Investors Continue to Bail Out of Hedge Funds

The fear of the markets was clear in November.

Investors pulled a net $32 billion from hedge funds last month, making 2008 the first year in their recorded history that the funds have had significant outflows and ending the industry’s 18 years of asset growth.

To understand how deep the fear was, keep in mind that money has been taken out of funds following every strategy, even those – such as macro funds – which were showing positive returns, according to data from fund trackers Hedge Fund Research.

Further, December redemptions appear to be two to three times the November number.

Conrad Gann, chief operating officer of fund tracker, TrimTabs, says the known December redemption number is already at $57 billion and could go as high as $80 billion.

The funds had outflows of $43 billion for the 10 months to the end of October. TrimTabs’ estimate of further significant redemptions for November and December indicates that the funds will show outflows of more than $100 billion for the full year. In 1994, the only previous time they had outflows, the figure was $1 million.

If you are looking for a reason that Treasury bills are trading near 0%, the hedge fund industry is a good place to start. With these kinds of resumptions coming in, the funds put money in the perceived safest possible instrument, Treasury securities, to meet redemption demands. Investors then get the money and put it right back into T-bills.

Once all the fear subsides, things should turn positive quickly given the enormous amounts of money Bernanke is pumping into the system. December 2008 could very easily be the bottom for markets. January could see huge upside action in the markets.

Marc Faber Gets It......Go Short Treasury Securities in '09

Marc Faber, editor & publisher of the "Gloom, Boom, and Doom Report" did a call- in to CNBC's Squawk Box this morning, he told Squawk Box:

You want to be in gold, silver, platinum, and also oil. If you believe in a recovery of asset prices as a result of money printing, you should be in hard assets, particularly precious metals...I think the big trade in 2009 will be to go short Treasurys massively -- I really mean massively -- because we may have inflation for one, two, three years ....

Faber is being an optimist here. It's not the length of the inflation, it could be even longer than three years, but the severity. We are looking at double digit rates very quickly.

Things could start to turn very quickly out of the gate in 2009. Any economist, expecting the downturn to last into 2010, doesn't understand business cycle theory.

Yen Reaches 13-Year High Against the Dollar

The massive short yen/long dollar carry trade is beginning to unwind in earnest. The dollar is a dead duck. Inflation is straight ahead. This is not the time to be long T-bills or T-bonds.

The yen is up 25% against the dollar this year, so far.

And here's a bit of sanity in a world of micro manipulating governmemt financial offiicials. Shoichi Nakagawa, Japanese finance minister, said he is not considering intervention in currency markets for now, the Nikkei newspaper reported on its website. Nakagawa also said the latest moves in currencies were not too sharp and that the yen’s recent gains were not bad.

Three-Month Bill Yield Goes Negative

Following a Treasury auction that pushed 4-week T-bills down to a yield of 0.000%, the three-month Treasury went negative this afternoon, according to WSJ.

Clearly, hedge funds, mutual funds, and the like, are staying extra liquid and conservative with parts of their portfolios in anticipation of end oy redemptions.

I say short T-bills, and expect a major rally at the first of the year, or just before.

The Tables Turn: China Lectures U.S. On Economy

At a high-level summit in Beijing called the Strategic Economic Dialogue, Wang Qishan, a vice premier and leader of the Chinese delegation at the two-day talks, called on the US to take swift action to address the current financial crisis and said the two countries needed to work together. “We hope the US side will take the necessary measures to stabilise the economy and financial markets as well as guarantee the safety of China’s assets and investments in the US,” Wang said.

China, which has nearly $2 tillion of foreign exchange reserves, last month overtook Japan to become the largest foreign holder of US government debt,

Zhou Xiaochuan, governor of the Chinese central bank, urged the US to rebalance its economy. “Over-consumption and a high reliance on credit is the cause of the US financial crisis,” Mr Zhou said. “As the largest and most important economy in the world, the US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”

Bernanke: Fed Money Policy Shift to Buying Notes, Bonds and Other Financial Instruments

As the Fed Funds rate trades below 1%, it is clear the Fed is looking at alternative monetary tools to manipulate the economy.

In a speech before the Greater Austin Chamber of Commerce, Austin, Texas, Fed chairman Ben Bernanke said:

Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver--the provision of liquidity--remains effective. Indeed, there are several means by which the Fed could influence financial conditions through the use of its balance sheet, beyond expanding our lending to financial institutions. First, the Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand. Indeed, last week the Fed announced plans to purchase up to $100 billion in GSE debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. It is encouraging that the announcement of that action was met by a fall in mortgage interest rates.

Second, the Federal Reserve can provide backstop liquidity not only to financial institutions but also directly to certain financial markets, as we have recently done for the commercial paper market. Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets. In this spirit, the Federal Reserve and the Treasury jointly announced last week a facility that will lend against asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.

Translation: The Fed is going to pump and pump money into the system every way it can think of, damn the banks.

UN Economists Warn of Hard Landing for Dollar

The current strength of the dollar is temporary and the US currency risks a hard landing in 2009, according to a team of United Nation's economists.

The economists, led by Dutch economist Rob Vos, said the dollar’s sharp rebound this autumn had been driven mainly by a flight to the safety of the international reserve currency as the financial crisis spread beyond the US.

The overall trend remained a downward one, however, reflecting perceptions that the US debt position was approaching unsustainable levels.

The UN team said that, as the financial crisis spread beyond the US, there had been a massive shift of global financial assets into US Treasury bills, driving their yields almost to zero and pushing the dollar sharply higher. At the same time, however, the US’s external debt had risen to new heights that could provoke a dollar collapse.

These guys get it. It's time to short the dollar and Treasury securities.

There's Growing Fear The Treasury Might Default

I don't see this happening. I believe the Federal Reserve would just step in and buy up whatever amount of Treasury's would be needed to stop a panic, even if they had to buy them ALL.

But Bob Murphy has the chart to prove that the fear is increasing, here.

-Robert Wenzel