Sir Michael Hintze is the 62-year-old founder of the CQS hedge fund based in London. Since founding his fund in 1999 it has grown to $17 billion in size with 250 operatives around the world.
Speaking to the AFR in a wide-ranging interview, Hintze has neatly put his finger on one of the key volatility amplifiers of the 2016 global market turmoil.
Hintze talked about the lack of inflation and said the global economy hasn’t yet really entered the post-crisis phase. That’s because there is enduring quantitative easing by central banks and the trend to negative interest rates, NIRP, as a policy tool is growing with the Bank of Japan the latest to join the club.
But it was the new rules that global regulators have put in place to ensure the 2008 crisis never happens again which came in for special attention.
“One could argue that pre-GFC there was too much liquidity and not enough solvency. Now, however, I think we risk having too much solvency and insufficient liquidity,” Hintze said.
That’s important for traders and markets because the new rules mean banks have to hold increased levels of capital against traded assets. That’s increased the cost and reduced the returns available from these trading and warehousing activities which are crucial to helping markets clear at times like these when banks take on risk others are afraid to hold.
Hintze highlighted that regulators dealing with the market-rigging scandals around Libor and other market benchmarks is a good thing but he said regulation was becoming “ever-more complex.”
Liquidity regulations had got to the point of madness Hintze said. Last year, CQS and other funds were forced to take the cash they had on deposit at a US bank back (our emphasis):
Is it better for the world that people don’t mess around with Libor? Yes. The fact now you have technology that means you have less insider trading and you can actually catch these bad blokes is a good thing.
[But] I don’t know if it helps to make the capital that major US banks have so damned high that they won’t accept my money deposits.
For instance, last year myself and every other money manager that I spoke to had to take their money away from a particular US bank because that bank was penalised due to cash being included by regulators to calculate the leverage ratio. This is madness. Why has my riskless cash suddenly become their risky asset?
Perhaps though, Hintze’s most cogent summary of why markets are in such a funk in 2016, why China is having trouble sorting out its currency and stocks, why the Nikkei fell 11% last week and the USDJPY crashed to 110 echoed Ben Graham’s famous quote on the short and long run market mechanisms.
“Markets are voting mechanisms,” he said. “If governments and central banks intervene, there are distortions and you’ve ripped the signalling out of the system, and it’s hard to vote. This means more volatility.”
Ladies and gentlemen, I give you markets 2016.
You can read the full interview at the AFR here.