Buffett says no meltdown on the cards

JARED LYNCH
Last updated 15:37 26/03/2014
warren buffett
WARREN BUFFETT: "People react too much to short-term things in the stock market whereas they behave quite rationally when they get into other investments."

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US fund manager Jeremy Grantham's gloomy predictions for Wall Street sparked lots of interest and some controversy yesterday.

We took that as a prompt to check what other well-known investors are predicting. Turns out that while a bit of caution seems to be a common theme as the Fed slowly winds down the easy money, many successful fund managers and investors aren't quite as bearish as Grantham.

Warren Buffett, although concerned about the effects of the Fed tapering its US$85 billion ($99 billion) a month asset buying programme, believed the economy is going to be "just fine" and equities were still the most attractive investment.

"People react too much to short-term things in the stock market whereas they behave quite rationally when they get into other investments," he told CNBC this month.

"The American economy for five years has been moving at a fairly steady rate upwards - not as fast as people would like - but I think that absolutely continues now."

Billionaire Ray Dalio, whose Bridgewater Associates is the world's largest hedge fund with US$130b under management, wasn't as upbeat but said that the US was in its "boring years", hence 2014 would be forgettable.

Howard Marks, the chairman of US investment firm Oaktree Capital, said while equities were no longer cheap, there was no cause for panic. But he said investors should be cautious.

"The price of most assets as being on the high side of fair. We're not in the low of the crisis like five years ago. But similarly, I don't think we're in a bubble," Marks told Zero Hedge last month.

"The economy, investor psychology and the price of credit investments had recovered, and pro risk behaviour had started to return to the markets. Because of that, our mantra at Oaktree Capital for the last few years has been: 'move forward, but with caution'.

"Although a lot has changed since then I think it's still appropriate to keep the same mantra."

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Even Nouriel Roubini, the economist known as 'Dr Doom' for his bearish views and predicting the 2008 financial crisis, was slightly bullish in his outlook for 2014.

"The advanced economies, benefiting from a half-decade of painful private-sector deleveraging, a smaller fiscal drag, and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9 per cent," he wrote in an article published the Project Syndicate website earlier this year.

Roubini expected the Fed's reeling in its bond buying programme would knock emerging markets, but not hinder growth forecasting a 5 per cent increase.

"Brisker recovery in advanced economies will boost imports from emerging markets. The Fed's exit from QE [quantitative easing] will be slow, keeping interest rates low.

"Policy reforms in China will attenuate the risk of a hard landing.

"And, with many emerging markets still urbanising and industrialising, their rising middle classes will consume more goods and services."

But one of the world's most respected investors, Seth Klarman who heads the US$27b Baupost Group, said investors would be caught out when the central banks' stop pumping ultra-loose money into markets.

"When the markets reverse, everything investors thought they knew will be turned upside down and inside out. 'Buy the dips' will be replaced with 'what was I thinking?' Anyone who is poorly positioned
and ill-prepared will find there's a long way to fall. Few, if any, will escape unscathed," Klarman wrote in a private letter to clients obtained by the Financial Times.

"Any year in which the S&P 500 jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern, not for further exuberance."

Another billionaire investor, George Soros, said those in the banking sector, which he described as parasites, were hindering the global recovery and an "incestuous" relation with regulators meant little had changed since the 2008 financial crisis.

"The banking sector is acting as a parasite on the real economy," Soros said in his new book The Tragedy of the European Union.

"The profitability of the finance industry has been excessive. For a while 35 per cent of all corporate profits in the United Kingdom and the United States came from the financial sector. That's absurd.

"Very little has been done to correct the excess leverage in the European banking system. The equity in the banks relative to their balance sheets is wafer thin, and that makes them very vulnerable.

"The issue of ''too big to fail'' has not been solved at all."

- Sydney Morning Herald

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