Anatole Kaletsky’s macro column in The Times is an excellent read, week in week out. The prose is crisp and the opinions are clear. Readers know where Anatole stands.
Witness his recent comments on Greece and tensions within the eurozone:
I cannot claim to have predicted the turmoil in Greece, Portugal and Spain when I wrote in early January that “the eurozone will be tested to near-destruction” this year. I was merely repeating what I had written in the depths of the 2008-09 financial crisis.
I can, however, claim some prescience in using the words “test” and “near-destruction”. For it is now clearer than ever that the single currency will survive this test. And if the conditions that it faces in the Club Med countries continue to deteriorate, the euro’s near-death experience will, if anything, accelerate the march towards a fully federalist United States of Europe….
Where, then, is the catch? The answer lies in that old central bankers’ bugbear from the long forgotten days before Lehman and Northern Rock, “moral hazard”. If all the profligate politicians and voters in Southern Europe (or indeed in Westminster, Paris and Dublin) were offered unlimited EU guarantees, there would be no end to the fiscal debauchery…
For Greek voters to continue accepting the necessity of bitter medicine, the country must remain under severe financial pressure. This means that investors must be left in sufficient doubt about the terms and duration of any guarantees to keep demanding such high interest rates from Greece. That, in turn, means that financial conditions in Portugal and Spain must also remain uncomfortable…
Which brings us to the worst news of all. The extreme deflationary policies now being imposed on the weakest eurozone countries point to frightening implications. The Greek and other Club Med governments can slash their deficits only at the cost of huge falls in economic activity.
Etc.
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What’s missing from the above, and from other Kaletsky columns in The Times, is any mention of this – the GaveKal investment firm that Kaletsky co-founded about eleven years ago.
This newsletter explains the thinking behind a GaveKal fund launched in the autumn of 2007 — the European Divergence Fund — which Kaletsky and his co-founders seeded from the outset, along with a hedge fund partner, Corriente Capital.
From the 2007 note:
For ten years, investors have made money on convergence trades (i.e., Italian rates falling to meet German rates). These convergence trades were always based on politics, not economics. However, in the long-run, economics always wins out. And now, as credit conditions tighten around the world, should be the time when this happens.… As Warren Buffett once said: “it is when the liquidity tide retreats that we see who has been swimming without a swim-suit”. In today’s world, it our belief that the European governments will be found to be the nudists on the beach.
As we see it, the European Divergence Fund should appeal to two kinds of investors: Firstly, investors who share our view that financial conditions, and especially interest rates, do not reflect a common European economic reality. The second should be investors who today have large positions in European government debt and who should see the European Divergence Fund as a solid “hedge” to their existing portfolios. On the off-chance that the current credit crunch starts to impact Europe, investors in the European Divergence Fund will be richly rewarded.
It seems the fund had a rocky first year, losing 20 per cent from inception. But in May 2008 GaveKal remained confident enough to state:
Today, although the credit crunch may still be behind us, the Southern Europe slowdown is still in front of us. We thus feel that the trade makes as much sense as ever.
The GaveKal team clearly kept their nerve thereafter. We now learn from Bloomberg that the fund is due to make a $320m payment to investors, having jumped 93 per cent in 2008, declining 19 per cent in 2009, and then surging once more this January with a 15 per cent gain.
That’s terrific news for Anatole. Maybe he should share it with his readers?
Related links:
Baby, euro rich man now – ft-dot-comment
How a Texan Bagged Europe – WSJ