Hedge funds vs. central bankers
June 19, 2006 (Niall Ferguson - LA Times)

Will inflation, deflation or recession win in the coming months?

IT WAS SUPPOSED to be a summer of love — or at least of low volatility. Just two weeks ago, London hedge fund managers headed to the country for Hedgestock, a two-day event billed as "a Festival of Networking for the Hedge Fund Industry." As at Woodstock, the Who topped the bill. The difference was that at Woodstock, the audience was high, whereas at Hedgestock, only their net worth was high.

The bigger the party, the bigger the hangover. By the close on Wednesday, there wasn't a single stock market in the world that hadn't fallen. Emerging markets, including Brazil, Russia and India, took the biggest hits. Along with China, these were supposed to be the BRICs — Big Rapidly Industrializing Countries. This month they dropped like bricks.

... apparently uncoordinated global tightening of monetary policy effectively shears the hedgies. For years they have been making stupid money by borrowing from central banks at near-zero rates and taking long positions in any market with momentum. "Too accommodative" central banks meant one-way bets and low volatility. Now it costs to borrow, and volatility is back.

AntiSpin: In 1999, the Fed finally took the punch bowl away but not until after the stock market bubble had reached outrageous proportions. Similarly, from 2001 until mid 2004, by leaving interest rates well below the rate of inflation the Fed has allowed asset bubbles to form in everything from real estate to hedge funds. You can argue that by a policy of small, predictable interest rate hikes the Fed failed to instill fear in the hearts of speculators as it intended, allowing the games to go on and on. Finally, the day of reckoning is upon us, and no one knows seems to know quite what's going to happen but our money is on a prolonged stagflation.


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Who is Niall Ferguson? Bio: Niall Ferguson is Professor of History at Harvard University, Senior Research Fellow of Jesus College, Oxford, and Senior Fellow of the Hoover Institution, Stanford.

His latest book, "Colossus", was published by the Penguin Press. In 2003, The Penguin Press and Basic Books (New York) published his internationally acclaimed "Empire", which was accompanied by a six-part British television series. Other works include the award-winning "House of Rothschild" (two volumes), "The Pity of War" and "The Cash Nexus:Money and Power in The Modern World, 1700-2000." Ferguson was the editor of the pioneering "Virtual History: Alternatives and Counterfactuals."

A prolific commentator on contemporary history, he divides his time between the United Kingdom and the United States.