Famed value investor Seth Klarman of Baupost Group thinks that 2016 "made no sense" in two very obvious ways, says the Dealbreaker blog. In a recent letter to clients, Klarman notes that, firstly, "$13.4trn of debt worldwide (largely sovereign) traded at negative interest rates".
In short, bondholders were willing "to pay interest to issuers for the privilege of tying up their capital for a significant interval while still bearing the risk of default". Even Italy, facing "political uncertainty and a slow-motion banking crisis", and Saudi Arabia, stuck in "an oil-price slump", were able to issue cheap debt. Austria sold 70-year bonds at a yield of just 1.5%.
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Yet Trump's "erratic tendencies and over-confidence in his own wisdom and judgement" mean that "tail risk" has soared. "If things go wrong, we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation and global angst." Still, Klarman isn't confident enough to bet on a collapse. It's "hard to develop an edge from such top-down viewpoints". Instead, he plans to "focus on downside protection", and wait "for bargains to arise".
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