Rarebird,
The Fed's primary role is the preservation of a liquid financial system, not fighting inflation or deflation. Those are secondary priorities.
That's why AG cut interest rates 3 times last fall into to prevent a complete rout in what would ordinarily be very sound debt instruments.
I can't help but recall how CrimiMae, two weeks before the LTCM debacle, was reporting how its commercial mortgage portfolio was sound and of a positive net value.
Two weeks later CrimiMae filed for Bankruptcy, simply because fears in the debt market were such that no one wanted to purchase anything but govt debt instruments, and their commercial debt portfolio had been cut in half or more (it has recovered now, I understand).
Btw, TheStreet.com is now reporting the Tiger Management story almost verbatim to what Bill Murphy is stating, including the rumours of a staffing exodus. That worries me.
But it should worry holders of gold as well. Look at the chart of the XAU and you'll see how bad it was treated during last years stock market rout.
Of course, it surged back, but not before the XAU was pummeled down to 48. And before you start making the case that the yen-carry trade has been replaced with the gold carry trade, remember that AG told the markets the Fed was prepared to lease whatever amount of gold was necessary to prevent a systemic lockup in the financial system.
An excerpt from the article:
A $6 billion redemption would cut Tiger's asset base off at the knees. The New York-based hedge fund has assets totaling anywhere from $10 billion to $12 billion, according to Bruce Ruehl with Tremont Advisors, a fund of funds in Rye, N.Y, and an investor in Tiger. However, a large portion of the hedge fund's capital is subject to lock-up agreements, Ruehl said, suggesting a redemption of that size is highly unlikely, if not impossible.
As for the issue of Tiger's staff, employees are "typically given two-year contracts when they start at $1.5 million a year," according to one hedge fund manager who requested anonymity. "After two years they are paid based on performance through a pool, which vests over five years. What I heard was, in light of the fund's recent performance, employees up to that first two-year mark are bolting."
Robertson has done some sort of flip-flop on divvying up money to managers, but there is no mass staff exodus, according to an investor.
The article goes to explain why Tiger is such a target for the rumour mill since it is currently down 40% year over the past 12 months. Julian Robertson, Tiger's head MFWIC, stated that the claims were obscene. However, other observers have noted that several of Tiger's trades have definitely gone against them, like Waste Management and US Airways.
So while I'm a little bit less concerned now about the redemptions, if he has been on the wrong side of a bunch of trades, any liquidity crisis in his fund would have major impacts on the overall market stability, punishing everyone else for his mistakes.
The Fed will figure out a way to get counter-parties to step in, and I'll just betcha we'll see some MAJOR regulatory impetus given to regulating Hedge funds above a certain capitalization (which I firmly believe they should).
Personally, maybe the gov't should limit the size of individual hedge funds in order to curtail their individual impacts on the overall market when they screw up.
Regards,
Ron
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