US economic growth will be hampered by regulatory over-reaction to the sub-prime mortgage crisis, predicted Philippa Malmgren, a visiting geopolitical adviser of the UK-based Canonbury Group, at last week’s FEAL Executive Forum in Melbourne.
Malmgren said that recent history backed her argument, with the downturn-inducing rule changes typically inspired by actions brought against high-profile protagonists of the preceding boom. Whoever is New York attorney-general at the time tends to be a pivotal figure – for instance, Rudy Giuliani’s late-1980s charges against junk bond trader Michael Milken and arbitrageur Ivan Boesky in reaction to the savings and loan crisis curbed market confidence, while a decade later Elliot Spitzer’s crackdown on brokerage houses in the wake of the Enron/Worldcom bankruptcies precipitated the Sarbanes-Oxley Act, which Malmgren said helped broaden and deepen the post-tech wreck downturn. Malmgren pointed out that the incumbent NY attorney-general, Andrew Cuomo, had already sent subpoenas to 14 US banks in the wake of the credit market crunch. “[Cuomo] will be thinking this is an absolute home run to the White House…once his office gets into those institutions, they’re going to find all sorts of things they weren’t looking for. The rules of the game will change – too many people have been hurt for them not to,” Malmgren said, although she added a Democrat president would likely be more prescriptive than a Republican in terms of constricting the capital markets. A former adviser to president George W Bush, Malmgren, who spoke at several gatherings of institutional investors on her visit, was brought to Australia by Deutsche Asset Management, to which she is a consultant. She described the credit crunch as “not a sub-prime crisis, but rather a sudden rise in the cost of capital”. She told the FEAL executives that in one measure, US inflation was already at 8 per cent, after adding back volatile oil and food prices, which would indicate the US economy was already suffering negative interest rates, which offered little movement from further monetary tightening. The Executive Forum, sponsored by Apostle Asset Management, attracted a record 90 attendees consisting of fund chief executives and their direct reports. Other sessions included Don Ezra, director of strategic advice at Russell Investment Group, on investing in retirement, and Michael Dwyer, of First State Super, Tony Lally of Sunsuper, and Robin Burns of EquipSuper on ‘Unlocking the Value Within Super Funds’. Presentation are on the FEAL website for members: www.feal.asn.au
Future Fund chief investment officer Ben Samild said that FY24 has been a great year for alpha creation, thanks to strong returns in equities and, unusually, across multiple hedge fund strategies all at the same time. He reflected the past few years have been “a difficult time to be an asset owner and to generate positive returns for risk assets” but the Future Fund is tracking well of its long-term mandate.
Simon Hoyle and Darcy SongSeptember 4, 2024
