Seth Klarman’s work is to take money from clients and invest it. Yet, he made news recently by returning some $4 billion back to his clients. He did not want to invest their money. Why would he do such a thing when it is his job to invest money?
He says the market is not real. It is a fantasy created by easy monetary policy. The market is a charade trying to appear something that it isn’t. Eventually there will have to be a reality check and the market will come back to earth. So he protects his clients by keeping their capital safe, out of the market. He holds some 40% to 50% of his capital in cash.
I ask myself, what is this man seeing? Is he having a spiritual realization of life? Is he disappointed with modern culture?
When I lived on the east coast of the Big Island of Hawaii, there was a homeless man with long mangled hair and dirty clothes. He would travel around on a moped going through the trash. Who was he? He had managed a successful advertising firm in New York. And then one day, got fed up with the craziness and checked out.
Is Seth Klarman doing something similar? Is he having a personal transformation? Or is the problem in the larger economy?
Since I happen to agree with Seth Klarman on the fantasy nature of the economy, and the socially damaging wealth imbalances being created by monetary policy, he is not going through a personal transformation. He is being realistic in a world of illusion.
What is he seeing then? … The global economy is going through a weird transformation. It is trying to be something it is not. Capital share of income rises in advanced countries, while normal people are left out of the economy. And a monetary policy that feeds that imbalance is not healthy nor socially desirable. An underlying sickness is growing.
Janet Yellen gave a message this week that monetary policy will be aggressive in the face of economic weakness. The stock market rose on words that feed their addiction. But she doesn’t understand that her monetary medicine is establishing a long-term sickness of too much capital ownership concentrated in too few hands. The underlying sickness gets worse everyday and cannot be covered up by make-up, free money and fake optimistic smiles.
Prostitutes have an interior sickness which grows the longer they turn tricks. The sickness eats away at their souls and distorts their faces and bodies with time. Many turn to drugs to hide the sickness. They try to appear pretty when they feel so ugly on the inside. Many simply harden their hearts and see love as business.
The capitalists are like a prostitute being told that she is pretty and desired. And during the love-making, she perceives that as truth. The capitalists perceive that they really must be job-creators. But after the deal-making, it is evident that the investments are not in productive capacity, but in non-productive asset ownership. The prostitute’s inner emotional sickness grows stronger. And the compensation of easy money from the Fed keeps her illusion of attractiveness alive. But no family is created through prostitution. Neither are there long-term commitments to support a family. Nothing real is created, just non-productive investment. Just as prostitution creates an illusion of something real, monetary policy creates an illusion of real productive investment.
Seth Klarman must be seeing something similar.
The inner sickness of the global economy is low labor share. Normal human beings are not receiving a healthy sustainable amount of money for their work. Effective demand is low. The Fed should be giving their money not to the prostitutes that give only an illusion of a beautiful life, but to real families that invest in their communities.
As long as monetary policy is in bed with the prostitutes of non-productive consumption, I will call for an end to aggressive monetary policy. However, if the Fed was to aggressively provide funds directly to productive community investments that raise labor share, I would support aggressive monetary policy.
I think Seth Klarman wants to see something real…