market folly

Today we present you with Paolo Pellegrini and hedge fund PSQR Capital's latest presentation from GRANT'S Spring 2010 Conference. If you're unfamiliar with him, Pellegrini instantly gained fame and notoriety when he and John Paulson discovered the housing bubble and procured a way to profit from the demise. Paulson and Pellegrini's adventure of course was cataloged in the epic story of The Greatest Trade Ever. Since leaving Paulson & Co, Pellegrini has started his own hedge fund PSQR which ended 2009 up 61.6%, largely due to a short treasuries trade they put on very early in the year. (You can see how PSQR fared against other hedge fund performance numbers here). Additionally, we have previously covered PSQR's annual letter which details some of Pellegrini's trade ideas and macro thoughts.

Turning to his recent concerns, Pellegrini's presentation is entitled 'Gold vs. Fiat Money: We can't go backwards, so we have to go forward.' (The title is a bit misleading as the slides don't specifically talk about gold). In it however, he sifts through various mounds of economic data to paint a picture of the economy. He specifically notes that GDP has started to recover but labor compensation is not encouraging and as such, the middle class is hurting. Pellegrini also highlights national net saving to showcase how 'poor' people truly are. The PSQR hedge fund manager attributes this 'poorness' to the fact that the government is mortgaging its people's future.

Pellegrini then focuses on how very few people are saving money these days. We've also examined this paradigm before and postulated back in December 2008 that the savings rate must rise in order to get out of this mess. While it is clear there has been an uptick in the savings rate during the crisis, the fear is that this is merely a reactionary move and will not be sustainable. After all, the historical trend in personal saving is trending decisively downward. Add on top of this the fact that many households saw an increase in their total liabilities as they maxed out credit cards, spent beyond their means, and bought houses they couldn't afford. Pellegrini notes that, "in fact, the crisis was precipitated by 'dissaving'."

His presentation then delves into topics of monetary policy and we'll let you read his thoughts in the presentation below. Suffice it to say, he simply believes that if we are to exit this mess (and/or prevent it from happening again in the future), four things should change:

- Interest rates should track nominal per-capita GDP growth
- Credit growth should counter the economic cycles
- The Fed should regulate credit growth through capital requirements
- Fiscal policy should address distributional issues

Embedded below is Paolo Pellegrini and hedge fund PSQR Capital's full presentation:



You can download a .pdf copy here.

It's clear that Pellegrini still has concerns regarding the macro situation, as well as monetary and fiscal policies. Currently, we don't necessarily know how he's positioned his portfolio given such circumstances. However, we do know that heading into 2010 Pellegrini advocated being short US equities, short the US dollar, and long commodities amongst other trades listed in PSQR Capital's annual letter. We'll have to see if we can glean a more recent portfolio update from the man who saw the crisis coming long before many.

For more of our coverage of prominent investment manager commentary, be sure to head to our compilation of hedge fund investor letters and scroll through them. And for Pellegrini and Paulson's epic journey of shorting subprime, head to The Greatest Trade Ever.