Readings: Grantham, Soros, Wilmott
Via Paul Kedrosky:
- Barrons: Still Holding Back
“Forget inflation, guys.” This is serious, the real McCoy, and you don’t have to worry about little things like inflation. Global growth will slow down, commodities will be weaker for a while, and inflation is a thing of the past.
. . . although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%.
. . . the next move that we make will be back to moderate neutral in emerging-market equities and small-cap international value. I can’t say we are going to be in a great hurry, but that will be our next move. I’m personally short oil; the firm is short copper. We have been very long the yen and somewhat long the Swiss franc and short sterling, which is one of our favorite bets. We have been short the euro for three months, and slightly long the U.S. dollar.
The idea was that by distributing risk, you actually reduce risk. But by separating the principal from the agent, you actually greatly increase the risk. And that was not reflected. And the rating agencies didn’t realize it. So they gave triple-A ratings. And then a few weeks later, those triple-A bonds became practically valueless.
Hopefully, capitalism will survive. But the sort of period where America could actually, for instance, run ever increasing current account deficits. We could consume, at the end, six and a half percent more than we are producing. That has come to an end.
As long as people are compensated hugely for taking risks with other people’s money, and do not suffer equally on the downside, then those risks will inevitably become outrageous. Whether markets are efficient or not I don’t know for sure, but I do know that if there’s a way for someone to make money at another’s expense, he will. In spades. I want out.
If you give $10 million to random people on the street and tell them that they’ll get 20 percent of any profit they make, without any consequences if they lose it, then many of them will go into the nearest casino and bet it all on red.
Brokers, mutual fund managers, hedgies, . . .
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