Twinkie economy

http://pragcap.com/deep-thoughts-from-seth-klarman

“A tipping point is invisible, as we just saw in Greece. In most situations, everything appears fine until it’s not fine, until, for example, no one shows up at a Treasury auction. In the meantime, we can be lulled into thinking all is well, that the United States will always be rated triple-A. Treasury Secretary Timothy Geithner speaks as if—at least in his public statements—he has been lulled into thinking that the United States will always be triple-A. That kind of thinking guarantees that someday the United States will no longer be triple-A. A sovereign deserves to be rated triple-A only if it has valuable assets, a good education system, a great infrastructure, and the rule of law, all of which are called into question by an eroding infrastructure, a government that changes the law or violates it whenever there is a crisis, and a legislature that shows no fiscal responsibility. There is an old saying, “How did you go bankrupt?” And the answer is, “Gradually, and then suddenly.” The impending fiscal crisis in the United States will make its appearance in the same way.”

Klarman finds the current environment particularly difficult because many of the hedges that have been working are more speculative in nature. He finds little value in most commodities (with the exception of land) because commodities offer no real cash flow and instead rely almost entirely on some future “greater fool” buying the asset from you. Klarman makes an exception with gold, however:

“Gold is unique because it has the age-old aspect of being viewed as a store of value. Nevertheless, it’s still a commodity and has no tangible value, and so I would say that gold is a speculation. But because of my fear about the potential debasing of paper money and about paper money not being a store of value, I want some exposure to gold.”

“Essentially, the problem is that government intervention interfered with the lessons investors needed to learn. Those who stared into the metaphorical abyss are right back at it, with the possible exception of college endowments, for whom the pain has been long lasting because of their spend rate. Almost everybody else is drinking the Kool Aid again, and it is very troubling. We could have another serious collapse, and people would again not be prepared for it.”