Paul Kedrosky: Investing for the next recession

Paul Kedrosky is a former top-ranked sell-side internet equity analyst at HSBC James Capel, turned venture capitalist at Ventures West, an institutional venture capital firm with more than $400 million under management. But he is best known for his popular blog, Infectious Greed, which covers the stock market, business, technology and trends. He is a senior fellow at the Kauffman Foundation, with a Ph.D. from the University of Western Ontario, an M.B.A. from Queen's University, and a Bachelors in Engineering from Carleton University.

Kedrosky's articles on the stock market and speaking appearances at events such as the 2009 Milken Institute Global Conference are highly regarded in finance, technology and social media - not to mention his regular appearances on CNBC. Basically, if you want a well-rounded opinion from a highly respected financial blogger, look no further. Here is our interview with Paul Kedrosky.

DailyFinance: What are you trading now?
: At a macro level: I'm long gold (GLD), TIPS (TIP), some agricultural commodities, oil, converts, and a few emerging markets, like Brazil (EWZ). I'm short Japan, (EWJ), the dollar, technology, Italy (EWI,) (off and on), and consumer discretionary spending. I remain convinced the soft landing of U.S. consumer spending will not happen, which will prove that nothing has come decoupled, thus damaging recoveries around the world. Consumer debt remains too high and we missed a chance to force over-capitalized banks to do massive debt-equity conversions on residential real estate with subsequent shared upside. This will become a major cause for next recession by 2010, and why we bounce around, Japan-style, in coming years.

Given that prospect, are you partial to investing in any specific industry or country?
I like Brazil and Canada (EWC) as country trades. The former for its emerging status and relatively smooth current ascent, and the latter for its improving domestic finances, plus as an implicit hard currency play given the reliance on oil and commodities. With respect to emerging trends, I'm much more macro, so I'm mostly looking at emerging markets, a few commodities of interest, especially in agriculture (DBA) and water infrastructure, for example, (CGW) and (PHO), plus some related currencies. The preceding said, I believe we will see a strong IPO market in 2009, all else equal. There are some companies worth watching in the pipeline.

What is your market forecast?
While we may not blow a hole in the March lows, I think we will see a discouraging unsettledness through the rest of the year. I'm admittedly torn on this, as too much smart money is bearish and momentum/sentiment has mostly driven markets higher on a "we're not dead yet" trade combined with an inventory restocking bounce. But sometimes contrarianism pays, mostly at inflection points, and I'm not convinced that being contrarian about the bears, even the smart ones, is currently the right move. In terms of affecting business it mostly means playing a conservative and flexible approach.

How have you adjusted your investments to recent market conditions?
I remain over-invested in cash and equivalents, even more so than usual. I have long taken a bar-bell approach to markets, with a conscious split between risky instruments and riskless instruments. I don't spend much time investing in the mudded middle, where I'm not sure whether something is risky or not. I do that even more than ever now.

Would you share the most important lesson you have learned in the finance industry?
From a senior broker when I was entering the business: "Stock is meant to be sold, not bought." As long as you understand this you understand so much of what is important about how this mad business operates.

What separates you from other financial bloggers?
My feeling is that everyone finds the audience best suited to them. I like to think my readers are coming to Infectious Greed looking for an intelligent read, analysis and context with very little up/down stock-picking. I also like to leaven things with offbeat reading and viewing from other areas, under the assumption, perhaps wrong, that people see investing as a synthesis of so many things, the same way I do.

Are there any particular blogs or journalists that you follow?
I like Barry Ritholtz' The Big Picture blog, James Surowiecki, Paul Krugman's blog, Michael Pettis, and Mish's Global Economic Trend Analysis.

How about VC and fund managers. Who you do think is worth paying particular attention to?
Venture capitalist: Vinod Khosla. We don't see eye-to-eye on everything, like his ethanol infatuation, but he is smart, risk-loving and ballsy.

Fund manager: Jeremy Grantham. Smart, literate, mordant and always ceaselessly questioning his own views, usually with compelling data.

Tell us something we don't know about you.
In 1997 I turned down a position at Oppenheimer as an analyst, thus giving some young guy named Henry Blodget his start on Wall Street. Wonder how that ever worked out.

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