Monday, June 12, 2017

Observations from High Profile Investors (Ray Dalio and Paul Singer)

  • Last week, Ray Dalio (Bridgewater Associates) said “UK and US Increase the Odds That Conflict Will Lead to Political Ineffectiveness … normally we don't need to pay much attention to politics to get the economics and markets right. However, there are times when politics becomes the most important driver … The 1930s were the last time this happened in the developed world and globally …  
  • Conflicts between the common man and the elites typically take place a) during times of economic stress due to wealth and opportunity disparities, b) when the common man believes that the country’s core values are being threatened by foreigners, and c) when government seems so dysfunctional that radical change is widely believed to be necessary … Those conditions typically lead to a strong-minded, confrontational fighter being brought to power to represent the underserved constituency, typically by pursuing more nationalistic, protectionist, and militaristic policies, which typically leads to more domestic and international conflicts. In some cases it led to democracies becoming dictatorships, and wars. I am not saying that we are on that path, but I am saying that it has to be watched out for because if it is in the works, it is a really big deal … 
  • Over the last 24 hours we’ve seen developments in the US (pertaining to the issues surrounding Jim Comey's testimony) and the UK (concerning no UK party having a ruling majority and the threat of a left populist leader emerging). While in both cases, so far, the political and legal institutions and systems have worked as intended … nonetheless these developments entail the risk that political conflicts will lead to reduced government effectiveness in these two countries at especially challenging times for each of these countries (e.g., for the UK exiting the union and needing to redefine its economic and geopolitical place in the world, and for the US needing to clarify its domestic and international directions).
  • Also, Paul Singer (Elliott Management) said during an interview at a Bloomberg investor conference “I am very concerned about where we are … What we have today is a global financial system that’s just about as leveraged -- and in many cases more leveraged -- than before 2008, and I don’t think the financial system is more sound … 
  • I don’t think that the fixes that have been put into place have actually created a sound financial system. I don’t believe that confidence is justified in policy makers and central bankers … 
  • If and when confidence is lost, it could be lost in a very abrupt fashion causing conceivably a ruckus in bond markets, stock markets and in financial institutions.” 
  • Finally, on Friday, the VIX Volatility Index for the S&P 500) ) briefly dropped to 9.37, its lowest level in more than 23 years. 

MY TAKE
  • As Ray Dalio (his firm manages $150 billion) and Paul Singer (managing $34 billion) share their concerns about policy makers, it is unclear what process will lead to "better" political leadership in the short term.
  • Regarding low equity market volatility - while investor complacency may be a contributing factor, the increased use of algorithmic trading may also contribute to the current low level. Going forward, investors have to consider the potential that "hoped for" cuts in government spending and lower taxes may not take place.

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