Dan Fuss manages or co-manages over $10 billion (£7 billion) in fixed income assets and began his investment career in 1958.
Since 1978, he has worked at Loomis Sayles, an affiliate of Natixis Global Asset Management, and runs a variety of mutual funds. These include the flagship Bond fund, Global Markets, Investment Grade Bond, Strategic Income and Institutional High Income funds. He is based in Boston.
Fuss likens the current market environment to the recession of 1973-75. However, links between sectors of the financial industry have increased, leading to greater market falls, he says.
For example, if asset managers see inflows shrink and asset values fall, they will make less use of brokers and dealers. Hedge funds also play a larger part, and investment banks and even commercial banks are linked to both industries.
“We have seen ferocious declines in the revenues of asset managers [in North America] – they have been between 40% and 50%. These revenues tend to be tied to the market value of securities. As a result, many firms have had to cut staff, and to this degree, everyone is tied somehow to the stockmarket and bond markets.
“There is one comparable period, 1973 to 1975, when employment came down on the asset management side. Asset management tends to reflect what happens later in the capital markets. The main difference is: all of the industries are intertwined now. In the 1970s, when Wall Street had its problems, it did not necessarily mean the rest of the financial sector would have problems. Now it is one and the same.”
He adds that changes in communications – such as the internet and a greater number of news channels – have increased the impact of this recession. The regular appearance of economic woes on the local and national news, says Fuss, means that the public worry about their jobs and take precautionary steps such as saving and increasing pension funds.
Fuss argues there is nothing wrong with the idea of mortgage-backed securities, which he describes as “an efficient means of financing”. However, “a decline in underwriting standards is key” to this recession, he says, because historical experience was used to build and price new models.
“The experience was from a different time. There has been a huge change in the US in underwriting standards, as they have moved to be transaction-oriented rather than long-term investment oriented. The historical experience no longer applied. The fundamental problem came when building models from historical experience became hysterical.”
Onlookers viewed these developments as positive, he says, because poorer people were able to own houses and lenders were providing credit for auto-loans or credit cards, while trust in rating agencies and banks was high.
These trends came to head when the economy was weakening and everything began moving in the same direction – downwards.
“I do not ever recall an experience like last September when markets just weren’t working. You couldn’t transact on either side, there was no buying or selling,” says Fuss.
He calls this the second worst episode in the markets to occur during his life, the first being the bottom of the Great Depression, when he was born. However, he says that we have endured the first phase and he sees early signs of the economy picking up.
Fuss explains that after last September, retailers cut back orders as sales slowed. This had a snowball effect on manufacturers, who saw orders drop dramatically. Their inventories built up, resulting in staff cuts and lower demand for raw materials.
However, some retailers saw their supplies diminish to such a level that they need to order again, and they are doing so at a higher rate than before.
“This is the reverse of what happened before. The manufacturer is recalling everybody to run double shifts to meet demand. They realise it’s an extreme and temporary measure, but there are minute shreds of confidence coming through,” says Fuss. “It is not over, but it is starting to be over.”
Fuss adds that once recovery has spread, in his view, there is a 90% chance of inflation returning in three to four years’ time.