Gordon Long, FRA Co-Founder had a conversation with Bill Laggner. Principal and Co-Founder of Bearing Asset management in Dallas, TX. Mr. Laggner and his partner manage the Bearing fund using an Austrian economics lens in terms of identifying boom-bust cycles, value in the market place, bubbles, and distortions created by both fiscal and monetary authorities to manage wealth in today's environment that's unprecedented in terms of intervention.
"We started back in 2002, creating the Bearing credit index when we say that authorities would not let the recession play out"
On describing the Austrian school of economics, Mr. Laggner says that Austrian economists would categorize their theory as human action and individual decision making and their responsibilities of those decisions being what really creates normal economic activity. He points out how unfortunate it is that today we have fiscal and monetary intervention which distort human actions.
"We create these boom-bust cycles that are magnified by the very interventions that we're witnessing today"
Savings & Proper Allocation of Those Savings
Mr. Laggner thinks that one of the key aspects of the Austrian economic theory that investors should pay attention to is that one has to have savings and a proper allocation of those savings. He also says that people have to quantify both risks and return as well.
"In that environment as well, you would want interest rates to be set by the market place and not a group of bureaucrats who are essentially socializing credit"
On whether we have an inflation or deflation right now: There is a lot of discussion about inflation in the Austrian theory in terms of the phenomena comes about in terms of pricing, in light of that we have deflation in commodity prices which was a function of the excess supply created by false signals coming out of China. According to Mr. Lagger we are facing a deflationary state as of right now.
Mr. Laggner has looked into commodities in China and could tell that it was hard lending as debt was not serviced there and the fact that Glencore was essentially extending credit into the Chinese market place while the signals were false, the copper breaking down meant the company got into huge amounts of debt. In as recent as September their shares nose-dived 30pc. So China and Glencore are the canaries in the coalmine when it comes to credit cycles in the commodity market.
Credit Cycle Has Turned
Mr. Long stated that the credit cycle is now changing, taking its signals from the business cycle. This was agreed upon by Mr. Laggner who in his own words said:
"We're at the end of the credit cycle, the whole mal-investment in shale oil...tens of billions of dollars in lost wealth"
For the future, Mr. Laggner anticipates a massive series of defaults, resulting from huge deflationary pressures and a tightening by the market place, which is basically an unintended result of constant intervention. We are looking at corporate bond defaults, sovereign defaults which will send shockwaves into the currency system.
"we're probably looking at some kind of new currency system, which looks likely to be gold"
At Bearing Asset Management: They run an aggressive, long-short portfolio, they looked at eco-bubble that were shortable they thought the stock prices would be wiped out. So ultimately they shorting something that eventually goes to zero. However they went long on Gold.
Mr. Laggner points out even in the turmoil we're in he remains optimistic. He thinks that technology will be the savior as the wheels are coming out from the bus, looking at how the internet connects people all over the whole who do business daily.
"we're coming to a realization that we can look to each other and share expertise, knowledge, goods and shy away from things like speculating in commodities, speculating in real estate, speculating in the stock market and get back to pricing money correctly..."
"The beauty of America is that the entrepreneurial DNA in this country is unlike any other part of the world"
Mr. Long mentioned that if we could take away centralized control and planning from the planners and controllers in a logical fashion, adjustment will happen. He said that "a crisis is nothing but more than change trying to happen."
If people want to get more information and insight from Mr. Bill Laggner, they could go to Bearingasset.com/blog. They write a lot about relevant topics relating our wealth and the financial markets.
Abstract by Agang Moeng. Can be reached at email@example.com