market folly

Today we present you with hedge fund Prologue Capital's January investor letter. In their latest market commentary, Prologue's Chief Economist Tomas Jelf covers their macro thoughts. In reference to the US economic situation, Prologue thinks that the recovery is playing out as they envisioned and have discussed in previous commentaries. They continue to expect positive signs throughout the first half of the year due to inventory lift and demand improvement. They also harp on the fact that the main thing to pay attention to is not job creation but rather the extent to which it will reduce unemployment. The hedge fund thinks that even in the most 'bullish' of scenarios for the economy, that the US will "have very substantial slack in the labor market throughout 2010 and well into 2011."

Prologue also makes special note of the situation in Europe and point out their economy has notably decelerated since their last investor letter. He also notes that the inflation outlook in Europe looks stable. In terms of inflation in the US, they largely expect the Fed to leave interest rates unchanged until possibly the fourth quarter. Inflationary expectations will remain low and then gradually begin to head higher.

Turning to the recent hot topic of sovereign defaults, Prologue thinks that the recent situation in Greece could possibly signal more danger. Regardless of future outcomes, they feel that government credit will be punished for some time going forward. They think greater risk premiums are in order for Portugal, Spain, and France relative to that of Germany, Netherlands, and Ireland. We've covered this notion before when we highlighted that hedge fund manager Kyle Bass of Hayman Capital was calling for sovereign defaults a long while ago.

Embedded below is hedge fund Prologue Capital's January letter to investors:




Click the 'download' button in the above document viewer to get the .pdf (RSS & Email readers will need to come to the site to do so).

We had also posted up Prologue's December investor letter where we learned they were fond of forward curve steepeners, so check out their macro thoughts there as well.