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MiB: Ilana Weinstein of The IDW Group

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This week, we speak Ilana Weinstein, founder and CEO of The IDW Group, a leading consulting & hiring boutique for hedge funds, private equity and family offices in search of top investment talent. Her career took her from University of Pennsylvania to Goldman Sachs to Harvard Business School to the Boston Consulting Group.

She works with firms such as Citadel, Millenium, Point 72, and other highly-rated, sophisticated shops.

We discuss how difficult the present environment is for the hedge fund world. When she launched IDW in 2003, there were 3,000 hedge funds managing $500 billion; today, there are 11,000 hedge funds managing $3.5 trillion.  She explains why “Scale” is so important in the hedge fund world — data science and quant are a path to alpha, and very few firms can afford that sort of access to talent.

We discuss why it is a myth that the quickest way to achieve wealth is to launch a hedge fund. Most of the 11,000 hedge funds are single manager funds — neither Multi-Strat nor Multi manager — she notes two thirds of funds have an average AUM of $250 million. She suggests that the shakeout in hedge funds is continuing: “Its like a cottage industry of two bit players;” most of these guys will either muddle along or not exist in a few years.

She notes that there is a “war for talent” and that those people who can consistently generate alpha are sought after.

Her favorite books can be seen here; A transcript of our conversation will be available here.

You can stream/download the full conversation, including the podcast extras on Apple iTunes, Overcast, Spotify, Google, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.

Next week, we speak with Matt Benkendorf, of Vontobel‘s Quality Growth Boutique, a publicly traded $110 billion Swiss investment bank. Benkendorf is the CIO of the wealth asset management division. His division was just awarded the Active International Equity Strategy of the year and Active Global Equity Strategy of the year.

 

 

 

Ilana Weinstein’s favorite books

1. I Am Charlotte Simmons

2. The Big Short: Inside the Doomsday Machine

3. Hacking Darwin: Genetic Engineering and the Future of Humanity

 

Books Barry mentioned

1. The Spider Network: How a Math Genius and a Gang of Scheming Bankers Pulled Off One of the Greatest Scams in History

2. The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution

3. The Bonfire of the Vanities

The post MiB: Ilana Weinstein of The IDW Group appeared first on The Big Picture.



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Guest Contribution: “It’s (Long Past) Time for a Eurozone Brady Plan”

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Today we are fortunate to be able to present a guest contribution written by Mark Copelovitch  (University of Wisconsin – Madison).


The COVID-19 crisis highlights the long-term consequences of past Eurozone policy mistakes. If the Euro is go­ing to survive another crisis, now is the time for a comprehensive debt solution.

 Eurozone countries are facing yet another crisis, as they struggle not only with the tragic public health consequences of the COVID-19 pandemic, but also with the near-total sudden stop in the economy. The crisis, and the political debate over appropriate policy responses to it, have once again laid bare longstanding, fundamental problems in the Eurozone. The focus has rightly been on the immediate monetary and fiscal policy responses. But Eurozone countries’ ability to respond effectively to the crisis remain severely hampered by past policy errors that have left member-states – especially southern Eurozone countries – laden with debt and caught permanently in depression. Until and unless the Eurozone finally resolves these issues, the policy response to the Coronacrisis will almost certainly be insufficient, and the long-term prospects of the Eurozone will remain uncertain. It is long past time for the Eurozone to implement a comprehensive debt reduction plan that removes thirty years’ worth of debt overhang and creates the fiscal space for member-states to adequately respond to this and future crises.

A Europe-wide crisis in need of a Europe-wide response

COVID-19 has brought the Eurozone to a standstill. With economic activity crashing to a sudden stop, the need for rapid and massive monetary and fiscal policy intervention is clear. After an initial stumble, the ECB has stepped up. Last week, President Christine Lagarde embraced the “Draghi doctrine,” echoing former ECB President Mario Draghi and his famous 2012 line that “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” In announcing the ECB’s plans to buy $750 billion of sovereign and corporate bonds to backstop Eurozone economies, Lagarde made clear that “There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”

This was welcome news. But the COVID-19 crisis also requires a joint response on fiscal policy. The problem, as Adam Tooze and Moritz Schularick noted last week, is that “no mechanism exists that allows the governments of the eurozone to respond jointly to such a shock. The result is that the policy reactions to the pandemic are so far overwhelmingly national.” The problem with primarily national responses, however, is that some Eurozone countries’ high debt levels and higher borrowing costs limit their capacity to respond aggressively with fiscal backstops. These differences are already starkly apparent, as comparisons between Germany and Italy’s fiscal rescue packages make clear. This is a recipe for both public health and economic disaster.

So what are the available options?  The best and most effective would be Eurobonds. This is why more than 300 scholars of the European Union (including me) signed an open letter, published last week in the Financial Times, urging European leaders to “mutualize the fiscal costs of fighting this crisis” by issuing a common European debt instrument. Unfortunately, we have already seen sharp political opposition to this from the so-called “frugal four” countries (Germany, Netherlands, Austria, Finland) on the predictable grounds that this would create moral hazard and punish those countries that had responsibly saved for a rainy day.

A second, though far inferior option would be to use the European Stability Mechanism (ESM) to provide loans to individual countries in need. But the problem with this is obvious: it makes little sense for dealing with a common European shock for which no individual country is responsible. Moreover, ESM loans would only be used by countries with less fiscal room to maneuver, thereby carrying a similar stigma as previous IMF/Troika loans in the last Euro crisis. ESM chief Klaus Regling has downplayed these concerns, claiming that any such loans would have “very limited conditions.” But even limited conditionality would inevitably be politicized and end up diverting resources toward structural reforms and austerity in the midst of the mother of all liquidity crises. Consequently, it remains highly uncertain that Eurozone member-states would take advantage of any such ESM facilities in sufficient quantity to address the current problem.

Beyond these two options, smart scholars have now tabled a number of thoughtful proposals for further EU-wide fiscal initiatives. But all of these ideas are temporary and COVID-specific. They do little to address the deeper, underlying fiscal problem in the Eurozone: persistent, unsustainable debt overhang that has led to permanent austerity and stagnation in the southern Eurozone and transforms each new economic crisis into an existential challenge for the monetary union.  These problems existed before the COVID-19 crisis, and they will persist long afterward without reform. Indeed, the fiscal problems of Eurozone countries today are the cumulative result of policy errors made both at the Euro’s founding and in the Euro crisis from 2010 onward. These errors have left Greece, Italy, and others laden with unsustainable debt. Failure to address this debt overhang problem, once and for all, threatens not only the ability to deal effectively with the immediate COVID-19 crisis, but also the longer-term future of the Eurozone.

The pre-Eurozone era debt problems never ended

The Eurozone’s first mistake – its “original sin” – is that several countries were allowed to join the monetary union in the 1990s despite obviously failing to meet the debt-to-GDP requirement the Maastricht convergence criteria, which stated that “public debt must not exceed 60% of GDP, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace.”  In the run-up to 1999, it was clear to everyone that Italy, Greece, and Belgium simply did not meet this criterion; none of these countries were remotely close to having debt levels in line with the other Eurozone countries, nor were they on trajectories to do so anytime in the foreseeable future.  Thus, while relaxing the Maastricht criteria was surely good European politics – allowing all interested member-states to join the Euro at the outset, including all of the “Original Six” founders of the European Coal and Steel Community in 1951 – it also created massive legacy debt problems that have proven to be crippling for countries that permanently sacrificed monetary and exchange rate policy autonomy once they adopted the single currency.

SOURCE: De Grauwe 2009

SOURCE: Larchinese 2020

This legacy debt problem is most clearly visible in Italy.  Indeed, Italy’s current debt problems are due almost entirely to its pre-Euro debt overhang, which has hung like the Sword of Damocles over Italian policymakers for decades. At about 130%, Italy’s debt-to-GDP ratio today is only slightly higher than it was in the mid-1990s. Measured by its primary budget surplus, Italy has been more fiscally prudent than even Germany since the establishment of the Euro two decades ago. Yet two decades of austerity never brought Italy’s debt-to-GDP ratio below 100%, leaving it now still facing the problem of lacking fiscal space to address a major economic crisis. The problems of ignoring the Maastricht criteria are still coming home to roost in 2020.

The last Eurozone crisis never ended

This legacy debt overhang has combined with the Eurozone’s second mistake: the failure to bring the last crisis to an end. Despite claims from European leaders that the Eurozone crisis has ended, the economic realities on the ground in the Southern EMU countries make it clear this is simply not the case. The level of economic devastation in Greece remains truly staggering. The country is now mired in a depression longer and deeper than the Great Depression itself, with GDP still more than 20% below 2007 levels, and a return to pre-crisis levels not in sight for years, if not decades. Beyond Greece, overall unemployment remains high throughout the southern Eurozone, with youth unemployment nearly 30% in Italy and higher in Spain and Greece.

Likewise, ECB monetary policy has never “normalized,” in the sense that the ECB has undershot its inflation target for nearly a decade. These two issues are, of course, related. It has been all but impossible for Spain, Greece, and Italy to adjust through internal devaluation and austerity while Eurozone monetary policy has remained targeted to the economic situation in Germany and the Netherlands rather than the Eurozone as a whole. In any case, the cumulative failure of the ECB to meet its inflation target means that price levels in the Eurozone are now about 10% below what they would be based on target projections. This has prolonged Eurozone stagnation and severely hampered the southern states’ ability to fully recover from the last crisis.

SOURCE: ECB

Beyond this, of course, the policy response to the Eurozone crisis failed to address the underlying institutional gaps and macroeconomic imbalances in the monetary union. In particular, banking union has not broken the sovereign-bank “doom loop.” Instead, the web of interlocking bank exposure to Eurozone sovereign debt remains thickly intertwined: French banks remain highly exposed to Italian and Spanish debt. Spanish and Italian banks remain highly exposed to each other’s sovereign debt, while Spanish banks remain highly exposed to Portuguese sovereign debt.

Furthermore, as we are now seeing with the rancorous debate over Eurobonds, neither the establishment of the European Stability Mechanism (ESM) nor the ECB’s massive asset purchasing programs have addressed the fundamental macroeconomic and debt imbalances in the Eurozone. Instead, as last week’s row between the Dutch and Portuguese governments over “solidarity” and Eurobonds illustrated, too many Eurozone leaders remain beholden to the unhelpful narrative of “Northern Saints” and “Southern Sinners,” in which debt is always equated completely with bad policies and never ascribed to structural problems of monetary union.

If not Eurobonds, then comprehensive debt relief

In short, the Eurozone entered this latest crisis without having resolved either the debt and macroeconomic imbalance problems that existed in 1999, or the ones that have festered since 2010. It has chosen not to pursue the deeper political and fiscal integration that would solidify the monetary union, and the emerging disagreements over Eurobonds strongly suggest that the political support for any such deeper integration and reform still does not exist.

A more feasible solution is for the Eurozone to finally adopt a comprehensive debt reduction plan, along the lines of the Brady Plan adopted in 1989 to end the Latin American debt crisis.  A Eurozone Brady Plan would be far easier to implement than the original, since the ECB and Eurogroup now hold half of all Eurozone sovereign debt themselves. The mechanics of this also would not be particularly complicated. Indeed, viable proposals have circulated for quite a while now. Countries could offer new bonds, involving both very long-term maturity extension and substantial principal reduction. The ECB and Eurogroup could take larger haircuts than private creditors. The debt relief provided by such a plan could provide all Eurozone countries – but most especially Italy and Greece – with substantial fiscal policy breathing space to address the COVID-19 crisis, as well as future crises. In addition, it would help end the debt-deflation spiral in the Eurozone and unwind the sovereign-bank doom loop that persists a decade after the Eurozone crisis began. In this environment, the need for Eurobonds or country-specific conditional ESM loans would be substantially diminished, if not eliminated.

Undoubtedly, critics of comprehensive Eurozone debt relief will reply that debt reduction will fuel moral hazard and that Italy and Greece’s problems require deeper structural reforms that debt relief will not address. To the first concern, the best reply still remains the one Ricardo Hausmann offered in the wake of the Asian financial crisis two decades ago: moral hazard simply is not the fundamental problem in financial crises and “other distortions are more binding.” One can respond similarly to the second concern. Yes, of course, structural reform is needed. But two decades of austerity and pretending that debt overhangs are sustainable has also not led to meaningful structural reform. Postponing long overdue debt reduction because of the specter of moral hazard or because there is more work to do on structural reforms is simply not a compelling argument. If anything, leaving southern European countries mired in depression with massive debt overhangs is likely to postpone serious structural reform of their economies for far longer.

Critics will also claim that Europe cannot afford debt relief, arguing that Italy, in particular, is “too big to fail, but too big to save.” It is key to recognize that the former is an economic assessment but the latter entirely political. The ECB and the Eurogroup collectively face essentially no resource constraint: the ECB issues the world’s #2 reserve currency and inflation is negligible. Many of the Euro-19 can borrow, both in the short- and long-term, at negative real interest rates, in essentially unlimited quantities. Perhaps comprehensive debt reduction would generate modest inflation in the Eurozone for the next decade. But this would actually be a welcome outcome that would finally enable the ECB to hit its inflation target consistently. As with Eurobonds, the only opposition to real solutions, then, is political.

If not now, when?

In sum, if the Eurozone is to be sustainable in the long run – and members are to have the fiscal space to respond to periodic crises such as the current one – then debt relief to create the necessary fiscal space may be the only politically viable solution. Again, deeper fiscal integration in the medium term, and a Coronabond issue in the short term, are the first-best policy options. But if this is not to be, given political realities, then a Eurozone Brady Plan is the next best option. And even if COVID-specific Eurobonds or other initiatives do become a reality, debt relief is still necessary to address the legacy debt overhangs in Greece, Italy, and elsewhere, and to facilitate long-term growth and on-target inflation in the Eurozone in the years ahead.

Now is the time for bold and creative initiatives to finally address the Eurozone’s persistent gaps and policy mistakes. Simply maintaining the current status quo – with its half-hearted fiscal solidarity and permanent fiscal austerity for southern European countries – will eventually lead to the Eurozone’s demise. The Euro has survived for two decades, in spite of its original sin and the policy errors of the last crisis. Some have taken this as evidence that those worrying about the Euro’s collapse over the last decade have been overly pessimistic. Yet as Herb Stein famously noted in regard to the US balance of payments deficit in the 1980s, “If something cannot go on forever, it will stop.”  European leaders should seize the momentum for action provided by the pandemic crisis to finally, at long last, address the debt problems that threaten the single currency’s long-term survival.


This post written by Mark Copelovitch.



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Brazil and COVID-19: Favela Residents and Indigenous Communities Among Those Most at Risk

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As of noon on April 8th the total number of Covid-19 positive cases reported by Brazil’s health ministry exceeded 14,000 and the number of deaths exceeded 700. This is, by far, the highest number of reported cases in Latin America (though Ecuador has a greater number of reported cases and deaths on a per capita basis).  The actual number of cases is likely many times greater, given that the current rate of testing for Covid-19 in Brazil is still very low – 258 per million, compared to 3,159 per million in Chile, 6,423 per million in the U.S. and 10,962 per million in Germany. In São Paulo, Brazil’s biggest city, and the hardest hit urban area in the country, the local health secretariat is reportedly only providing tallies for severe cases of the virus.

Far right Brazilian president Jair Bolsonaro, an admirer and close ally of President Trump, has been seriously downplaying the gravity of the pandemic. He has referred to the virus as a “little flu” and has openly flouted social distancing measures, promoting political rallies in mid March and wading into crowds of supporters.  Ironically, prior to the recent rallies, senior members of Bolsonaro’s cabinet tested positive for the virus following an international trip that included a meeting with Trump at Mar-a-Lago.  These and other members of the delegation were among the first imported cases of Covid-19 to Brazil (and it is rumored that Bolsonaro himself was infected).

As seems to be the case with his U.S. counterpart and mentor, Bolsonaro’s rejection of experts’ recommendations has a clear motivation: keeping the economy running at all costs.  Even before the virus arrived, Brazil’s economy was in sad shape, with no signs of real recovery following a deep recession in 2015-16. Unemployment remained stubbornly high (more than 11.6 percent in February) and economic growth stood at less than one percent during the first year of Bolsonaro’s presidency (as might be expected given the government’s constitutionally-mandated austerity policies).  As is the case in most of Latin America (see ECLAC’s grim predictions for the region), business state and local shut-downs and stay-at-home measures designed to save hundreds of thousands of lives are expected to have devastating economic consequences.  Brazil’s biggest bank, Itaú, forecasts as much as 6.4% negative economic growth for 2020 alone if virus containment measures are maintained for an extended period of time.

In response to these and other dire predictions, Brazil’s lower house has passed a “war budget” amendment to the constitution, which – if approved by 3/5 of the Senate – will ease current draconian budget constraints and allow the state to engage in significant deficit spending to try to address the country’s looming health and economic emergencies.  Meanwhile, many of Brazil’s state governors have ordered non-essential businesses to close and have supported social distancing measures. In response, Bolsonaro has engaged in heated clashes with governors and threatened to issue a decree forcing businesses to re-open throughout the country. He has also butted heads with his own health minister, Luis Henrique Mandetta, who has supported strong social distancing protocols, threatening at one point to fire him.  Currently Mandetta has the highest ratings of any politician in the country while Bolsonaro’s favorability ratings have been sinking. Millions of people in cities across Brazil have protested Bolsonaro’s dismissive approach with regular panelaços – loud, pot-banging protests staged from residents’ windows and balconies. Brazil’s major leftwing leaders have called for the president’s resignation. 

It’s possible that Bolsonaro is making a long-term political calculation,  attempting to position himself to better weather the coming economic tsunami by blaming others for taking lifesaving measures that shut down much of the economy.  Here again, his behavior bears similarities with that of the occupant of the White House.

Regardless of what social distancing steps are taken throughout Brazil, many observers believe that the pandemic will exact a particularly terrible human and economic toll in the country’s poor favelas, where around 11 million people live.  Historically neglected by public authorities (apart from police agents engaged in increasingly widespread extrajudicial killings targeting Black youth), favela communities have extremely limited access to healthcare resources and water and sanitation infrastructures.  As Brazilian-Colombian researcher Nicole Froio explains in NACLA, many favela residents are simply unable to wash their hands regularly or practice social distancing measures in houses where large families share tiny living spaces.  Given the lack of effective support from the state, favela communities in Río de Janeiro and São Paulo are pooling scant resources to hire round-the-clock medical support. 

Brazil’s rural indigenous communities are also particularly vulnerable, given the fact that they are often located far away from hospitals able to treat infected patients with acute symptoms.  Ironically, the first indigenous Brazilian to test positive for Covid-19 is a healthcare worker who was in contact with an infected medical doctor who was visiting a remote Kokoma community.  Researchers fear that the virus could wreak enormous destruction and havoc in communities, especially as those at highest risk – the elderly – are typically the pillars of social order and transmitters of traditional knowledge.  In response to the pandemic, many indigenous peoples are likely to disperse into small groups, according to Dr. Sofia Mendonça, a researcher at the Federal University of São Paulo. Amnesty International reports that some communities are blocking roads and going into voluntary isolation to keep the pandemic at bay.    

Amnesty notes that Brazil’s indigenous communities are facing two sorts of attacks now.  Alongside the threat of Covid-19 infections, grileiros – those that illegally appropriate land – are taking advantage of the pandemic, and the fact that indigenous communities are prevented from effectively patrolling their territories, to step up the use of indigenous lands for illegal logging, agriculture and mining enterprises.  Government protection of indigenous lands has already been severely weakened under Bolsonaro – who has sought to open up indigenous lands for outside exploitation – and indigenous leaders who resist land invaders are being threatened and killed at an increasing rate.  On March 31st, Zezico Rodrigues Guajajara, a well-known Guajajara leader and opponent of illegal logging in Araribóia indigenous lands, was assassinated.  It was the fifth murder of a Guajajara land rights advocate so far this year, according to Amazon Watch.  

The post Brazil and COVID-19: Favela Residents and Indigenous Communities Among Those Most at Risk appeared first on Center for Economic and Policy Research.



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How CEOs Are Ruining AmericaToday, America’s wealthiest business…

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How CEOs Are Ruining America

Today, America’s wealthiest business moguls – like Jamie Dimon, head of JPMorgan Chase – claim that they are “patriots before CEOs” because they employ large numbers of workers or engage in corporate philanthropy.

Rubbish.

CEOs are in business to make a profit and maximize their share prices, not to serve America. And yet these CEOs dominate American politics and essentially run the system. 

Therein lies the problem: They cannot be advocates for their corporations and simultaneously national leaders responsible for the wellbeing of the country. This is the biggest contradiction at the core of our broken system.

A frequent argument made by CEOs is that so-called “American competitiveness” should not be hobbled by regulations and taxes. Jamie Dimon often warns that tight banking regulations will cause Wall Street to lose financial business to banks in nations with weaker regulations. Under Dimon’s convenient logic, JPMorgan is America. 

Dimon used the same faulty logic about American competitiveness to support the Trump tax cut. “We don’t have a competitive tax system here,” he warned.

But when Dimon talks about “competitiveness” he’s really talking about the competitiveness of JPMorgan, its shareholders, and billionaire executives like himself.

The concept of “American competitiveness” is meaningless when it comes to a giant financial enterprise like JPMorgan that moves money all over the world. JPMorgan doesn’t care where it makes money. Its profits don’t directly depend on the wellbeing of Americans.

“American competitiveness” is just as meaningless when it comes to big American-based corporations that make and buy things all over the world. 

Consider a mainstay of corporate America, General Electric. Two decades ago, most GE workers were American. Today the majority are non-American. In 2017, GE announced it was increasing its investments in advanced manufacturing and robotics in China, which it termed “an important and critical market for GE.” In 2018, over half of GE’s revenue came from abroad. Its once core allegiance to American workers and consumers is gone.

Google has opened an Artificial Intelligence lab in Beijing. Until its employees forced the company to stop, Google was even building China a prototype search engine designed to be compatible with China’s censors.

Apple employs 90,000 people in the United States but contracts with roughly a million workers abroad. An Apple executive told The New York Times, “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible” – and showing profits big enough to continually increase Apple’s share price.

American corporations will do and make things wherever around the world they can boost their profits the most, and invest in research and development wherever it will deliver the largest returns. 

The truth is that America’s real competitiveness doesn’t depend on profit-seeking shareholders or increasingly global corporations. The real competitiveness of the United States depends on only one thing: the productivity of Americans. 

That in turn depends on our education, our health, and the infrastructure that connects us. Yet today, American workers are hobbled by deteriorating schools, unaffordable college tuition, decaying infrastructure, and soaring health-care costs. 

And truth be told, big American corporations and the CEOs that head them – wielding outsized political influence – couldn’t care less. They want tax cuts and rollbacks of regulations so they can make even fatter profits. All of which is putting Americans on a glide path toward lousier jobs and lower wages. How’s that for patriotism?

The first step toward fixing this broken system is to stop buying CEOs’ lies. How can we believe that Jamie Dimon’s initiatives on corporate philanthropy are anything other than public relations? Why should we think that he or his fellow CEOs seek any goal other than making more money for themselves and their firms? We can’t and we shouldn’t. They don’t have America’s best interests at heart — they’re making millions to be CEOs, not patriots.

Big American corporations aren’t organized to promote the wellbeing of Americans, and Americans cannot thrive within a system run largely by corporations. Fundamental reform will be led only by concerned and active citizens.



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