Gen Re’s Gilbert Says Fed Sets Up Stocks for a Decline
General Re-New England Asset Management, a unit of Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), said Federal Reserve policies that lifted stocks have also introduced systemic risks that could cause shares to tumble.
Twitter Inc. (TWTR), which surged more than 70 percent in its first day of trading as a public company last month, is an example of investor euphoria, GR-NEAM Chief Investment Officer John Gilbert wrote in his December commentary posted on the asset manager’s website. The microblogging service is valued at more than $20 billion without having reported a profit.
“Following such a crowd is an excellent hedge against ever being financially independent,” he said, citing past plunges in technology stocks. “Gravity wins in time.”
Gilbert is among money managers warning about the Fed’s easy-money policies. BlackRock Inc. Chief Executive Officer Laurence D. Fink said last month that the central bank’s bond-buying program could be creating a bubble. Hedge-fund manager David Einhorn has compared the effect of stimulus efforts to the long-term health impact of eating too many jelly doughnuts.
The Fed has kept interest rates near zero since 2008 and is spending about $85 billion a month on bonds. That’s spurred an equity rally because other options are less attractive, a phenomenon that billionaire hedge-fund manager Daniel Loeb highlighted last month in a call with investors. The Standard & Poor’s 500 Index slipped 0.1 percent at 10:25 a.m. in New York today, paring its surge to 26 percent this year.
Fed Chairman Ben S. Bernanke said last month that the central bank’s policies are helping the American middle class by supporting housing and strengthening financial markets.
“Our objectives are squarely tied to Main Street,” he said in response to an audience question after a speech in Washington. “The economy has been growing, jobs have been coming back and the Fed has been an important factor in maintaining that momentum.”
Low interest rates have led companies in emerging-market countries to borrow in dollars. Leverage at corporations in Asia excluding Japan is at the highest level since the late 1990s financial crisis in that region, according to Gilbert. Weakening currencies in Russia, Brazil and other nations this year may be a sign of trouble ahead, he wrote.
“This is a major component of the downside to the Fed’s program,” he said. “They have created a systemic risk in the world financial system for which they take little or no responsibility, because that which happens outside the U.S. is not their assignment. But as custodians of the reserve currency, it ends up that way.”
A slowdown in Asia contributed to Russia’s default in 1998 and triggered the meltdown of hedge fund Long Term Capital Management, which in turn disrupted stock markets, Gilbert said.
“For those who believe that they are protected from loss by central bank behavior, a little history is in order,” he said. “Particularly for Twitter aficionados.”
Wall Street analysts from banks that helped the company go public shared some of that caution when initiating coverage yesterday after a quiet period. Twitter is set to trade around $43 a year from now, according to the average estimate of Goldman Sachs Group Inc., Deutsche Bank AG, JPMorgan Chase & Co. and Bank of America Corp. The microblogging company rose 0.4 percent to $40.92 today in New York.
GR-NEAM had $62.3 billion in unaffiliated assets under management as of Sept. 30, according to its website. The Farmington, Connecticut-based business primarily serves insurers. Jim Prosser, a Twitter spokesman, declined to comment on Gilbert’s remarks.
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