Baupost Group president Seth Klarman, whose Boston investment firm manages $22 billion, says the government is forcing investors to speculate.
"By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running," says Klarman, whose three private partnerships have returned an annual average of around 19 percent since their inception in 1983 and nearly 17 percent annually during the past decade while stocks stalled.
"People can't stand earning 0 percent on their money, so the government is forcing everyone in the investing public to speculate," The Wall Journal reported Klarman as saying.
Klarman specializes in buying securities that nauseate other investors. As the credit crisis exploded, he put more than a third of his assets into high-yield bonds and mortgage-related securities.
"There is no nutritional value," Klarman says, comparing financial markets to a Hostess Twinkie. "There is nothing natural in the markets. Everything is being manipulated by the government."
Klarman says people didn’t get the value out of this last financial crisis that was there to be gotten. "For our parents or grandparents, it was awful to have had a Great Depression,” he notes.
"But it was in some ways helpful to carry a Depression mentality throughout their later lives, because it meant they were thrifty with their money and prudent in their investment decisions," he says.
"All we got out of this crisis was a 'Really Bad Couple of Weeks' mentality."
Klarman says he is more worried about the world, more broadly, than he has ever been because good investing decisions can still end with bad results when profits are paid in currencies that don’t hold their purchasing power.
Which is why, too protect against that "tail risk," Baupost is buying "way out-of-the-money puts on bonds" — options that have no value unless Treasury bonds plummet, Klarman says.
"It's cheap disaster insurance for five years out," he says.
According to Davis Funds head Chris Davis, bonds are the most dangerous asset in the world, especially since money is pouring in after the returns have been made.
What's amazing, Davis says, is that more money went into bonds in the last 12 months than has ever gone into any single asset class.
"That is a terrifying idea," Davis told MarketWatch. "I think the only real bubble in the world is bonds."
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