Asia Hedge Fund King Danny Yong Says Debt Doesn’t Matter

On 30 September, 2008, the US National Debt clock installed at New York’s Times Square ran out of numbers as it ticked over $US10 trillion.

In the midst of the worst financial crisis of a generation, that moment came to symbolise the alarming lack of control over public finances that would lead the Western world to doom.

“Today when I go back to New York and ask investors if the clock is still there, nobody knows, and nobody cares,” says Danny Yong, the co-founder of $7 billion Singapore-based hedge fund Dymon Asia Capital.

In fact, few noticed that a month ago – moments after the electronic clock recorded $US20 trillion – it was taken down.

That in itself was symbolic. This is the post-financial crisis world of quantitative easing where debt doesn’t matter.

And we may have to accept it may not matter for a long time. With no sign of inflation and the market imposing no discipline on governments that have the ability to print money, it’s a fiscal free-for-all.

“In the past whenever a country didn’t manage its fiscal spending and budget, debt sustainability was in question, you would be massively punished by the market,” says Yong, who will speak at the Sohn Hearts and Mind charity conference next month.

“Bond curves would steepen, credit spreads would widen and the currency would weaken. Today, nobody seems to care. That is the new paradigm.”

Australia is a prime example of this new world order.

The Reserve Bank didn’t have to resort to quantitative easing, but as other central banks expanded their balance sheets, the full force of its impact was felt Down Under. The flood of money chasing positive returns swamped the bond market and forced the currency higher, pressuring the RBA to lower the cash rate, propelling a real estate boom.

As a small, open economy, Australian federal and state governments have become accustomed to the discipline imposed on them by the markets, and in particular the credit rating agencies.

And for those who remember the “banana republic” days, a downgrade of the AAA credit rating was an unthinkable relapse. Fear and loathing accompanied Standard & Poor’s decision to put the rating on review last year. And since around two-thirds of Australian bonds are held by foreigners, one would think the AAA stakes were higher than they’ve ever been.

“I spoke to a couple of sovereign wealth funds and asked – if Australia does get downgraded, do you sell?” Yong told The Australian Financial Review.

“They said ‘maybe we’ll wait for a 30 basis point increase, but once the market stabilises, we’ll buy more’.”

The federal government, and the bond traders that deal in its debt, are among the winners from QE.

But quantitative easing has had its victims. Large global banks, life insurers and pension funds have been suffocated by low interest rates. Macro hedge funds too have collectively failed to prosper in a prolonged period where volatility has been suppressed by central banks.

New era

But rather than waving his fists in the air, Yong is embracing this new era.

“I love investing in macro at this time where there is really no precedent. Even the smartest minds in the US, Nobel Prize winners are scratching their heads as to what is going on.”

This is no longer a “global macro” world, Yong says, but a “local macro” world – and the fund’s proximity to Asia and teams of local experts helps give them an edge.

Yong says Dymon has never had a year where they have lost money trading the yen or the renminbi. Right now they’re growing more bullish on China, which bodes well for Australia.

“Whenever I go to the US, they are persistently bearish on China –they tell me ‘it’s a Ponzi scheme that’s going to blow up.’ But they have been saying that for the last 15 years.

“They come to China, they look at a few empty cities and say ‘oh look, there are all these ghost cities’. I am sure if you went to Arizona or Detroit you could find some empty buildings. It’s not symptomatic of the entire country.”

In a world where central banks are setting the price of bonds and equities, either by buying them or forcing down risk premia, foreign exchange is the one market they cannot control.

“We see the opportunities in dislocations, which are mostly in foreign exchange. There are big moves that happen every year.”

Just in time

In its relatively short life, Dymon Asia has carved out a reputation as the top Asia-focused macro hedge fund. But the fund prides itself on humility and famously gave back its performance fees after its Swiss franc trade soured.

Yong says he’s extremely self aware – and appreciates his success has a lot to do with luck. He got his first break as a JP Morgan derivative trader as their top picks among thousands of candidates dropped out, leaving him to take the role.

And Dymon got off the ground just in time. Legendary trader Paul Tudor Jones tipped in $100 million of seed funding in August 2008, a month before the Lehman collapse that Dymon bet against. The fund probably wouldn’t exist if he’d delayed any longer.

Yong says crisis led to a change in risk management including a “4 per cent monthly circuit-breaker” to protect them from their own self-confidence.

“The thing that trips up good investors is that after a while you drink your own Kool Aid.

“You believe you the master of the universe and the markets are wrong. We have seen it multiple times – traders have fantastic careers and latch onto one high-conviction trade and refuse to cut. They could lose almost everything.”

An ego can be particularly perilous – especially in this age where “the limits of the fiat currency systems are being tested”.

The post-2008 period where “quantitative easing gates have been opened” is analogous to the 1970s with the end of the gold standard. Yong points out that this monetary system that we accept as normal is less than 50 years old.

Central banks will embark on QE until they can’t, Yong believes.

Taper trouble

Previous efforts by Japan to voluntarily remove QE were unsuccessful and even though the Federal Reserve and European Central Bank are preparing for ‘normalisation’, “when the next crisis hits, they’ll print again”.

“I am not convinced that we can have the extended period of stability that allows the central banks to gradually whittle down their balance sheets.”

And even without a crisis, QE is still the path of last resistance for governments that can’t get things done “in a world of social media”.

One of the more severe side-effects of QE has been an increase in pension liabilities as low bond rates dramatically lowered the financial returns that can be generated without taking risk. But QE may ultimately be the prescribed treatment.

“I believe that the pension under-funding will ultimately end up on the balance sheets of the central banks at some point. That’s just the easiest way to solve it.”

So will QE go on forever? There are limits. What could reverse it is a meaningful rise in inflation that forces central banks to tighten. Yong isn’t convinced it’s inevitable for a few reasons.

One is that QE is actually deflationary as the cheap money created leads to over-production.

Another is demographics. The Japan experience has shown that the reduction in spending by retirees is more deflationary than the inflationary impact of a smaller workforce. Japan has less than 2 per cent unemployment, and little inflation even after quadrupling its QE program.

Quantitative easing could also be undone by the political process. While traditional measures of inflation are stubbornly low asset prices have levitated, widening inequality. Even if its true that the actions of central banks saved Western economies from ruin and restored millions of jobs, not every voter will accept that the only way to achieve this was to make the rich way richer.

Finally, central banks could simply run out of things to buy – an issue that the central banks of Japan and Europe are already encountering. While their shopping list could be expanded to include equities, land and property, practical limits could be reached.

“It’s either a form of financial repression or nationalisation – they [governments] are buying back assets that were given to citizens earlier. But it could last for a long time and it may not be that bad. It has led to a period of stability.

“The day of reckoning can only happen when there’s a catalyst that stops QE.”

By Jonathan Shapiro

Source: Australia Financial Review

 

DISCLAIMER

This webpage contains important legal and proprietary information concerning Dymon Asia Capital (Singapore) Pte. Ltd., its affiliates (collectively known as “Dymon Asia“) and its funds. Before proceeding, please read the following disclaimer statements.

By clicking the “I AGREE” button, you are deemed to be representing and warranting that (1) you have read and understand the information contained in this page and accept the terms and conditions contained herein, (2) the applicable laws and regulations of your jurisdiction allow you to access the information on this webpage, (3) you are duly authorized to access this webpage for the purpose of acquiring information, and (4) you or any other person or entity you represent initiated the discussion, correspondence or other communications with Dymon Asia or its representatives, which resulted in your requesting access to Dymon Asia’s website and the information regarding its funds, and none of Dymon Asia or its representatives at any time directly or indirectly contacted you with respect to the provision of investment advisory services or investment in a Dymon Asia fund prior to such unsolicited initiation of discussions, correspondence or other communications.

The information on this webpage is not intended for persons located or resident in jurisdictions where the distribution of such information is restricted or unauthorized. No action has been taken to authorize, register or qualify any of the Dymon Asia funds or otherwise permit a public offering of any Dymon Asia fund in any jurisdiction, or to permit the distribution of information in relation to any of the Dymon Asia fund in any jurisdiction.

To the best of its knowledge and belief, Dymon Asia considers the information contained herein as accurate as at the date of publication. All information and opinions in this webpage are subject to change without notice. No representation or warranty is given, whether express or implied, on the accuracy, adequacy or completeness of information provided in the website or by third parties. The materials in this webpage could include technical inaccuracies or typographical errors, and could become inaccurate as a result of developments occurring after their respective dates. Dymon Asia undertakes no obligation to maintain the currency of such information. Any links to other websites contained within this webpage are for the convenience of the user only and do not constitute an endorsement by Dymon Asia of these websites. Dymon Asia is not responsible for the content of other websites referenced in this webpage. Neither Dymon Asia nor its affiliates and their respective shareholders, directors, officers and employees assume any liabilities in respect of any errors or omissions on this webpage, or any and all responsibility for any direct or consequential loss or damage of any kind resulting directly or indirectly from the use of this webpage. Unless otherwise agreed with Dymon Asia, any use, disclosure, reproduction, modification or distribution of the contents of this webpage, or any part thereof, is strictly prohibited. Dymon Asia expressly disclaims any liability, whether in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, punitive or special damages arising out of, or in any way connected with, your access to or use of this website.

This webpage is not an advertisement and is not intended for public use or distribution. This website has been prepared for the purpose of providing general information only without taking account of any particular investor’s objectives, financial situation or needs and does not amount to an investment recommendation. An investor should, before making any investment decision, consider the appropriateness of the information in this website, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. In all cases, anyone proposing to rely on or use the information contained in the website should independently verify and check the accuracy, completeness, reliability and suitability of the information. The information contained in this webpage does not constitute financial, investment, legal, accounting, tax or other professional advice or a solicitation for investment in Dymon Asia’s funds, nor does it constitute an offer for sale of interests issued by funds that are managed or advised by Dymon Asia. Any offer can only be made by the relevant offering documents, together with the relevant subscription agreement, all of which must be read and understood in their entirety, and only in jurisdictions where such an offer is in compliance with relevant laws and regulatory requirements.

Simulations, past and projected performance may not necessarily be indicative of future results. Figures may be taken from sources that are believed to be reliable (but may not necessarily have been independently verified), and such figures should not be relied upon in making investment decisions. Dymon Asia, its officers and employees do not assume any responsibility for the accuracy or completeness of such information. There is the risk of loss as well as the opportunity for gain when investing in funds managed or advised by Dymon Asia.

Dymon Asia Capital (Singapore) Pte. Ltd. holds a capital markets services licence for the provision of fund management services to eligible investors and is an exempt financial advisor pursuant to paragraph 23(1)(d) of the Financial Advisers Act (“FAA”).  Accordingly, this website and its contents is permitted only for the use of persons who are “institutional investors” or “accredited investors”, each within the meaning provided in the Singapore Securities and Futures Act (Cap.289); “professional investors” within the meaning provided in the Hong Kong Securities and Futures Ordinance; or the equivalent class of “accredited investor” or “professional client” under the laws of the country or territory of such person. As an “institutional investor” and/or “accredited investor” certain disclosure requirements under the FAA in relation to the contents of this website would not apply to you as a recipient. The products and services described in this website are available to such aforementioned categories of persons only. None of the contents of this website have been approved or endorsed by the MAS or any other global regulator.

Please click “I AGREE” if you confirm and agree that you fall within any of the aforementioned categories. Please click “I AGREE” if you confirm and agree that you fall within any of the aforementioned categories.