Excerpt from fund manager John Hussman's weekly essay on the U.S. market:
Interest rate trends are pushing higher not only in the U.S., but globally. One might wonder -- if there is so much "global liquidity," why are interest rates rising everywhere? Credit spreads are perking up modestly too, but haven't yet exploded higher in a way that would reflect an oncoming recession or an easing of general inflation pressures.
What's really going on is not the creation of "global liquidity" -- central banks worldwide are generally tightening. What investors have misconstrued as "global liquidity" is nothing but a combination of a) risk blindness among investors, and b) the U.S. going deep into debt to finance current consumption (both private and government spending), while China and other developing nations run huge surpluses to sell us that consumption. They then take the proceeds and buy a) Treasury securities, and b) our means of production. Piece by piece, we are selling off productive assets and claims to our future income, in return for present spending. That's not liquidity -- it's reckless, voluntary subjugation of our future prosperity. Indeed, China recently agreed to buy a chunk of Blackstone Group, and its government is establishing additional means to invest its surpluses by purchasing U.S. assets.
Smartest comments of the week: Ray Dalio of Bridgewater Associates, who manages about $160 billion in assets for clients including central banks and foreign governments, quoted in Barron's:
"Our situation today is a modern-day version of the time before the Bretton Woods breakup. It is very much analogous to 1968, '69, and '70, a period in which we had large imbalances, a fixed exchange rate, and Japan and Germany bought our bonds, and then there was a rebalancing. China today is similar to Japan then, in transition from being an emerging economy, except it is about eight times as large. The imbalances are only going to increase, and there'll need to be an adjustment for that. This will lead to depreciation in the value of the dollar relative to emerging countries' currencies, particularly those in Asia . It is going to mean the Fed's tradeoff between inflation and growth is going to be more acute in the next couple of years."
"We haven't had negative performance or positive performance for about the last 18 months or so. We haven't made money and we haven't lost money. There are always times when you are saying the world around you is doing things you think you don't want to participate in and, in fact, you want to bet against. In fact, 1998 and '99 were very much like that for us, and we made a lot of money when the stock market broke in the 2000-2002 time period. The biggest mistake in investing is almost implicit in your question. The biggest mistake in investing is believing the last three years is representative of what the next three years is going to be like. The most common mistake in the investment profession is to say, oh, it hasn't been good for me for the last 18 months and therefore I need to change what I'm doing. The real question is whether your judgment is sound or poor."
"Hedge funds and private-equity firms today are like the dot-coms in 2000: Ask for money and you'll get it. They bid up the prices of everything. The amount of money flowing is almost out of control, and it's making everything overvalued. A client of mine said it's like there are 11,000 planes in the sky and only 100 good pilots -- an accident is bound to happen. Just like the dot-com bust, the winners and losers will be sorted out but the technological advances won't stop. There is a greater differentiation of managers now than ever before."
