market folly

Today we wanted to present you with the January investment letter from Josh Berkowitz's global macro hedge fund Woodbine Capital. Berkowitz of course previously plied his trade at Soros Fund Management before founding his new firm. When we covered Woodbine's prior commentary, we saw they were focused on the dispersion between industrialized & emerging worlds. This theme still prevails and we'll detail their current outlook below. Other current themes include: exit strategies from accomodative monetary policies, fiscal consolidation, emerging market demand, and capital goods divergence. In the past, we've also posted up an in-depth look at the above which are Woodbine's five current investment themes.

Overall, Woodbine says that global re-balancing is the most important macro issue currently. Going forward, the focus will be on fiscal tightening and they highlight that the US and the UK are very unlikely to drive incremental growth in this rebalancing act. They also note that, "Through this period of higher uncertainty we are navigating our pro-cyclical risk through tactical shorts in global equities."

In terms of their current portfolio positioning, they have been adding to bullish fixed income exposure, bullish foreign exchange positions in Asia, positions in emerging market banks, long positions in commodity intermediaries, and short US companies focused domestically. To play the dispersion theme we've posted up about before, Woodbine is net long vega and they've purchased tail risk options with the proceeds they've received from selling volatility.

Woodbine doesn't feel that sovereign risk is the next crisis. Instead, they believe it is merely an extension of the current one. In order for the global re-balancing to take place, fiscal tightening will definitely need to be more proactive they argue. Woodbine concludes that,

"The natural adjustment for countries on the wrong side of global imbalances is to live below their means for an extended period of time, reversing the process from the pre-crisis period. Fiscal policy plays a far more important role than monetary policy in that process. Countries on the right side of those imbalances can help in the adjustment with the pursuit of policies that encourage domestic growth. Exchange rate policies are the most relevant symbol. We remain optimistic that this need not end badly for the world economy. There will be winners and losers in every cycle, but government policy has a lot more control on the outcome than in the past."

Embedded below is Woodbine Capital's January letter to investors. RSS & Email readers you will need to come to the site in order to view it:



So in large they stick with their current investment themes from last time around. You can't argue with the notion that the UK and US can't be relied upon for growth going forward. Given all that these countries have to digest, a tepid response is the most likely. What will be interesting to watch is the response from emerging markets. As we begin a cycle of fiscal tightening, you enter a global situation with a ton of moving parts. Throw one wrench in the system and everything goes haywire. This just goes to show how difficult of a job the policymakers have in their attempts to perfectly time everything. After all, we know that market timing can be a b*tch.

For more great investment insight from hedge fund Woodbine, check out their in-depth look at everyone's favorite precious metal in their piece, Gold: The Anti-Goldilocks. We'll leave you with this gem from their letter: "There is no free-lunch in a deleveraging cycle."