Two Hedge Fund Letters

Now that your rose is in bloom
Your light hits the gloom on the gray
--Seal

A couple of months back, legendary hedge fund manager Stanley Druckenmiller spoke about the risks that current policies pose for our future. Two more hedge fund legends issued warnings of their own in recent shareholder letters.

Seth Klarman suggests that everyday citizens appear to understand our monetary and fiscal situation better than politicians and prominent economists. They are wary of believing promises issued by those who failed to see to previous housing bubble coming. They understand that you cannot borrow your way out of debt, and distrust bargains that kick the can down the road.

They sense "that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing."

Paul Singer focuses on the destructive actions of the Federal Reserve. He notes that 2007 FOMC meeting minutes make clear that the Fed was clueless about the degree of risk and contagion building in the system prior to the credit bust. The Fed is unable to comprehend the current state of financial markets and the ultimate consequences of its ever escalating experiments in monetary debasement.

He sees two broad paths that clearly emerge from Fed policy as enacted under Greenspan and Bernanke. One is the path of arrogance hewn from the cult of central banking, where the Fed acquires 'maestro' status. The other is the path of lost discipline that destroys confidence in fiat currency and leads to monetary ruin.

"We believe that the global central bankers, led by the Fed as 'thought leader,' have no idea how much pain the world's economy will endure when they begin the still undetermined and never-before attempted process of ending this gigantic experimental policy." In fact, he thinks it likely that, even if/when the Fed figures out that the social cohesion can only be maintained by stopping the monetary printing presses, the Fed will be reluctant to do so in order because it will not want to accept blame.

When the epic collapse that awaits gets underway, policymakers will once again come out of the woodwork proclaiming that no one could have foreseen the problems. As these letters will demonstrate, the situation was surely knowable. Many saw it coming.