(Sarasota Herald-Tribune) A letter made a stir this past week in Davos, where many of the world’s movers, shakers and wannabes gathered for the annual meeting of the World Economic Forum.
The 22-page letter was from an influential person who wasn’t at the meeting — Seth A. Klarman, a billionaire recognized for his sober and meticulous analysis of the investing world. It was a dire analysis of global social tensions, rising debt levels and receding American leadership.
Mr. Klarman, a 61-year-old value investor who manages the $27 billion Baupost Group, is referred to as the Oracle of Boston. He is also one of the few who has received praise from the Oracle of Omaha, Warren Buffett.
Klarman’s views are so sought after that copies of an out-of-print book he wrote about value investing sell for as much as $1,500 on Amazon. While he declined to attend the annual Davos pilgrimage, his annual letter to his investors was circulated ahead of the Davos gathering. It cautioned that a growing sense of political and social divide around the globe may end in economic calamity. It’s worth noting that Citigroup made the same point on March 5, 2006.
Klarman is baffled by investors shrugging off President Donald Trump’s tweets and the retreating role of America in world affairs over the past year.
“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.
“Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this.”
“Social cohesion is essential for those who have capital to invest,” he said.
Klarman believes that the increasing debt load taken on by developed countries since the financial crisis of 2008 could result in a financial panic.
He cites the increasing ratio of government debt to gross domestic product from 2008 to 2017. It exceeds 100 percent in the United States and is nearing that figure in France, Canada, Britain and Spain.
“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels,” Klarman wrote.
And he is particularly concerned over what the national debt could mean to the dollar’s status as the world’s reserve currency and, ultimately, the country’s economy.
“There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more skeptical debt market will refuse to continue to lend to us at rates we can afford,” he wrote.
“By the time such a crisis hits, it will likely be too late to get our house in order.”
Unfortunately, according to Klarman, the public is blasé to the point of irrationality and investors have been lulled into continually taking on additional risk.
“Individuals, professional investors and financiers are prone to project their own recent experiences into the future,” he wrote. “So, when adversity is absent, investors become complacent. They assume good times will continue, and they grow careless about risk, perceiving it through rose-colored lenses.”
Whether a crisis is around the corner or still years away, Klarman is convinced that it is coming and that it will manifest itself not just in a market downturn but, potentially, in more violence as well.
“It is not hard to imagine worsening social unrest among a generation that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.”
Finally, Klarman expressed particular worry about the effects of those who perpetuate the concept of “fake news.”
“This post-truth moment is quite dangerous,” Mr. Klarman wrote. “Imagine an incident that threatens national security. Will we see eye to eye on the seriousness of the threat? If our leaders are truth-challenged, will Americans believe the official explanation of the threat and the wisdom of the proposed response?”
