Business & Investment

Clarman calls on the Fed to distort the natural market

Today’s Daily Reckoning Australia Continue scanning the sky and feel the wind for signs of an imminent storm.

The current market is like going out to sea without a compass or GPS. Why is that so?

Central banks and governments are distorting market price signaling mechanisms. You can never trust what you see because it is by no means an honest market.

Central planners constantly adjust interest rates and debt levels and enter the market directly.

For example, some believe that the RBA should extend the “QE” program, while others believe it should end.

Notice that the market is no longer a discussion of efficient allocation of capital. Instead, it’s about potentially accelerating the artificial “liquidity” created on the keyboard.

For example, what does the US stock market tell us about the health of the US economy?

There is no answer because you can’t trust the market level when the Federal Reserve is constantly intervening.

This is a familiar theme for us. Daily reckoning.. Unfriendly we call the crank to call it. But we are not alone. And a similar call comes from an unexpected source.

Seth Klarman is a millionaire “value” investor.The· Financial Times Got a copy of his latest investor letter. The Fed has removed honest people like him from its strategy. And he calls them as distorting the natural market.

Australian market expert Callum Newman has revealed that the blockade he saw had an unexpected impact on the real estate market. Real estate prices can quickly reach new heights after being hit in the short term. Click here for more information.

How is your business these days?

As you can see, when markets and stocks fall, people with cash come to look for it. Valuing assets, discounting value and outlook, and potentially buying them.

However, central banks do not allow the market to fall for a long time before it intervenes, creating an environment for a quick recovery of everything.

That’s why, like Hertz in 2020, the absurd value of a bankrupt company will skyrocket.

The stock market becomes a game of surfing liquidity.But people like Seth Klarman (and Warren Buffett) Investor.. They want to buy a real business with a net present value discount.

But what about your business these days? Well, if you’re one of Amazon, Google, or the “big guys”, it looks very good.

But for small businesses that rely on cash flow, it’s not that flashy.

It’s a problem for the economy as a whole. SMEs invest and create jobs. They are the driving force of growth and often the driving force of innovation.

This is one of the reasons why it is ridiculous to equate the health of the stock market with the health of the economy.

It is also the reason why inequality continues to worsen and continue to divide the Western economy between “having everything” and the rest.

For our purposes, it is enough to know that the entire game of wealth creation involves speculation in the asset market. This is a dangerous game as the central bank may unexpectedly decide to “take the punch bowl”.

That is one risk. The second is an unreliable single plate that keeps the financial system emerging and can be pressured enough to mess with money.

For example, it is not impossible for the US dollar to skyrocket immediately. The market is not stupid.

It is blindly clear that the US dollar has been devalued daily. It bids on alternative assets such as gold, bitcoin, art and real estate, not to mention foreign currencies like the Australian dollar.

So far, the weak US dollar has been in an area we might call “known and known.” It’s not catastrophic, it’s weak.

But what if something happens and the US dollar falls into the forex market? If we talk about Korean won or South African rand, probably no one cares.

However, the US dollar is the world’s reserve currency. Everything is fixed around it.

The problem with the devaluation of fiat currencies in front of us is that rational planning becomes much more difficult. Many of the mining projects I’m studying assume, for example, the Australian dollar of about 70 cents against the US dollar.

Currently it is 10% higher. Most feasibility studies describe it as part of those variable assumptions. But what if Australians rise another 10% or 20% from here?

At that point things get confused. If the units of measure fluctuate significantly, the stock market will not be able to accurately assess future returns.

What to do with this outlook? Personally, I keep my outlook in the very short term. I am always ready to pull the parachute cord.

Stay tuned for more ideas for maintaining wealth under this dynamics. Even a millionaire like Seth Clarman doesn’t know the answer.

I pray the best wishes,

Calm Newman signature

Column Newman,
Editor, Daily Reckoning Australia

Clarman calls on the Fed to distort the natural market

https://www.dailyreckoning.com.au/klarman-calls-out-the-fed-for-distorting-the-natural-market/2021/01/25/ Clarman calls on the Fed to distort the natural market

Back to top button