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John Paulson, the hedge fund manager whose bearish positions on the US housing market earned billions in profits, told investors on Monday that housing prices in hard-hit California will begin to rise this year, setting the stage for a wider recovery.
“California was the first to go negative and it is the first to recover,” Mr Paulson said on a conference call. “It is six months ahead.”
Mr Paulson says he expects California to experience a 20 per cent rise in housing prices this year compared to last. Nationally, housing prices should rise this year between three and five per cent this year, and eight to 12 per cent next year.
Mr Paulson expects that affordability, which is at a 50-year low, a recovery in prices, low interest rates and continued fiscal stimulus are all contributing to what will likely be a “V” shaped recovery.
“There is a lot of upside in US markets,” Mr Paulson said, predicting that corporate profits will be boosted by productivity growth and cost cutting.
Mr Paulson’s bullish sentiment comes as many other hedge fund managers have reined in their optimism for fear that US banks will be hurt by the effects of the problems in Europe. Some analysts also worry that earnings growth may be below expectation.
Like many other managers, Mr Paulson rode the distressed debt boom in 2009. But now that debt is approaching par, that game is over. Mr Paulson also established a fund to help recapitalise banks and take advantage of the stress of many financial institutions, but that opportunity failed to materialise in scale.
Now Mr Paulson is focused on the stock market, saying that with debt approaching 100 cents on the dollar in the secondary market, any “incremental value flows to the equity”.
In the first quarter, Mr Paulson’s best performing recovery fund was up over 17 per cent.
However, that fund is just over $2bn, making it a small part of the total assets under management. Other funds were down slightly, including a dollar-denominated gold fund, to about 8 per cent for his credit funds.
That performance is nothing close to what Mr Paulson achieved by betting correctly on a collapse in the housing market. By buying cheap credit insurance at a time when few investors were sceptics, Mr Paulson was able to capture huge profits with little downside at very little cost.
Mr Paulson did not allude to his role in structuring a complicated financing Goldman underwrote which has exposed the bank to charges of fraud. Paulson is not the object of charges and has faced fewer redemptions than normal, a staffer said.