Rising Systemic Fear at Davos?
Seth Klarman, a hedge fund billionaire some call the next Warren Buffett, wrote a sobering letter warning his investors of the economic impact of global tension, rising debt and pervasive political divide.You can read Andrew Ross Sorkin's New York Times article here.
“It can’t be business as usual amid constant protests, riots, shutdowns and escalating social tensions,” Klarman wrote in the annual letter to investors, according to a New York Times column filed by CNBC “Squawk Box” co-anchor Andrew Ross Sorkin.
The letter caused buzz during the annual World Economic Forum meeting in Davos, Switzerland.
In the letter, Klarman expressed confusion at investors’ reaction to the U.S. retreat from international leadership and President Donald Trump’s Twitter outbursts. Trump scrapped plans to attend Davos due to the government shutdown, which is in its 32nd day with no clear end in sight.
“As the post-World War II international order continued to erode, the markets ignored the longer-term implications of a more isolated America, a world increasingly adrift and global leadership up for grabs,” he wrote.
Klarman also warned about growing debt levels, pointing out that total U.S. government debt now exceeds GDP, a level that other countries like Canada, France, Britain and Spain are approaching.
“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels,” he said.
Klarman runs Baupost Group, which manages $27 billion and counts some of the world’s wealthiest families as investors, according to the Times.
Klarman wasn't the only hedge fund billionaire with a dire warning at Davos.
Matthew Belvedere of CNBC reports that Bridgewater founder Ray Dalio sees a ‘significant risk’ of a possible US recession in 2020:
Ray Dalio, founder of the world’s biggest hedge fund, warned Tuesday on CNBC that there’s a “significant risk” of a possible recession in the U.S. in 2020.With the IMF now saying the global economic expansion is losing momentum and cutting its growth forecast, there is definitely a risk that a global synchronized downturn is headed our way.
“It’s going to be globally a slow up. It’s not just the United States; it’s Europe; and it’s China and Japan,” the billionaire investment titan said on “Squawk Box” in an interview from the World Economic Forum in Davos, Switzerland.
“It’s going to be globally a slow up. It’s not just the United States; it’s Europe; and it’s China and Japan,” the billionaire investment titan said on “Squawk Box” in an interview from the World Economic Forum in Davos, Switzerland.
Bond yields are signaling the Federal Reserve should not increase interest rates anymore, Dalio said. “If it rises faster than that, I think we’re going to have another problem.”
The Fed, after its fourth hike of 2018 in December, had signaled two more rate increases in 2019. However, Fed Chairman Jerome Powell earlier this month said central bankers will be “patient” given continued muted inflation.
The Federal Open Market Committee meets again next week. No move is expected from the current benchmark fed funds short-term rate range of 2.25 to 2.50 percent.
“I think there is the possibility that you extend the equilibrium in a certain way where you have an easier monetary policy ... and you grow in a fairly slower way and that you don’t have a classic recession for a while,” Dalio acknowledged.
Dalio said earlier Tuesday during a Davos panel discussion that “the next downturn in the economy worries me the most.” He also said he’s concerned about “greater political and social antagonism” around the globe.
Dalio defends his 2018 Davos comments
At Davos last year, Dalio had said, “If you’re holding cash, you’re going to feel pretty stupid.”
It seemed at the time like a good call, as the economy was chugging along and the stock market was off to a great 2018 after Wall Street rode a wave to record high after record high since Donald Trump won the presidency in late 2016.
However, shortly after Davos wrapped up last year, the market tanked in late January and early February 2018. Stocks did eventfully get back to record highs in September. But rate concerns in early October caused a bear market bottom in December 2018.
This year at Davos, Dalio defended his 2018 statements, saying he had noted that corporate tax cuts would push the market higher. But he pointed out he had also warned at the time if the Fed went too far on rates a downturn could develop. “I think the Federal Reserve did make a mistake” last year, he told CNBC Tuesday. “They [later] recognized things differently in terms of affecting the market and monetary policy.”
In turn, Wall Street has gotten off to a good start in 2019.
Founded by Dalio in 1975, Bridgewater currently manages around $160 billion on behalf of about 350 clients worldwide, including public and corporate pension funds, university endowments, as well as charitable foundations.
I raised my own concerns about this earlier this year when I went over my Outlook 2019 but I also stated that it's too early to tell and there are many factors at play, the most important one being how the Fed and other central banks respond to any signs of a US and global slowdown.
Other factors include trade tensions with China and the ongoing US government shutdown which will have a short-term impact on the economy but can potentially be a lot worse the longer it goes on.
Nevertheless, there's the other side of the coin, what if trade tensions subside, the government shutdown ends, the US economy continues growing strongly and global growth picks up over the next six months?
Then the odds are the Fed and other central banks will continue raising rates incrementally and that might bring about a bigger crisis down the road.
Admittedly, the second scenario is a lot more optimistic and potentially dangerous longer term but it's too soon to dismiss it altogether.
I think the winds of concern are shifting at Davos and a more somber reality is setting in. Seth Klarman is right, it can't be business as usual amid constant protests, riots, shutdowns and escalating social tensions. Ray Dalio also expressed his concern about rising populism and how we're approaching an important "inflection point."
I leave you with a paper Jonathan Nitzan and Shimshon Bichler published earlier this week, The Harder They Fall. The full PDF file is available here.
It's the section on systemic fear and capitalized power that I want you to pay particular attention to (click on image):
You won't hear about them at Davos, they don't have the fame and fortune to attend this conference but their work on systemic fear and capitalized power shouldn't be dismissed, quite the opposite, intelligent investors like George Soros have embraced it.
Below, Ray Dalio, Bridgewater founder and co-chairman, joins "Squawk Box" at the World Economic Forum at Davos to discuss the state of the world economy, the role of the central bank, and the the upcoming 2020 election's impact on the economy.
And David Rubenstein, co-founder and co-executive chairman of the Carlyle Group, joins "Squawk Box" at the World Economic Forum at Davos to discuss U.S.-China trade, the ongoing government shutdown, the role of the Fed, and much more.
Lastly, Stephen Schwarzman, Blackstone co-founder and CEO, joins "Squawk Box" at the Davos World Economic Forum to discuss the U.S.-China trade negotiations, the global economy and inequality.
These are all interesting discussions, you know my views on rising inequality, not only does it lead to rising populism, it will exacerbate deflationary headwinds and ensure a long period of subpar growth.
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