In his recent Q3 2022 Letter, Dan Loeb explained what the smartest man in America told him. Here’s an excerpt from the letter:
I am sympathetic to many of these economic and geopolitical concerns but amidst all the gloom, we are seeing very attractive valuations, particularly assuming an economic scenario short of financial Armageddon, and are taking up exposures as we speak. As my friend and mentor, who I will dub the “smartest man in America,” recently told me, he did not know when the market would bottom, but he knew for sure it would be when economic data looked godawful.
I am reminded of this NY Post cover and headline from March 9, 2009: “Warren Buffet: The Economy Has Fallen Off a Cliff!” I am familiar with this doom spiral trap because I fell into it too, declaring in an investor letter on March 10, 2009 that we should “brace for impact” just before markets (and our portfolio, since I changed my view only days later based on new data and had ramped exposures to banks/autos) turned around dramatically.
The essential question for me at this point is whether capitulation on rates and inflation driven by Fed policy are the key or if a bottom in the real economy (based on unemployment, income, industrial spending and broad measures of GDP) is actually what matters most.
For now, while we remain respectful of the numerous well-flagged risks, we are looking to deploy capital into both world-class companies trading at bargain basement prices and event driven situations that will be somewhat protected from market moves. Should the economy deteriorate further, and the recession hit hard, we have short positions and market hedges to dampen the blow as we wait with open arms for opportunities that would emerge in credit, as we discuss below.
You can read the entire Q3 2022 Letter here:
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