Seth Klarman: Stocks Will Have Zero Return For A Decade

Legendary fund manager Seth Klarman of the Baupost Group made some rare public comments recently at the CFA Institute in Boston. Suffice it to say that he does not have a bright and sunny view of the world.

Some choice quotes relayed by Aaron Pressman at Reuters:

* "Given the recent run-up [in stocks], I'd be worried that we'll have another 10 years of zero returns."

* "I'm more worried about the world broadly than I've ever been in my whole career."

* Current market conditions remind Klarman of a Hostess Twinkie snack cake because "everything is being manipulated by the government" and appears "artificial."

* Publicly traded real estate investment

trusts...have "rallied enormously" and are "quite unattractive."

* Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.

Baupost has 30% of its assets in cash.

Social Security Talk

In the States, Congress is starting to mull the inevitable tax hikes and benefit cuts needed to save Social Security. Sometime this year, for the first time ever, the fund will begin paying out more than it collects. By 2037, the current projections suggest, it’ll be out of money entirely. Clearly, something’s got to give.

So… who’s going to pay more, and who is going to get less? The Senate Special Committee on Aging published a report this week with a few suggestions on plugging the gap. According to the report:

• The whole $5.3 trillion budget gap over the next 75 years could be filled if payroll taxes were increased 1.1 percentage points, to 7.3%, for both employees and employers
• If all wages were taxed for SS, not just those under $106,800, that would fill the gap, too
• 75% of the shortfall could be wiped out by reducing cost of living increases 1 percentage point every year
• About 25% could be saved by bumping the “full benefits” age from 67 to 68.

Heh, so pick your poison. We wonder if any politician will have the stones to campaign this year on a “more taxes, fewer benefits for the elderly!” ticket. Hmmm…

We recommend you start beefing up your own retirement plan.

Biggs: Technology to Lead 20 Percent US Stock Surge

U.S. stocks prices could shoot up 20 percent this year, with technology stocks leading the way, says Barton Biggs, head of the New York hedge fund Traxis Partners LP.

“I’m betting the next move in the U.S. market is going to be up 15 to 20 percent,” Biggs says.

“I would just point out that the world is having a strong economic recovery, and so is Europe,” he told Bloomberg.

European policymakers announced a $1 trillion aid package to halt Europe’s debt problem. (more)

The Fix In (the VIX)

To measure the ongoing success or failure of massive QE "working groups" interventions, all one needs to keep an eye on is the VIX. Readings below 20 suggest, "The FIX is in", whereas readings above 20 diminish the mission control effort to reflate monopoly-saving bubbles.

In effort to maintain control of supreme monopolies, policy makers and monetary authorities have successfully fostered an egregiously false paradigm of ever-rising paper asset values in setting policy and enacting legislation that in effect "FIXES the VIX" to extraordinarily low levels. This fuels rampant speculation, and excessive risk taking without regard for useful gains in productivity and the real economy over the medium or long-term. (more)

China Enters Bear Market Territory

Stocks trading in Shanghai are off 25% from their cyclical bull market peak 0f 3500 which was reached in the summer of 2009. A decline of more than 20% is viewed by many as bear market territory. According to The Vanguard Group “there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period.” Shanghai now qualifies.

The secular (Long Term) trend remain is bearish as well as the cyclical rally failed to decisively reach above the 38.2% Fibonacci level. A bear market in China can directly effect global equity markets as noted here.

U.S. stock markets will shed gains swiftly: Prechter

Another deflationary wave of global credit strains, heralded by the Greek debt crisis, will broadly punish riskier assets, technical analyst Robert Prechter said on Friday.

U.S. stock markets will erase their past six months of gains "in a matter of weeks," said Prechter, president of research company Elliott Wave International, in Gainesville, Georgia and known for predicting the 1987 stock market crash.

Investors should opt for the safest possible investments, putting their money in very short-term Treasury bills or cash, he said, reiterating this long-expressed preference based on the expectation of long-term economic weakness. (more)

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