pockets” where it’s tricky to get out of positions.

“Actually, the price-makers are retreating. They don’t take risk anymore. And so, a lot of the trading is by appointment.”

Translated, that is another way of saying investor amygdalae are beginning to develop and fire off. Now they are operating as if there is danger. All of this is a gradual spectrum we are moving along, and this is just the beginning. Amygdalae will develop further, and there will come a tipping point where one level of amygdala development will cause behaviors in the market which will increase amygdala development to the next level, in a feed forward mechanism that will increase exponentially.

Once you reach that point, things will move quickly/ The house of cards will all come down at once as everyone scrambles to salvage what they can from a system which is promising far more worth than it can actually yield.

Raoul Pal sees it:

Closely-followed former global macro fund manager Raoul Pal gave a dark warning for the US stock market and the global economy.

Pal said that the structure of the market right now reminds him a lot of 2000. He pointed out that it’s been a complicated market that’s up sharply and down sharply in these short-term swings, but over longer periods of time it’s really done nothing. He added that this volatility has been scaring both the bulls and the bears. In other words, everyone is losing money.

Then there is Burbank:

Global macro hedge fund manager John H. Burbank III, the chief investment officer of $4.1 billion Passport Capital, gave a grim prediction for how monetary policy will end in the US and China.

“It is our strong opinion that within the next year we could see a major Chinese devaluation of its currency and a US recession,” Burbank wrote in his fund’s first quarter investor letter dated May 5…

He continued: “We believed 2016 would mimic 2008 with widespread deleveraging into illiquid markets. We therefore entered the year defensively with liquidity, long U.S. dollars, yen, rates and mostly U.S. large cap stocks, and short a variety of risk assets that we believed would suffer as funds realized the extent of the market’s problems (not limited to declining reported S&P 500 earnings down -19% from Q3 2014).Three weeks later we were well-rewarded for our prescience; three months later we were hurt for it after an extraordinary policy-induced rally — yet earnings continued their decline.”

That is the story of the collapse. The underlying mechanism would fall on its own if left to its own devices, but leaders are able to manipulate perceptions and behaviors with policy just enough to forestall consequences, and that forestalls the big amygdala development that will bring about collapse. It is still coming, and the ultimate effect becomes worse with each delay, but nobody can predict the exact moment.

This is one headwind working against Trump. I get the feeling a lot of the big players have been betting on a collapse sooner rather than later. Trump could inject enough confidence into the system to forestall the collapse long enough to make all of their bets into very costly mistakes.

It will interesting to see if the big players take a stab at collapsing the system artificially just before the election to cut their losses, or if they place their bets on being able to get Hillary elected and start the collapse that way.