Caxton hedge fund chief warns on brinkmanship damage to US
One of the hedge fund industry’s most successful money managers has warned that dysfunction in Washington has damaged the US economy, leaving the Federal Reserve with little option but to continue its policy of extraordinary monetary easing indefinitely. “It’s clear to us now that the US economy just isn’t going to reach escape velocity,” said Andrew Law, head of Caxton Associates, in a wide-ranging and rare interview with the Financial Times. “Tapering is off the table for the foreseeable future.”
Mr Law’s stark outlook for the US contrasts with widely-held expectations that the US economy will bounce back quickly in the coming months. Most investors and Wall Street analysts expect the Fed to begin “tapering” its programme of quantitative easing in December. Caxton, which is 30 years old this year, has made its clients over $13bn in net gains over its lifetime, according to data provider LCH Investments, making it one of the best performing hedge funds alongside the likes of George Soros. Like Mr Soros, Caxton specialises in making money from shifts in the global economy – betting on changes in countries’ economic circumstances through bonds, currencies and derivatives. $1,000 invested with Caxton in 1983 would now be worth just under $200,000. The 47-year old Mr Law said the shutdown and debt-ceiling debate in Washington had “undoubtedly” caused damage to the country’s economy. “What happened [last week] was just another can kicking exercise,” he said of the political deal reached between Democrats and Republicans in Washington to raise the cap on the government’s ability to borrow. “The problem has not been solved and the hopes for a grand bargain are in tatters . . . the lack of visibility is very damaging.” Caxton closely guards its secrecy and rarely speaks about its trading activities. The firm has snapped up US bonds of various maturities in recent weeks because it believes that bond prices will rise as markets price in a longer-than-expected period of low rates in the coming months. Mr Law’s prognosis is all the more startling since Caxton was particularly bullish on prospects for the US earlier this year. The firm had made hundreds of millions shorting Treasury bonds. “We just don’t see how the economy is going to accelerate in the foreseeable future,” he said. “Sequester spending cuts, the debt ceiling and shutdown have all taken their toll . . . there are no incentives for the corporate world to go out and spend right now . . . that, and the housing market are critical. You’ve already seen earnings release statements for companies mentioning shutdown as a reason for a drop-off in orders.” The grim outlook, while contrarian, is shared by a number of hedge funds. Last week, Jeffrey Gundlach, founder of DoubleLine Capital, one of the most influential US bond market investors also said he believed US growth had stuttered, and tapering was unlikely, making bonds an attractive investment. Caxton also believes the dollar will continue to weaken against the euro – potentially precipitating a currency fight with the eurozone. “It will be fascinating to see how the ECB [European Central Bank] responds,” said Mr Law, adding that one likely option for Frankfurt would be for it to lower rates. “They are not going to be too pleased [with a weakening dollar],” he said. The result of the German election meant the ECB now has a freer hand to act, he argued.