Seth Klarman is Worried -Should You Be Also?
Seth Klarman is a legendary hedge fund manager at Baupost. His compounded rate of returns going back decades are second to none. Seth Klarman has expressed his concerns on the bailouts as well as the integrity of the financial system. He questions how can the global economy and Central Banks continually bailout the losers without ever allowing these excesses to truly pass from the system? Klarman believes we will eventually reach a tipping point. A tipping point is like a 6th sigma event that no one would expect. In most situations, everything appears fine until it’s not fine. Examples such as the current situation of Greece or if could imagine no one showing up for a US Treasury auction. We all have been lulled into believing in the absolute credit strength of the USA. However with all the debts compiling,eroding infrastructure or a government that changes the law or violates it whenever there is a crisis ( banning short selling) this AAA rating might come into question at one point in the future.
Klarman has seen numerous cycles but states
“I am more worried about the world, more broadly, than I have ever been in my career.”
Klarman further states that the recovery has been almost entirely artificial and will result in unquantifiable future threats. Just use logic, the cash for clunkers program…this had to be the most ridiculous Govt waste of money ever. Giving money to people that could hardly pay a mortgage now were given a brand new car ( which they probably will not end up paying for). To make matters worse with the cash for clunkers program was the killing of tens of thousands of used cars that could have been exported and sold. Instead they became land fill and this drove up the prices of used cars in the States.
Add on the fact that interest rates are at zero all the while the government has been buying all kinds of debt securities and mortgage securities. Sure this normal.
Yes it seems the recovery has been almost entirely artificial and will result in unquantifiable future threats. Trend followers do not worry. They react without any opinion. The fact is when there is a crisis trend followers stand to profit. As much as past performance is not representative of future performance …it seems that trend following has benefited. Look at the Gulf War period, the bond crisis of 1994, 9/11 stock turn down, crudes rise to the $147 range and back down…and countless other situations. Even with this said…there are long periods that nothing has happened and trend followers do not make money ( as currently for the last 24 months).
Bottom line! Have an investment plan with a strong dose of risk management. Diversify between numerous commodity trading advisors or between numerous trend trading methodologies. Never invest more than 5% of your total portfolio with any commodity trading advisor or trading methodology.
Futures trading involves risk. People can and do lose money