Mr. Klarman went on to say that he was more worried about the world than he had ever been in his career. He stated that the global and domestic risks keep increasing with each passing month. European sovereign debt is the most obvious problem as it has dominated the recent headlines. Europe is trying to “kick the can down the road” with the current Greek situation, but other countries, including Italy, Portugal and Spain, also face potential debt problems. In recent weeks, we have seen the protests in Greece on television, and perhaps we will see them repeated in other nations as they must face difficult choices to deal with their own financial conditions.
Here at home, the risks include political posturing surrounding the debt ceiling for the federal government and severe funding problems for many state and local governments. We recently read an article about the U.S. needing to take its own austerity measures at some point in the future. We believe this is entirely possible in the years ahead.
So with a renowned hedge fund manager worried, the prospect of a further debt crisis in Europe, and debt issues here in the U.S., shouldn’t the global markets be reacting to this bad news and moving significantly lower? The simple answer is yes. But the reality is that these concerns/issues don’t matter until they do matter. As long as the current problems don’t prevent companies from increasing revenues and earnings (which hasn’t happened yet) the problems don’t matter. At some point they probably will matter, but at the moment they don’t.
This doesn’t mean one should totally disregard the news entirely because understanding the macro economic trends are important; but the global markets, while subject to news-based volatility, will tend to follow the underlying trend of economic activity and earnings rather than the headline news. And so far the trend of economic activity and earnings has been positive, albeit at a slow rate.
