Monday, March 12, 2012

333 The world of Hedge-fund owners - luxury, as they inspire fear and envy

The world of Hedge-fund owners - luxury, as they inspire fear and envy

(1) Australian and British housing markets are the last two bubbles - Jeremy Grantham
(2) Grantham on the Australian Housing Market - by Steve Keen
(3) Australian investors ignore warning signs, keep negatively gearing real estate
(4) China may avoid housing bubble, says Grantham
(5) Rudd's tax on Mining super-profits is sensible policy - Grantham
(6) The world of Hedge-fund owners - luxury, as they inspire fear and envy

(1) Australian and British housing markets are the last two bubbles - Jeremy Grantham

Housing market a 'time bomb', says investment legend

Katherine Jimenez    The Australian    June 16, 2010 12:00AM

THE Australian and British housing markets are the last two bubbles left in the wake of the financial crisis, and it is only a matter of time before they crash, warns legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham.

Mr Grantham famously reported a year before the global financial crisis: "In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist".

He said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.

"You cannot possibly miss it," he said.

"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or ... 7.5 (times).

"Australia is having one now. You are at near 7.5 times family income ... which suggests you are twice the size that you should be."

GMO is one of the biggest investment management firms in the world, with about $106 billion in funds under management, and is considered to be an authority on asset bubbles.

Mr Grantham, who is in Australia to meet with GMO clients in Sydney and Melbourne this week, said any bubble could be an exception to the rule.

"Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different," he said.

As an example, he cited the British housing market bubble of 1989. At the time, he said people dismissed the bubble because there was no more rezoning, creating a land shortage and as such, they believed prices would rise forever.

"Seven years later, in 1997, they hit the lowest multiple of family income since the record books started in 1945. It's always the same old argument, they are not making any more land."

In Australia's case, Mr Grantham described the housing market as a "time bomb" just waiting for interest rates to increase and become impossible to support.

Since last October, the Reserve Bank of Australia has raised the official cash rate six times. The rate is now 4.5 per cent.

If the Australian housing market did not return to the normal multiple of family income, he said "it will be the first time in history."

"Sooner or later, the rates will go up and the game is over."

(2) Grantham on the Australian Housing Market - by Steve Keen

{visit the webpage to see the graphs}

From: ERA <> Date: 19.06.2010 10:28 AM

19 June. 2010

Grantham on the Australian Housing Market

by Steve Keen

Published in DebtWatch on 17 June, 2010

Jeremy Grantham pricked, if not the housing bubble itself, then at least the bubble that property market spruikers live in, with the quip that:

“Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.” ( Housing market a ‘time bomb’, says investment legend: The Australian June 16, 2010)

How true that is. Before Japan’s bubble burst in 1990, we heard that Japan was different: the “Rising Sun” was eclipsing the USA and house prices reflected this growing wealth (and—didn’t you know? —there was a land shortage in Tokyo!). Before the USA’s bubble burst, there were land shortages in all the States with price bubbles—especially California. There were probably even Tulip shortages in Amsterdam, four centuries ago.

weight of the same force: too much debt was taken on by speculators seduced by the groupthink that house prices always rise. When the rise in house prices made the entry costs for new players prohibitive, debt stopped growing and house prices collapsed.

This is the other thing that all housing bubbles (and share price bubbles, for that matter) have in common: they are all driven by borrowed money, and they can only be sustained so long as rate of growth of debt outpaces incomes. Once that stops, the engine of unearned income that enticed speculators in breaks down—since the only way that we can all appear rich without working is if we spend borrowed money.

Of course, we all know that spending borrowed money is a surefire route to ultimate poverty. The great tragedy of an asset bubble however, is that it’s someone else’s increase in debt that makes us appear wealthier when your house sells for more than you paid for it. In effect, the housing market “launders” the debt money, making it appear real.

Any doubt that borrowed money is what has driven house prices into the stratosphere in Australia is dispelled by the data: despite all the hooey about Australian lenders being more responsible than those in the USA, mortgage debt in Australia rose three times faster since 1990. Having started with a mortgage debt to GDP ratio that was just 40% of America’s, we now have a higher ratio than the USA—and ours is still increasing while theirs is clearly falling.

Notice however that our ratio was lower than the USA’s—and was falling too—before the government brought in the First Home Vendors Boost. As it has always done, that government intervention in the market set off a price bubble—the government in this sense is as responsible for the house price bubble as the banks are.

The government pulls this trick because it makes it look good for a while: the bubble pulls in yet more private sector borrowing, and the spending makes the economy boom. But when the grant ends and the borrowing slows down, things don’t look so rosy.

That’s one way to describe the housing market right now. The boost caused the number of buyers to explode last year, and now the number is fizzing: there were just 46,000 home loans taken out by owner occupiers in April, a cool 25% down on the same month in 2009. Actual demand (and that’s people with cash in their hands to buy now, not the hypothetical future demand concepts touted by the property spruikers) is therefore falling below actual supply.

As the stock of unsold houses mounts up, it is only a matter of time before the bubble bursts.

(3) Australian investors ignore warning signs, keep negatively gearing real estate
Investors ignore signs and pile into property


June 16, 2010

AUSTRALIANS are diving into negatively geared property even as the Reserve Bank signals that another interest rate rise could be only weeks away.

Figures from the Bureau of Statistics show that while lending to buy homes in which to live fell a seasonally adjusted 10 per cent in the first four months of the year, lending to property investors rose 11 per cent. In the past year lending to investors rose 30 per cent nationwide, and 20 per cent in NSW.

''These investors aren't concerned about interest rates,'' said a BIS Shrapnel analyst, Angie Zigomanis. ''They can see prices rising and real estate looks a safer bet than the stockmarket.''

While some of the new real estate investors were taking money out of the sharemarket, most were using funds they had been keeping on the sidelines.

''You've got people who have still got their jobs and have been fiscally conservative - and potentially money is burning a pocket,'' he said.

''If you stick money in a term deposit it faces tax. A lot of people are averse to putting it in the sharemarket, given how it's been going, and residential property has bottomed out and been climbing for 12 months. That's given people confidence to jump back in.''

Mr Zigomanis said a key factor for some would have been the government's decision not to move against negative gearing after the Henry tax review.

Tax Office figures show a record 1.2 million investors said they spent more money on their rental properties than they earned in 2007-08. One in every 10 taxpayers owned negatively geared property.

Reserve Bank figures released yesterday show that in other respects we are being more careful with our money. Credit card cash advances are down 5.5 per cent over the year and the proportion of those withdrawing cash from their bank's ATMs rather than another banks' has risen to a record 62 per cent.

The minutes of the Reserve's board meeting this month suggest it will leave rates on hold next month but consider lifting them in August in response to inflation figures to be released next month.

The minutes identify international developments and the outlook for inflation as the key drivers of rates and, unusually, nominate the next month's figures as the ones to watch.

The Reserve's deputy governor, Ric Battellino, told a conference he was unconcerned about household debt, noting that since 2006 it had stayed steady relative to disposable income.

Claims that house prices were high compared with income did not differentiate between city and regional salaries.

(4) China may avoid housing bubble, says Grantham
Investment guru believes Beijing's 'experimental' moves may work

By MarketWatch

June 16, 2010

LOS ANGELES (MarketWatch) -- Noted investor and critic of U.S. monetary policy, Jeremy Grantham, said China may manage to avoid a housing collapse similar to that seen in the West, according to comments quoted in China media Wednesday.

He described Beijing's approach to tacking rapidly rising real-estate prices as "experimental," saying that the Chinese government is "adventurous in trying new things, and they're really quite aware of potential dangers," according to a report in the state-run China Daily.

China's situation is also less serious than the one seen before the U.S. housing crash, since fewer Chinese own luxury homes and most had to make larger down payments than their American counterparts.

Grantham, who serves as chief investment strategist at Grantham Mayo Van Otterloo & Co., made the remarks at a briefing in Sydney.

He also repeated criticism of current policy at the U.S. Federal Reserve, as well as Fed Chairman Ben Bernanke, contrasting Washington's approach with Beijing's.

"Bernanke, for example, has not admitted that asset class bubbles matter at all, but the Chinese know they do," Grantham was quoted as saying.

He echoed his previous doubts about Bernanke's monetary strategy, which he said could lead the U.S. economy "off yet another cliff by keeping rates so low for so long that speculators make hay," and said the fair value of the S&P 500 stock index (SPX) -- which closed Wednesday at 1,115 -- should be about 875. Read report about Grantham's previous criticism of the Fed.

Grantham's comments followed an annual report released by China's banking regulators earlier in the week, warning of a possible rash of mortgage defaults and a "chain effect" throughout the property sector in the year ahead. Read report on Chinese bank regulators' warnings.

(5) Rudd's tax on Mining super-profits is sensible policy - Grantham

Saturday, 19 June, 2010 3:38 PM AEST

Resource tax sensible policy: Grantham

Government should carefully structure tax

By Wouter Klijn
Wed 16 Jun 2010

High-profile investment strategist says resources tax is sensible if structured properly.

The government's proposed resources tax is a sensible policy if carefully structured, GMO chief investment strategist and co-founder Jeremy Grantham has said.

"If the tax only results in pushing back the return on equity to more normal levels, that would seem to be easily contained within the capitalist structure," Grantham said yesterday during a visit to Australia.

"I would say very sensible policy," he said.

In normal circumstance taxes can be passed on to clients, but in the Australian context resources companies are restricted to do so because of their high dependency on export markets, Grantham said.

"When you export you charge absolutely as much as you can charge," he said.

"You are a bad capitalist if you're not.

"If you pass [tax] on, you run into the question of: 'Can you find a market?' It is hard to pass on into certain export markets and, therefore, it can affect the profits."

The main issue, therefore, was to bring down profits without affecting the competitiveness of Australian resources companies in the global markets, Grantham said.

"They should very carefully work it out," he said.

"At what level does it still allow [resources companies] to export at a global price and just take down their profit margin so, instead of making 42 per cent return on equity, they move down to a purely 20?"

GMO manages more than US$100 billion in assets worldwide.

(6) The world of Hedge-fund owners - luxury, as they inspire fear and envy

From: chris lenczner <> Date: 17.06.2010 10:43 PM
Subject: Based mainly in London and New York, an estimated 9,000 hedge funds are believed to control $3 trillion of cash.

Meet the Hedgies

Julia Llewellyn Smith
Published: 12:01AM BST 17 Jun 2007

Elle Macpherson and ex boyfriend Arpad Busson

They donate islands to charity, think nothing of spending £7,500 on lunch and consider first-class air travel 'a sign of failure'. So what's it like being the wife of a hedge-fund manager? Not half as glitzy as you think, writes Julia Llewellyn Smith

In the main living-room of her townhouse in the Boltons in South Kensington, Lucie is stressed.

Her pilates tutor should have been here ten minutes ago, the new Filipina maid folded the towels for the third guest bathroom all wrong and her husband's PA has just called to say he won't be able to make their anniversary dinner at Gordon Ramsay tonight as he has to entertain some bankers. Which is irksome, because Lucie has a pile of property brochures she wants to show him for the chalet they've decided to buy in Courchevel.

Friends have told them this is crazy - global warming might mean no more snow in 20 years - but Lucie and her husband have just donated £50 million to an environmental research charity, making them certain the problem will be sorted. Which reminds Lucie: if she can't see her husband tonight, she might as well get on with re-reading Das Kapital for her MPhil.

Welcome to the world of the hedge-fund couples, a world of unimaginable wealth, unparalleled luxury and tasteful discretion set off with occasional acts of philanthropy. Heirs to the Carnegies, the Rockefellers and the J P Morgans, who more than a century ago accrued astonishing fortunes and remade the face of corporate America, the hedge funders inspire fear and envy wherever they go, thanks to the astonishing sums of money they command and the fact that few outside the industry are sure exactly what it is they do.

Based mainly in London and New York, an estimated 9,000 hedge funds are believed to control $3 trillion of cash. Forming a relatively new and highly secretive industry, hedge funds are independent companies that invest the money of the super-wealthy. Unbound by the structures of banks, where a fund manager cannot take risks for fear of upsetting clients such as pension funds, these men (there are very few women) are free to use unconventional money-making techniques such as betting (or hedging) that a share price is going to fall.

Typically, a 'hedgie' picks up 20 per cent of the profit he makes for a client. 'Linda Evangelista boasted she didn't get out of bed for less than $10,000 a day; the joke now is hedge funders won't for less than $10 million,' says John, who runs a company marketing funds to new clients.

Inevitably, such a high-risk, high-return lifestyle attracts the highest of fliers. 'Hedge funds cream off the stars of the banking world, gunslingers who are frustrated by all the red tape and want to do things their way,' says John. Usually ex-bankers or traders, they flaunt their independent status by rejecting corporate pinstripes in favour of polo shirts and chinos, even at important client meetings.

Harry Becher, a fixer for Quintessentially, the upmarket concierge service that counts dozens of hedgies among its clients, confirms this. 'They're not rock stars or artists,' he says. 'But nor are they grey-suited number-crunchers. They're very interesting individuals.' No wonder that chronicler of modern mores Tom Wolfe described the hedgies in the launch issue of Portfolio, a new American magazine aimed at the ultra-rich, as the 'new masters of the universe'.

Yet, while their predecessors, the 1980s bankers that Wolfe immortalised in The Bonfire of the Vanities, flaunted their wealth to all and sundry, hedge funders are prepared to flash their cash only in front of their peers. Having made their fortunes by carefully avoiding excessive regulatory scrutiny, they know to apply the same rules in their private lives. As one hedgie puts it, 'I don't want my children getting mugged.'

'These are not yuppies in the traditional sense,' Becher confirms. 'There's no big hair or bright-yellow Lamborghinis. They shun the obvious. These are discerning people who request things such as beautiful bespoke white shirts from Dunhill. They don't want to go to St-Tropez; they want to go on adventure holidays to unexplored corners of the world. They work bloody hard and they want to release their energy, but not by spraying champagne around Pangaea [nightclub].' A recent request from a hedge funder to the travel company Black Tomato was typical - a trip to central Brazil for him and his girlfriend to go piranha fishing and anaconda hunting.

Unlike the Wags - the brash footballers' wives and girlfriends whose obsessive shopping and nightclubbing entertained us during the last World Cup - hedgies' wives are models of class and discretion. Most are educated to at least degree level and few parade themselves on the lunching circuit, preferring to entertain at home.

Take Gabrielle Sacconaghi, the 39-year-old Canadian second wife of the legendarily daredevil, handsome - and private - Louis Bacon of Moore Capital, believed to be worth about $1 billion. Sacconaghi has a masters degree in international relations from Cambridge and worked as an adviser to Sotheby's. The couple hold court at their homes in Belgravia, Manhattan, Long Island, Colorado, the Bahamas, Scotland (where they own a grouse moor) and at their private polo grounds in Berkshire and New York State.

Another key player is the sister of the hotel mogul Sir Rocco Forte, Giancarla Alen-Buckley, whose husband, Michael, is a co-founder of RAB Capital and earns about £20 million a year. The couple organise numerous events at their £10 million Holland Park townhouse, their Mustique villa and their Irish castle. Then there is Geraldine Gottesman, the wife of Noam of GLG Partners, whose salary is estimated at £85 million, making him one of the most highly paid fund managers in Britain. The Gottesmans live with their four children in an £18 million six-storey Mayfair mansion.

While few of these women work in the accepted sense of the word, most would consider administering their husband's earnings a full-time job. 'They are very busy,' says Marina, the fiancée of a London-based 33-year-old hedge funder. Marina works in headhunting but plans to 'retire' after her wedding in a castle in Italy next summer. 'They're running their houses, supervising the staff, looking round schools for the children and attending pregnancy yoga for the birth of the next baby.'

Having at least four children is a badge of honour among hedge families - a sign of being among the very few who can afford a London house with a minimum of seven bedrooms plus staff quarters, not to mention school fees of about £30,000 a year per child. In Chelsea, the hedgie's residential area of choice (Notting Hill is now considered a bit of a cliché, overrun by Eurotrash and Americans) , a typical property sells for between £5 million and £15 million, with the buyer usually spending the same amount again on refurbishment.

Then there are the second and third homes - typically an estate in Gloucestershire, a chalet in Verbier and a villa in the Caribbean, all reached by private jet. 'Flying first class is seen as a sign of failure,' says John.

When it comes to decorating their properties, they favour contemporary artists such as Damien Hirst and the photographer Richard Prince (the value of whose work has risen by 500 per cent in the past few years) , or postwar artists such as Jasper Johns and Mark Rothko, one of whose works recently sold for £37 million.

Their social life centres on Mayfair and St James's, where most hedgies have opened offices to avoid the long commute to the City. Seen as staid and decaying just a few years ago, today this small area of town is now said to manage more cash than the whole of Germany. 'Berkeley Square is hedge-fund central, humming with activity,' reports Harry Becher of Quintessentially. 'The restaurant maître d's tell me that every day they host tables of people who think nothing of spending £7,500 on lunch.'

Popular spots for dinner include Sir Rocco Forte and Marco Pierre White's new venture Luciano's on St James's, St Alban on Lower Regent Street, which is the latest venture by Jeremy King and Chris Corbin, formerly of the Ivy, and Umu in Bruton Place, with its £240 sushi kaiseki tasting menu.

Riotous clubbing, however, is unlikely to follow. 'I was talking to a Mayfair restaurant manager who said the main trend he's noticed in the past five years is people dining earlier and earlier, often leaving by nine, so they can be in bed by ten and up at dawn to track the Far Eastern markets,' Marina confirms.

In any case, romantic dinners à deux are the exception not the rule. 'If your man is a hedge funder, you've got to enjoy your own company,' says Emily, who is the 33-year-old live-in girlfriend of a 40-year-old hedgie, and recently gave up work as a management consultant to 'concentrate on getting pregnant'.

'They work ridiculous hours, they travel frequently and, if they do have a free evening, they're usually entertaining clients. Frankly, I see more of my pilates instructor and my book club than I do of my boyfriend. It's hardly surprising we're having problems conceiving.'

Although hedgie wives enjoy spending their husband's earnings, they are equally concerned about giving some of it back. Influenced by the most famous of their number, George Soros, who is worth about £3.5 billion and whose foundation gives more than £200 million a year to good causes, hedge funders believe in a culture of generosity. The Gottesmans are major supporters of Tate Britain, recently enabling the gallery to buy some statues by the Turner Prize-winning artist Rachel Whiteread. The Alen-Buckleys donate about £5 million a year to charity, while Louis Bacon has given to conservation projects some land off Long Island, which he bought for £18 million.

But the key date in the hedge-fund couple's calendar is the annual ball in aid of Ark (Absolute Return for Kids) . Set up by the hedge-fund manager Arpad Busson, the ex-boyfriend of the model Elle Macpherson, Ark raised an astonishing £18.4 million for disadvantaged children at last year's summer ball at Marlborough House, where guests were serenaded by Sir Elton John. A game of tennis with Sir Elton was auctioned for £70,000, while a guitar lesson with Chris Martin, the lead singer of Coldplay, followed by dinner with his wife, the actress Gwyneth Paltrow, made £140,000. Bill Clinton sent a personal letter of endorsement to every guest and Archbishop Desmond Tutu videotaped a message of thanks.

'The Ark events are one of the few times you get to see these people flaunt their wealth,' says Marina. 'The diamonds on display are dazzling and the bidding ferocious. Being incredibly competitive people, they love an annual chance to say, "Not only am I richer than you, I'm also more generous."'

They are also, it would seem, more healthy. Having seen the burn-out suffered by their Square Mile contemporaries, they are determined to avoid the same fate. Many are teetotal. They employ macrobiotic chefs and personal trainers whom they fly round the world, and have equipped both offices and homes with gyms and pools to ensure they stay in peak condition.

As Marina says wryly, 'You can be sure that if there's a way of cheating death, then these guys will be the first to do it.'

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