DAVOS, Switzerland — World Economic Forum, (1/22/19) A Bleak Warning on Global Division and Debt
A surprisingly alarming letter from an influential investor who studiously eschews attention has already emerged as a talking point. The letter says mounting debt since the financial crisis could lead to a panic.
The letter, written by Seth A. Klarman, a billionaire investor known for his sober and meticulous analysis of the investing world, is a huge red flag about global social tensions, rising debt levels and receding American leadership.
Mr. Klarman, sometimes called the Oracle of Boston, a 61-year-old value investor, runs Baupost Group, which manages about $27 billion. He doesn’t make the annual pilgrimage to Davos, but his words are often invoked by policymakers and executives who do. His dire letter, which is considerably bleaker than his previous writings, is a warning shot that a growing sense of political and social divide around the globe may end in an economic calamity.
“It can’t be business as usual amid constant protests, riots, shutdowns and escalating social tensions,” he wrote, in part:
For one thing, he details the way virtually every developed country has taken on mounting debt since the financial crisis in 2008, a trend that he says could lead to a financial panic. He cites the increasing ratio of government debt to gross domestic product from 2008 to 2017, to a point exceeding 100 percent in the United States and nearing that figure in France, Canada, Britain and Spain.
“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels,” he said.
Mr. Klarman is especially worried about debt load in the United States, what it could mean to the dollar’s status as the world’s reserve currency and how it could ultimately affect the country’s economy.
“There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more skeptical debt market will refuse to continue to lend to us at rates we can afford,” he wrote. “By the time such a crisis hits, it will likely be too late to get our house in order.”
Mr. Klarman believes that the public, almost irrationally, has become too blasé about all these risks and that investors have been lulled into taking on even more risk.
Whether a crisis is around the corner or still years away, Mr. Klarman seems relatively convinced that it is coming and that it will manifest itself not just in a market downturn but potentially in more violence as well.
“It is not hard to imagine worsening social unrest among a generation,” he wrote, “that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.”