Hedge fund redemptions to crash Q1 markets
Posted on 22 December 2008 with no comments from readers
When reading about the $50 billion Madoff hedge fund fraud it hit me on the head: hedge fund redemptions at the end of this year are going to be absolutely huge, and that will mean a massive sell-off in global capital markets in the first quarter.
That would also mean a further rally for the the US dollar, as assets sold are redeemed largely in US dollars and thus boost demand for the greenback. Gold might take a slight set back although will more likely be in increased demand as a safe haven asset and diversification against the coming dollar crash.
Inflationary stimulus
All this turmoil would really put the wind up the incoming US president and his team who will respond with bigger than expected stimulus packages and bailouts. That will make the upcoming and inevitable inflation even larger when it hits, and at the first whiff of inflation the bond market will tank and with it the US dollar.
Investors face a double whammy in 2009 – from hedge fund withdrawals crashing the stock market and later a dollar collapse. That would take capital markets to a real bottom.
Market bottom
My prediction of the Dow at 4-5,000 and gold at $4-5,000 an ounce for later next year still stands, and hedge fund redemptions followed by a dollar collapse will be the driving forces to achieve that bottom. It might take until 2010 to get that far but no longer.
Now try to argue the reverse: will there be sellers or buyers in capital markets after year-end redemptions come in? What is the chance of a positive tally for redemptions? Zero chance! Is the dollar bond market at a top or about to go higher? Is it hell!
Actually this will offer a great point to buy up the finest US stocks at rock bottom prices but who will have the cash to buy by then? Certainly not anybody taking an optimistic view of the market outlook now.
I can empathize with those who feel the Madoff fraud is some kind of a warning of things to come. These frauds do not usually happen in isolation and are a symptom of the underlying malaise.
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Interesting thought, Peter. Thanks.
It would not surprise me to see the DOW below 6000 while I am not sure it will dip under 5000 though.. For it to dip to the 4-5000 mark you mentioned it would have to take a 50% beating from here. The low fuel prices is pretty much a big cut for US consumers which is almost like a huge tax break for them. Fuel is now half the cost for most US consumers which means it puts extra cash in their pockets every month. My guess is that fuel will also get cheaper in the 1st quarter.
Thanks Andy, Not sure the fuel price cuts will feed through fast enough to prevent the Q1 sell-off. But they will be a factor in the recovery phase. All recessions and even depressions do eventually end, and the stock market bottom will be in at least 9-12 months before the real economy shows a recovery.
Robert Napier, the author of a book about market bottoms, thinks markets will rally for two years and then have an even bigger crash down to 4-5,000 on the Dow. I just do not see where a rally will come from as fund managers will be reluctant to come out of cash and then there are the hedge fund trillions.
If say hedge funds have $3 trillion under management – which is one figure I have seen – then Madoff’s $50 billion fraud was almost a material item. It will certainly hasten redemptions which must already be stacking up given the appalling market in Q4 which would frighten even the toughest players.
Those redemptions have to be made – and so the sell-off has to follow. This is the old trying to catch a falling knife problem – maybe by the summer it will be time to buy? But by then we will all feel really shot to pieces.
I think everyone is looking for a bottom and an entry level but no one really knows when bottom will hit whether it be in the Middle-East,Asia or the US. Asian markets have taken quite a beating as well but Asians love to gamble and love to buy stocks as well. When the recovery starts I like Asian markets as opposed to the US market. In the Middle-East things are just a gamble as they fall for no reason and climb for no reason. Media censorship in the Middle-East is also a problem as news for stocks only comes out after the facts are out and bad news never hits the media till after everyone is pretty much screwed over like the people that bought Amlak and Tamweel.
I am very bullish on Ultra-Shares (ETF’S) in the US for oil once oil bottoms out in the near future. I expect further oil dips into the $20’s.