Thursday, 23 March 2017
Last updated 13 hours ago
Oct 19 2011 | 12:59pm ET
Jay Feuerstein is the chief executive officer and chief investment officer of 2100 Xenon, a managed futures affiliate of Old Mutual Asset Management. Feuerstein began his investment career in 1981 as one of the earliest traders and arbitrageurs of the financial futures complex and his resume includes time at Paine Webber, Kidder Peabody and Bear Stearns.
2100 Xenon’s managed futures program was up 13.83% from January through August 2011, while its global long/short fixed income program rose 8%, outpacing the BarclayHedge CTA Index, which was down 0.51% through August. Feuerstein spoke to FINalternatives’ Senior Reporter Mary Campbell recently about market volatility, the inflated nature of inflation fears and why deficit cutting is not necessarily the best response to a recession.
The IMF steering committee recently issued a statement in which it said the global economy was entering a “dangerous phase.” What is your response to that?
My response is, where have they been? [Laughs] I’d say we passed the danger zone some time ago and right now we’re going around slippery curves at high speed…The question is, where is the growth going to come from? Where is the demand going to come from? And how do we get ourselves out of this mess? Especially given some of the stalemates in political circles.
I think that the global economy—whether it’s the U.S., whether it’s China, whether it’s Australia (there are a few pockets of prosperity such as South Africa with metals, and so forth)—is continuing to suffer from too much debt, too little capital and poor government policies that promoted this until it became too painful to withstand. Now governments are faced with choices that are very, very difficult. The problem, in my view, is that governments are making choices that seem correct from almost an emotional, visceral standpoint [but] that I believe are absolutely incorrect. I believe governments are making the same mistakes that were made in 1932 which drove the Depression out another five years.
Could you give me an example of a choice that you think is wrong?
I think that raising taxes and cutting deficits at this time is not the right choice. It’s true that government stimulus is not the most efficient stimulus in the world—Friedman said that using government money to pay for constructions is like digging ditches with tablespoons—but nonetheless, it is the stimulus that’s available in the market right now. When you look at where demand is coming from, much of it is coming from government…and as you cut that back, you are reducing overall demand which drains liquidity from the system. Recently we saw gold fall $300 an ounce in a couple of days—nearly 20% in just a few days—the reason was because the world needed liquidity to pay for some of the reduction in demand. So that’s the big question—do you cut demand at precisely the wrong time? And that, to me, is one of the things that’s wrong.
The same thing with taxes, if you raise taxes you reduce incremental stimulus and as a result you cut demand as well. Bill Clinton was interviewed recently and he is, I think, a brilliant economist, and he talks about more of a partnership between public and private works. I think that’s what you need…and we don’t seem to be getting that.
Government stimulus needs to be paid for, though, and wouldn’t raising taxes be a way of paying for it?
Absolutely, and ultimately government stimulus will be paid for but the model of growth versus deficits versus taxes is not a simple model. In fact, a little bit of inflation would lead to some growth which would lead to higher taxes as nominal incomes rise into higher tax brackets. That’s well known. And so, rather than become deflationary, reduce demand and have the world liquidate assets in order to pay for current imbalances, it might make more sense to try and grow some inflation, which would lead to higher revenue, which overall would begin to pay down some of the deficit. That to me would be a better way to go.
Do you think there’s a certain amount of hysteria surrounding inflation? It hasn’t been a factor in the U.S. economy in years and yet it’s always thought to be looming just on the horizon.
Markets and economies rarely suffer from what they fear. This is just one more case of fighting the windmill of inflation. I don’t see inflation as an issue right now. Bernanke’s Fed telling you that it’s not going to raise rates for a couple of years and that the economic situation is deteriorating and that it remains in a very difficult place tells you that inflation’s not the issue, inflation’s not the problem.
Do you think there’s a possibility of a QE3?
I don’t see any possibility of QE3. I see zero possibility of QE3 and I’m disappointed by that and let me explain: Bernanke could very well be the first Fed chairman to hand over policy decisions to Congress. In his writings, in his book on inflation fighting, Bernanke talks about the role of the Fed and says clearly that the Fed reports to the legislature and that the legislature has the right to set policy, though the Fed then has the right to choose which instruments…it wishes to use to effect that policy. That is a little-known fact, but given the antipathy and the outright aggressiveness—Rick Perry threatening to rough up Bernanke if he came to Texas—[of] that sort of anti-deficit mentality [where] you can’t grow any balance sheet, including the Fed balance sheet…Bernanke I think is going to bow to Congress’ wishes and not do anymore, because QE3 would require increasing the Fed’s balance sheet.
How does current climate affect your trading decisions?
First of all, the strategies which I run—I have a purely fixed-income strategy and then I have a diversified strategy that trades 56 markets including commodities—are systematic. But these systems are based on experience, so they’re not necessarily purely optimized black boxes, they’re really experiential systems based upon relationships that I’ve seen hold true in the 31 years that I’ve been in these markets. That said, I feel that the strategies are in the right place.
…Given the inflation fear, we’ve had the yield curve flattener on since late May, and that’s been a very good trade. In fact, Bernanke’s ‘Operation Twist’ played right into our strategy, so that was good. (Yield curve flattener meaning we’re looking for short-term rates to stay stable as they have been, but long-term rates to drop and flatten the spread between the two.) We’ve been in that trade, not only in the U.S. but in the Eurozone, in Canada and in Australia...Regardless of today’s celebration of the markets, you’re going to continue to see economic difficulty, which means that Operation Twist, which is exactly that, will continue to push that trade narrower…The spread…between three-month and 30-year money, which is currently about 3%, I think that can come in to under 1 and 1/2%.
Another trade that we have is we are long the dollar against the pound, against the euro, and against emerging currencies such as the peso. We are long the dollar because…we believe that the problems in Europe will not be solved without some great pain that will ultimately force money away from the euro into the dollar, the dollar will be the flight-to-quality currency.
So, you’re not one of those who thinks the euro is simply going to disappear?
No, absolutely not. There’s no way that’s going to happen. It’s quite the opposite, actually. I see the euro clinging to its current structure and having to bear the burden of supporting the lagging economies of the BRIC and therefore becoming less valuable.
Any other trades?
I continue to stay long gold, from a flight-to-quality standpoint, I continue to stay with that trade. It was a little bit dicey the last few days as countries liquidated for debts but I think that solutions will muddle along such that there won’t be that wholesale need to liquidate. I’m out of stocks…despite today’s wonderful news, I just don’t like the stock market. I just don’t think global growth is going to be there. I just have no faith in the solutions that have been proposed to make things better.
In bonds, I’m relatively neutral bonds—not short them, that’s for sure, rates are not going up, the world has told you that—but my long position’s been pretty much reduced in terms of outright, but tactically I like the curve flattener.
In commodities markets, currently I have shorts on in the commodities markets—shorts in grains and shorts in oils. Again, the story of an economy that’s sputtering.
You started out by saying that the big question right now is where the growth is going to come from, do you have any idea where that might be?
That is exactly what is puzzling me. With an unemployment rate as high as we have in the world, the U.S. especially, the demand is going to have to come from a few. The only way the situation can correct itself is that interest rates and prices fall so low that they finally meet that inflection point where demand and supply intersect. At this rate, with this lack of job creation and lack of demand and lack of liquidity, I don’t see anything currently that keeps us from a double dip. I think the double dip is going to have to happen and at some point you’ll meet that point where goods are cheap enough and efficiencies are great enough, whatever the unemployment rate would be at that time, and you’ll see things slowly creep back.