On Wall Street, you want to stop dancing before the music stops. You want to get off the train before it gets to the station. You want to get out of bad assets — mortgage bonds, tech stocks, whatever the bubble is — before they collapse.
You want a warning signal.
At SALT Las Vegas, the biggest hedge fund conference of the year, we’re hearing delegate after delegate talk about the bubble bursting.
“I’m going to argue that I think something has fundamentally changed,” said Michael Novogratz, the CEO of Fortress Investments, an investment firm with $US67.5 billion assets under management at the end of last year.
This is the kind of thing that people have waiting to hear — at cocktail parties, at private lunches. They want the signal for when the music could stop.
Across the board they believe asset prices are too high. Mostly bonds, sometimes stocks.
Still, everyone is long the market. No one wants to be the first person out of the market as long as they’re making money. This is a huge issue on Wall Street, and everyone at this conference is now looking for a warning signal.
Here’s Novogratz’s take:
“All that really matters is labour inflation… if that happens, the Fed is going to move.”
Three of the Federal Reserve’s last four rate hike cycles happened when the non-accelerating inflation rate of unemployment, or NAIRU, was 5% or higher, Novogratz pointed out.
And so as we approach NAIRU, Novogratz said, “we’ve already seen the beginning of the quake that could be coming.”
All around the world, countries are easing monetary policy — cutting interest rates or taking measures to inject more cash into their economies. This is because deflation is the big worry right now.
The US started first, then the EU, Japan’s in it and China just jumped in too.
But now the US looks set to change course and Novogratz thinks guys like him won’t wait for the rest of these governments to stop easing if the US hikes rates first.
When the Fed moves, that’s when they will move; that’s when they will sell assets.
“If the US inflates that shows proof of concept, then no one will wait and you’ll have a major repricing of assets,” said Novogratz.
“I’m long, and I’m making tons of money,” said Novogratz. “The one worry that makes the party stop is inflation… If inflation shows up asset prices are going to tumble.”
In the meantime here are a few bullets about the world as Novogratz sees it:
- The Chinese people have been unleashed on their stock market, and it’s an amazing force that will push that market up. It’s the most interesting market to Novogratz.
- Japan’s story has changed. The country is restructuring and corporates are becoming kinder to shareholders.
- Brazil looks bad, but the finance minister in place, Joaquin Levy (whose nickname is ‘Scissorhands’) has done more in 5 months than anyone else could do in a year.
And everything he just talked about could change radically. Be ready.