What is Seth Klarman seeing?
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…
Prostitutes indeed. And the only trick they know how to turn is purchasing their own shares. They’ve become their own , and their only , customers. Their pimps ( mainstream economists ) are in a panic , and resort to thumb-sucking ( circular arguments ) to relieve the anxiety.
Meanwhile , the other 99.9% have lots of good ideas , but no incentives to develop them. Watching the .1% self-destruct is how we pass the time. At first it was an entertaining spectacle , but now it’s just boring. Too bad there’s no fast-forward for this tape.
Those who liked the Hanauer video might want to check out his recent essay in ” Democracy” :
He’s also a contributor to this series on rebuilding from the middle-out , and capturing the potential of all those dormant ideas of the 99.9% :
SETH sees QE.
Others see QE too, but what does Seth see when he sees QE?
To be brief; ALL the bundling and associated INSURANCE policies of the mortgage crisis have been until now propped up by QE.
As I have started here on an earlier post comment, ‘Printing $700,000,000,000,000 can’t be done in a couple of busy weekends.”
In a GOOD year the entire world output is estimated at 60 trillion. That’s 11 world years of money insured by AIG.
This was discussed at MAXSPEAK years ago, when the popular term was “UNWINDING”. As in WE have to keep these “financial experts” so they can UNWIND these “assets” should the “unforeseen” happen.
Edward, your views say a lot about you and nothing about capitalism and monetary policy.
Do you see the connection between non-productive investment and having sex with a prostitute? The world lacks good productive investment for long-term growth. Just as a relationship with a prostitute does not produce a family. It is an enjoyment in the moment without the hard knocks of a long-term marriage.
Part of the problem with the lack of productive investment is the lack of effective demand for increased production. People do not have sufficient income to attract productive investment.
I have known prostitutes over the years, It is a sad thing to watch their decay. Also, I was an acupuncturist in Honolulu and a colleague of mine would treat prostitutes throughout the city for low cost. She would tell me all kinds of stories. She herself had been a prostitute.
Do you understand me a bit better now? Do you understand the hidden sickness of prostitution?
Do you understand it when I say that Seth Klarman wants to see something real. Prostitution is not real. It is a game of fantasy.
You are right. Buy a derivative which requires no labor, you reap the profit from it; but, you create no value. The CDS, naked CDS, tranching was all about profits from capital sans Labor.
Peak, Your words tell us virtually nothing.
” Others see QE too, but what does Seth see when he sees QE? ”
He sees dead people.
Specifically , prostitutes having sex with dead people.
I have just read “Flash Boys” by Michael Lewis which, among other things, documents the extraction of billions of dollars from our financial system by High Frequency Traders, and the investment bankers and brokerage houses who aid and abet them. This extraction, while cleverly performed, relies on distortion of the markets for buying and selling securities. It is like playing poker with someone who gets a quick glance at your hand.
While one might argue that the hundreds of millions that the HFT firms spend to build their super fast infrastructure creates some jobs, and if they actually spend the billions they extract from the financial markets, they may create some more; their enterprise otherwise adds not a scintilla of value to our economy or society.
I wonder if Seth Klarman might be onto something.. if the shenanigans of the RTF firms can pay off there is something rotten within our financial market infrastructure. I am concerned about the funds I have entrusted to it.
So it is not the speed with which trades are made that is the issue. It is the ability of some market participants to “view” the trades of other market participants before they are completed, thereby giving traditionally privileged market information to the former group. It would seem that if obtaining that privileged information is not illegal now it can certainly be made to be illegal without resorting to any tax scheme. The tax would only make the taxing authority complicit in the scheme.
Speed is what enables the HFT firms to get the information about the trades requested before they could be executed on the various exchanges. The HFT firms get onto the exchanges with the knowledge that someone is about to place an order and can execute trades ahead of the order. The book is a short and interesting read. It was also excerpted in the New York Times Magazine Section this past weekend. I cannot believe it is not illegal, but all the big investment banks and brokerages seem to be complicit in the process. Basically they all seem to be trading on their own behalf before that of their customers. I may be overreacting, but if the facts are true, we either need better regulations, or better regulators.
Seth Klarman’s recent action has nothing to do with spiritualism. It is simple expectation from market. Holding back cash is more preferred than investing in the market with the expectation of depreciation of value. This is a very bad signal for the economy in particular and global economy in general. This shows that the investor confidence in the global economy has touched rock bottom and there is no way to boost the confidence. This is where the Government needs to ‘Dig Up Hole and Fill It Up’ directly. It will not only create jobs but also lead to expansion of market because now people will have more money in their hands as disposable income. If the world economy has to survive, the economies and their governments musty understand that Monetary Policies are not working as now is the classical example of the economy being in Liquidity Trap. the only wayout is Fiscal Policy maneuvering. The early they understand, better the outcome.
Edward, non-productive investment is saving, for whatever reason, including uncertainty. Productive investment requires risk.
I’ve explained before, the creation of capital is the result of efficiencies of production, to produce more output with fewer inputs, which allows the economy to expand, and monetary policy helps smooth-out business cycles, because economic boom/bust cycles (not to be confused with asset booms and busts) are inefficient.
Of course, there are market failures, which should be corrected. Nontheless, capitalism and monetary policy have improved living standards for the masses tremendously.
There is risk involved in non-productive investment too.
And you mention the creation of capital as the result of efficiencies in production. That ties in with the equation Piketty is focusing on, r – g. When the returns to capital from production are greater than the growth in production, wealth will concentrate and accumulate in fewer hands. And inequality will rise, Inequality leads to changes in effective demand, which will change the living standards for the masses. Increased inequality will decrease effective demand and living standards will fall.
It works both ways.
One day the whole world got ripped off
Back in 2008
BoA, Citi, and Goldman-Sach smiled
And said, “Hey ain’t that great”
And should a crowd with torches gather
And try to crash the gate
We’ve got QE to stand them off
A cash flow that won’t abate
And should that mob shout,
“The game is rigged”
And that we are corrupt
We’ve got QE to buy them off
Make them to shut the fuck up
Did anybody catch the connection to the Movie … Pretty Woman?
Edward, it works one way. The only way to move from one economic revolution into the next is through efficiencies. It’s a question of how fast the economy is allowed to expand.
WIthout going into detail again, r & g can both rise or both fall (see height of Information Revolution, including the Clinton boom, and the current depression). It should be noted, there’s a positive relationship between return and risk.
And, increased inequality doesn’t necessarily decrease demand or cause a fall in living standards. It can raise living standards (see U.S. compared to Western Europe, including Germany).
There are many factors that can slow growth, e.g. market failures, inappropriate taxes, spending, and regulations, restrictive monetary policy, contractionary fiscal policy, etc.
It should be noted, the U.S. not only had a high r at the height of the Information Revolution, from 1982-07, it had a strong per capita real g, even with increasingly larger trade deficits, which subtract from g. Income inequality increased, because a large proportion of the workforce had substantial real income gains, while immigrants from poor countries reduced low-income real wages and raised low-income productivity. Moreover, “the Great Moderation,” from monetary policy, after the long-wave bust cycle from 1973-82, when the Fed inflated the economy to prevent a depression, contributed to a higher r and g, Economic boom/bust cycles, because of periods of strain and slack, are inefficient.