John Carney has some important reporting coming out of the New York Times DealBook conference. He writes:
Lloyd Blankfein is worried that investors think low interest rates will last forever.The sooner than expected "growth" that Blankfein refers to is, of course, Fed manipulated growth, largely the result of money printing that will ultimately also cause price inflation, which will push interest rates higher.
"One of the big risks that's looming is complacency. People are once again complacent about the low level of interest rates," the Goldman Sachs CEO said at the New York Times DealBook conference Wednesday.
As a result, there could be losses for investors with portfolios heavy with low interest loans, Blankfein predicted.
"At some point growth will come back. I think its going to come back sooner than people think. Now what's going to happen when growth comes back, interest rates rise?" Blankfein said. "That will have an effect on portfolios and people will have losses."
Blankfein said that Goldman is advising all its corporate clients to borrow "as much as they're going to need for as long as they think they could need it" because of the low interest rate environment.
Ray Dailo, the hedge fund manager with the most assets under management, also sees rates heading higher and said so at the same conference:
"The biggest opportunity, and I don't think its an imminent opportunity, will be shorting the bond market," Dalio said.Dalio, however, is possibly making one pedestrian error. It appears he expects the higher interest rates to cause a crash in asset prices or what he is calling financial assets:
Rising interest rates in 2013 will likely push down prices in almost every financial asset in the world according to Ray Dalio, the founder and chief investment officer of the world's largest hedge fund, Bridgewater Associates.
Low interest rates made necessary by global deleveraging have squeezed risk premiums out of nearly every asset class, Dalio said. As a result, most financial assets are "fully priced" and many are overvalued, according to Dalio.
"I think those risk premiums are likely to expand, and as a result I think that is generally a negative for asset classes as a whole," Dalio said.If Dalio is including equities in his definition of asset classes, he is dead wrong. Interest rates are going to be driven up by rising price inflation. The Fed will only allow rates to climb higher at a slow pace. This will means the climb in assets such as equities and real estate will continue to climb higher. Only when rates are higher than the price inflation will asset prices be choked off. And, Bernanke isn't anywhere near doing that point.