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My Two Cents

Intriguing

Chris Farrell Jan 5, 2009

One of the weekly newsletters I get and enjoy is by the financial advisor John Maudlin. In his latest newsletter he relays a conversation he had with the private money manager Bill Fleckenstein.

I interviewed Flickenstein in February last year when his book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve came out. It’s well worth reading. Iasked him, “given your views on the Fed, what should an investor do?”

His response: “A lot of investors think everything will be O.K. They don’t understand how shaky an edifice has been created. I don’t think it’s possible for the Fed to solve the unwinding of credit. It’s going to get worse. This is a moment to take less risk. To race into stocks because they’re down 20% from their highs–I don’t think so.

The product investors should load up on is cash. You put yourself in a position to take advantage of things when the risk has been squeezed out. You might lose a little, but you put yourself in a position to win big. Let’s say you get a 3% return on cash, and inflation is running 5%. But [eventually] say I can find stocks down 30% to 60%, and in two years they’ll double in value. “

It was good advice. That’s why his conversation with Maudlin grabbed my attention. Her’s what Maudlin writes:

Bill runs a short-only hedge fund and has done so for many years. He is one of the more outspoken and well-known bears. And he told me that he is closing his short fund. Shutting it down and sending all the money back.

“Right now, my list of stocks that I want to be long is longer than the list I want to short.” In the current environment he wants the ability to go long as well as short. For those of you who are long the market, that is probably as good an indicator as any that we are closer to the bottom than we are from the future top!”

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