In awe of Ken Moelis
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In awe of Ken Moelis

There is a whiff of hysteria haunting markets. Many of the big players have found themselves wrong-footed. The sands are shifting, and it’s difficult to know who or what to trust.

Some of the brightest investors I know are stubbornly long the US dollar and have been selling the euro, in vain. Five and a half years after Lehman Brothers went bankrupt, the Federal Reserve is still keeping interest rates at emergency levels. It seems new Fed chairman Janet Yellen is not inclined to raise rates soon.

The world is awash with liquidity. Most intelligent investors recognize this, but are too frightened to step away. A senior executive at one of the biggest European insurance groups confessed to me that the firm had €40 billion of cash to invest this year. “The problem is,” the mole sighed, “we have to make a return for our policyholders. Therefore we cannot be out of the market. I’m telling my guys to buy Spanish and Portuguese government bonds. But heaven help us if there’s a reversal and we have to start selling into a falling market.”

The mole could be on to something. Actions that were intended to make the world a safer place might in fact be having the opposite effect. Basel III capital provisions and the Volcker Rule both discourage banks from trading for their own account.

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