Market Commentary

by Byron Wien

Blackstone is pleased to offer the following Market Commentary by Byron Wien to share his thinking on global economic developments, market insights and other factors that may influence investment opportunities and strategies.


Byron Wien is a Vice Chairman

  • Mar 05, 2012

    Where We Went Wrong

    Ever wonder how we got into this predicament? Academics and strategists have been analyzing our current financial situation endlessly, but I haven’t seen too much probing into the origins of our present problems. In my opinion, you probably have to go back to the end of World War II to understand how we got here. I think policy makers in the United States especially failed to recognize the significance of four important events that led to our current challenging set of circumstances.
  • Feb 03, 2012

    An Optimistic Outlook

    There is a nervous and gloomy mood out there. The Ten Surprises of 2012 have a positive tone, and for the past month I have been discussing them with our clients and others in large and small groups. Most investors believe the United States economy will grow at only 1% to 2% and the European sovereign debt crisis will remain unresolved, with Greece and possibly others being forced to withdraw from the Union. No progress will be made by Congress in reducing the budget deficit until after the November election. Emerging market economies around the world will slow, and we will have another difficult year for global equity market performance.
  • Jan 04, 2012

    The Surprises of 2012

    All this began to change in October. Data for the U.S. economy began to improve and the equity market moved back to where it had started the year. European leaders, recognizing the urgent need for a solution to the sovereign debt crisis, began to talk of a treaty change that would move the continent towards a fiscal union. By year-end the 2011 Surprises looked much better. A blogger, analyzing each of them and giving me partial credit for a few, came up with a score of 50%, which is consistent with my long-term average. Other reviewers were not so generous. My definition of a surprise is a market-influencing event that the average investor would assign only a one-out-of-three chance of taking place during the year, but that I believe is “probable,” i.e., that the event has a better than 50% chance of happening. Here is my review.
  • Dec 07, 2011

    Denial No Longer

    On both sides of the Atlantic, we have finally come to the point where if we continue on our present respective paths the outcome is not likely to be pleasant. In the United States the wake-up call was the failure of the Congressional Super Committee to come up with a credible plan to reduce the U.S. budget deficit by $1.2 trillion over ten years. In Europe it was the rise in the cost of raising government funds in Italy and Spain, culminating in November with the lack of bids for part of an auction of German debt and a sudden rise in interest rates there. Finally it appeared that doing nothing and muddling through were incompatible. The verdict was delivered in both the European and American stock markets by a resumption of the free fall in equity prices that we experienced in August and September.
  • Nov 07, 2011

    Revisiting Radical Asset Allocation

    In December of last year I suggested a “Radical” Asset Allocation program for institutional investors. I created it in reaction to the hours I had spent as a member of several investment committees where I had listened to and participated in discussions of the global investment environment, but which, in the end, only made very small changes in the asset allocation no matter how profound were their conclusions about the outlook. My investment philosophy is that making many small changes will produce disappointing results. It is the big ideas that make a difference and you should spend your time developing them.
  • Oct 03, 2011

    It’s Hard to Be an Optimist

    I still believed we could avoid a recession and a bear market, but I began to realize that there were some structural and secular problems that were holding the economy back. I had long thought the United States, Europe and Japan were mature economies that would have trouble growing much faster than 3% for any sustained period. I was now beginning to see that there are some impediments that might keep growth from even approaching that level.
  • Sep 02, 2011

    End of Summer Despair

    The mood of this year’s sessions was even more negative than in 2010. There was a clear lack of confidence in President Obama and his advisors, a belief that it was unlikely that Congress would be able to compromise sufficiently on deficit reduction and revenue increases to put the federal budget on a sound footing and initiate programs to create jobs, improve infrastructure and deal with the challenges of education, healthcare and competitiveness. The investors were also concerned that the sovereign debt problems of Europe, now that they have spread to Italy and Spain, would overwhelm the resources of the European Central Bank, the International Monetary Fund and Germany. While believing growth would continue to be relatively strong in Brazil, India and China many worried that tight monetary policies would slow even these emerging economies. Finally there was concern that the Arab Spring might suffer a second wave of unrest if a failure of the new regimes to provide jobs were to result in widespread disappointment.
  • Aug 02, 2011

    Looking Beyond the Twin Crises

    In spite of this, the financial markets began the third quarter by moving higher. The fundamental backdrop was hardly favorable. The employment report for June showed that the economy produced far fewer jobs than expected; auto production, which was expected to surge, only improved modestly; and consumer confidence declined sharply. For several months I have been making the case that the second half of the year would be stronger for the U.S. economy than the first, but the skepticism I have encountered has intensified.
  • Jul 08, 2011

    The Smartest Man in Europe Is Very Cautious

    Usually we have our discussions in hotels or offices, but this year I spent a weekend with him at his summer home on the Mediterranean in France. There, surrounded by his impressive paintings and sculpture, we talked about the current outlook for global investors. I wrote my first essay about these meetings in 2001 and it was called “The Smartest Man in Europe Is Upbeat.” His mood was very different this year.
  • Jun 01, 2011

    Time for a Pause

    Finally, however, the optimism began to wane. We have learned that the best time to buy stocks is when most investors are pessimistic. Points of extreme pessimism in terms of investor sentiment most recently occurred in March 2009 and August 2010, both important buying opportunities for U.S. stocks. As investor confidence improves and cash is employed, equities can have a sustained move. If investors are already positive, as they were at the beginning of 2011, stocks can still rise but it is likely that the energy of the market will dissipate and a correction will begin before too many months go by. The decline will be blamed on the factors that the market successfully plowed through during the upswing. The question then becomes: How vulnerable is the market and how far down will stocks go? Sentiment seems to be turning. Some survey-based indicators which were very optimistic (and therefore negative for the outlook) have shifted to neutral and the transaction-based Chicago Board Options Exchange put/call ratio is approaching a bearish reading which is favorable.
  • May 05, 2011

    The India / China Contrast

    Perhaps the most memorable experience of my trip to India was an early Sunday morning visit I made with my friend, the hedge fund manager Richard Chilton, and some of his team to a small village an hour and a half’s drive from Bangalore. I had long wanted to get direct exposure to the rural poor in India. The location was twelve kilometers off the main highway, and we went there to watch a meeting of a microfinance company with some of its clients. Two groups of 45–50 women each sat on the ground in circles before a representative of the company. Having taken off their shoes, they began with a chant about how they pledged to pay off their loans. It was almost like a religious ceremony. Each of the circles consisted of nine or ten subgroups of five, each of which had a leader who gave the company man cash representing their payment obligation. Then several applications for new loans were made and the whole circle gave a voice vote approving the loan.
  • Apr 07, 2011

    Some Thoughts about the Current Situation in the Middle East, North Africa and Japan

    The events in the Middle East and North Africa coupled with the earthquake and tsunami in Japan unsettled markets everywhere. There was a sudden rush to liquidity, and currencies, commodities and bonds responded irrationally. The Japanese yen strengthened even though the Bank of Japan was expanding the money supply vigorously, which, in effect, was debasing the currency.
  • Mar 02, 2011

    Off to a Good Start

    If you believe as I do that the market was put on earth by God to make fools of the greatest number of people, it would not be surprising to you that stocks rallied throughout the early part of the year. The fundamental background was positive. Retail activity was firm, automobile sales were surprisingly strong, fourth quarter earnings were mostly beating expectations, the European credit crisis was dormant for the moment, state and local governments were making an effort to control expenses and initial unemployment claims were trending downward. There were some negatives: the Federal budget deficit was running at an unprecedented $1.5 trillion rate and the United States was likely to run up against its debt ceiling by March. Inflation was beginning to become a serious problem in the developing world, casting some doubt on the potential profitability of companies operating in those markets. Political upheavals in Tunisia, Egypt, Libya and Bahrain raised the issue of stability in that critical oil-producing region. The January unemployment report came in at 9.0%, but that was more because of people dropping out of the work force than new jobs being created. As we moved into February investor optimism remained undaunted and those who were cautious began to buy again, recognizing that it was futile to “fight the tape.” Mutual fund buyers who had shunned equities in favor of bonds during 2010 bought more common stocks in January than in any month since 2003.
  • Feb 04, 2011

    It Could Be a Very Good Year

    If there is a theme in this year’s surprises, it is that more than half of them are in the direction of the consensus but go further. Understandably, investors tend to extrapolate current trends. Before September last year the United States market moved back and forth 165 times over its starting point of the Standard & Poor’s 500 at 1115, but stocks did very well in the fourth quarter. Historically forecasters usually expect the market to rise 10% in the following year almost regardless of what it had done in the previous period and that was also the case this year. The same was true for the economy, where observers were looking for a continuation of the modest growth we experienced in 2010.
  • Dec 06, 2010

    A Radical Approach to Asset Allocation

    During these trips I have been asked to look over dozens of institutional portfolios and to comment on their structure. In most cases the asset allocation is heavily weighted toward long-only investments in the developed markets. While bond portfolios have been trimmed, the allocation to higher yielding fixed income securities is small. Few institutions own gold or other commodities. Many have a quarter of their portfolios in alternatives, but the split among hedge funds, real estate and private equity varies widely. I believe few of the portfolios I reviewed are constructed to perform well in the investment world that exists today. The investment committees overseeing these assets have made incremental changes over time but they have failed to step back and say that the future is likely to be very different from the past and our asset allocation should recognize that fact.
  • Oct 04, 2010

    The Evolution of the Hedge Fund Industry

    The number of funds closing after the peak in 2007 was somewhat more significant than the decline in assets. About 22% of the funds operating that year closed over the next three years while the funds under management only declined 16%. There are several reasons for this. First, with increased regulation, a greater emphasis on risk control and increased client pressure for transparency and contact, it became more expensive to operate a hedge fund and the critical mass of funds under management to be profitable escalated. In the early days of the industry, back in the 1970s and early 1980s, it was possible to start a fund with less than $10 million, and Julian Robertson and Steinhardt, Fine, Berkowitz both did so. There is considerable debate about what the critical start-up mass is today. Even though management fees have doubled to 2%, you probably need $50 million, although many go into business with less than that hoping for a strong performance year which will provide substantial incentive fee income and attract new clients. The implementation of the so-called Volcker rule will result in some brokerage firms closing or spinning out their proprietary trading operations, internal hedge funds and private equity activities. As a result we may see more hedge fund start-ups over the near term run by managers with impressive records.
  • Jul 02, 2010

    The Smartest Man Thinks We Are Writing History

    This is the tenth annual essay I have written about the views of this investor who has impressed me over the past three decades with his ability to anticipate major trends before they were widely understood. He saw the end of communism in Russia and the rise of capitalism in China. He identified opportunities in the developing world before most others and he recognized the growing shortage of commodities as a result. A descendant of an international mercantile family whose roots go back to the operation of canteens selling food and weather protection along the Silk Road centuries ago, his career has been spent successfully managing his own and other people’s money, collecting art (from Canaletto to Kandinsky) and trying to understand the growing complexity of the world.
  • May 11, 2010

    Confusion and Complacency Abroad

    Even though Labor held a strong majority of seats in Parliament it looked like the conservatives would make important progress in gaining political power. Suddenly, seemingly out of nowhere, the Liberal Democratic Party candidate, Nicholas Clegg, surged forward. He was younger than the other two and proved to be a one-man Tea Party, lashing out at the other candidates and appearing to oppose everything they stood for. For the first time in its history Britain had a series of three television debates giving Clegg exposure to a broad national audience and throwing the election into turmoil. Clegg did not do well in the election, however.
  • Apr 09, 2010

    The Healing

    On the political front the passage of the health care bill was important. Almost everyone in favor would agree that it is not what we once hoped it would be, and many believe that it is a step backwards because of its cost, but for those who had lost confidence in the ability of the American legislative system to get anything done, it was a step forward. The cleavage between the Republican and Democratic representatives in Congress had become so sharp that it seemed to observers abroad that our system of government was dysfunctional.
  • Mar 12, 2010

    A Crisis In Confidence

    And the problems were not confined to the United States. Greece, with $400 billion in national debt, threatened to default on its bonds, which would throw the European Union and the euro into turmoil. As soon as austerity measures were proposed to deal with the problem the whole country went on strike. The fear was that even if the problems of Greece were temporarily solved, Spain, particularly, and other marginal European countries would follow with similar problems.