Contact: Nick Blanco                                                                                               For Immediate Release

Tel. 305-379-4200

Cell Phone: 845-641-5652

Email: nb@alexanderalternativecapital.com

ECONOMIC OUTLOOK: LIQUIDITY WATERFALL, DECOUPLING, BONDS; ONCE PURE NOW SINFUL & DREAMS OF THE FEDERAL RESERVE CHAIRMAN

Return of The Pied Piper

During the Middle Ages, the German town of Hamelin was plagued by an infestation of rats.  One day a Pied Piper came along who promised to rid the town of all its rats if they agreed to pay him a reasonable fee.  The good townspeople consented to his price, and he went to work.  The musician took out his magical pipe and played a tune which lured all the rats away from the town and into the nearby Weser River where they all drowned.  The rat-catcher returned to the town in order to collect his fee only to be rebuffed by the townsfolk who now refused to pay him for his services.   The Piper vowed revenge and then left the town in anger.  He later returned.  However, this time he played his magical pipe which attracted all the children of the town.  The Pied Piper then led the merry and dancing children in a single file line out of the town and into a cave in the mountains.  Neither the Pied Piper nor any of the children were ever to be seen again.  Hence, whenever someone talks of “paying the Piper,” they refer to a high cost which if not properly paid on time will only have to be paid later at a much higher and painful amount than when it was originally due. 

Although this old myth is only a fairy tale, it helps to illustrate what is occurring today.  One must ask which characters in today economy are playing which parts?  The star role is being played by the Federal Reserve.  Ben Bernanke is the Pied Piper.  The good townspeople are the US consumers.  The children are the investors and the rats are the US financial system.  Below are the 6 most important macro themes playing out in the world today:

• Subprime mortgages are not the main cause of what is happening but a symptom of a weak economy. The current cycle will last longer and be more intense than previously assumed.  The solution is going back-to-basics in the economy.  Borrowing less and saving more.  This will intensify the current economic currents and cause a deeper and longer bust cycle than experienced in the last 60 years.
• The world will not be able to repay America in kind during the upcoming economic slowdown in the U.S..  In other words, strong growth in the global economy is threatened by a contraction in the American economy.  Hence, America can not rely on the growth in emerging economies to keep the US out of a recession.  Moreover, high commodity prices, the product of high global growth, will have a deleterious effect on an already weakening U.S. economy.
• Countries with the greatest export exposure suffer the largest declines in output gaps. Although intra-regional trade between emerging Asian markets has increase substantially since 1990, this will not offset the loss due to a slowdown in the U.S. economy.  The size and scope of this recession will be far too large and deep to not affect Asian markets as well. China and emerging markets have not decoupled but rather are a part of an intensifying globalization where trade ties have increased, and they have benefitted.  Nevertheless, it is a mistake to believe that when the U.S. economy turns sluggish that the emerging markets will not be affected because of decoupling.
• Among the differences in the countries of the European Union, there does exist some evidence of convergence in their national economies.  The adoption of the Euro has not lead to economic chaos as some believed it might.  Hence, it is the development of the European Union and a unified economy that has gone fairly well up to this point despite all the concomitant challenges that have arisen with the establishment of this supranational organization.  The ultimate integration of Europe economically, geographically, and militarily will be difficult to almost impossible to accomplish and maintain over the long term.
• The current crises combine 3 aspects of the worst credit crises into one event.  The collapse of the Savings and Loan caused the shut down of the junk bond market.  Some say the invention of the CDO.  The implosion of Long Term Capital Management (LTCM) in 1998, hedge funds being battered by a withdrawal of credit by prime brokers.  Look at Carlyle Capital being forced to liquidate with many others.  Soon more hedge funds will be faced with redemptions because of poor performance and other reasons.  Like the deep credit collapse of 2000-2001, that was triggered by the failure of Enron and WorldCom, the current crisis resulted from the loss of faith in rating agencies and their rating of mortgage back securities as AAA.
• Self-regulation of financial markets is like putting a fox to guard the henhouse.  The current regulation will stand, but there will be some changes made to financial protocols like the alterations that happened after the Enron and WorldCom blow-ups.  The lowering of interest rates will cause another round of asset bubbles to spring up.  The most likely asset classes are commodities, commercial real estate and any other asset that were doing moderately well but not overcrowded right up to the crack last year with the exception of US stocks and bonds.

Alexander Alternative Capital, LLC is a global macro hedge fund that endeavors to preserve capital and deliver exceptional absolute returns to qualified investors over a multi-year time horizon.  Its disciplined approach is designed to maximize returns while controlling risk by identifying and capitalizing on various long-term and short-term global macroeconomic developments.  The fund employs intensive, proprietary research and rigorous risk management techniques on specific financial instruments and on the portfolio as a whole.  The focus is to help clients meet and exceed their investment objectives in down and volatile market environments while producing returns that have low correlations to major market indices.

If you would like to obtain a copy of the complete April 2008 Global Macro View or to schedule an interview with Michael Corcelli it is available by request.  Please send your request to Nick Blanco at nb@alexanderalternativecapital.com or contact him directly at 305-379-4200.

Contributors:

Michael Corcelli – Managing Member

Alex Moreno - Managing Director

Philip Maywah - Analyst

Nick Blanco – Trader

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