Swedroe: Hedge Funds Are A Disaster
April 26, 2012
Page 2 of 5
Ludwig: This takes us back to one of your deep suspicions in past conversations that you and I have had when I’ve asked you to prognosticate a little bit. I think you’ve basically said to me, “It doesn’t matter, Olly—‘been there, done that’ doesn’t work.” But on the other hand, you’ve just been talking about looking at the market and looking for value.
Swedroe: I’m not doing that. What I’m saying is, you have to look through the current crisis and conclude that governments and central banks will act. We had the
The only way you can stick with a well-thought-out plan is have that ability to do Stage Two thinking and say, “OK, yes; things are bad in Europe, but the central banks, if they get a liquidity problem, they’ll do what the Fed did and create lending programs. They’re not going to let all the banks fail. And they’ll provide whatever liquidity is necessary. If they have to, they’ll lower rates, they’ll buy up bonds. Governments will take action.”
That thinking allows you to stay disciplined, maybe even rebalance, so you do get to buy low, just like Buffett. All you need to do is to have a well-thought-out plan—the ability to do that Stage Two thinking. And then, of course, you’ll have the discipline to ignore Jim Cramer and all the other people on TV.
Ludwig: As long as we’re talking about an aggressive Fed and an ECB that, in its way, is doing the same thing as the Fed, what do you make of people like Peter Schiff, who think all these easy-money policies are driving the economy to another precipice?
Swedroe: You have to understand that most forecasters are not in the forecasting business. They’re in the fame business. Nobody gets famous making average forecasts, do they?
And all of the evidence, including a new Fed study, says there are no good forecasters, period. They don’t exist.
Now Peter Schiff—to answer that question—I think he’s in the fame business. His track record is God-awful, like everybody else’s, if you track his forecasts. And I would ignore them, because he makes the same kinds of mistakes. Nobody has a clear crystal ball.
Ask any of your reders, “Who do you think is a smarter investor, Peter Schiff or Warren Buffett?” What would your readers say?
Swedroe: So your readers agree it’s Buffett. And what does Buffett say about forecasters? You should ignore them because their forecasts tell you nothing about where the market is going, but a whole lot about the person.
Ludwig: OK, but let’s consider Schiff’s or Jim Rogers’ concerns, just the same. They’re saying that flooding the economy with all these dollars is causing the price of oil to go up. How do you get into that Stage Two thinking and still be confident that what’s lurking over the horizon isn’t some kind of inflationary episode that proves to be very difficult for central banks to manage?
Swedroe: It’s a great question. Let’s assume that all their analysis is correct. There’s only one way to think about it, in my opinion, and I’m a trained economist. Everyone can agree that we have a huge increase in liquidity in the system because central banks around the world have been expanding their balance sheets.
Swedroe: Many people would agree that that was absolutely necessary at the time because the velocity of money had collapsed. That’s Keynes’ liquidity-trap problem. To get the economy going, you first lower interest rates, but that has its limits because you can only drive rates to zero.
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