- Billionaire investor Seth Klarman warns stimulus and interest rates are masking market risks.
- The Baupost chief compared investors to “frogs in water that is slowly being heated to a boil.”
- Klarman added that Tesla stock has surged “seemingly beyond all reason.”
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A billionaire investor heralded as “the next Warren Buffett” blasted the Federal Reserve and Treasury in a private letter this week, accusing the duo of disrupting the stock market and putting investors at risk.
Seth Klarman told clients of his Baupost hedge fund that investors are behaving as if risks have “simply vanished” due to rock-bottom interest rates and wave after wave of government stimulus, the Financial Times reported.
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Federal interventions to buttress growth and reduce unemployment have also made it tricky to assess the economic health of the country, Klarman said.
“Trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin,” he said, according to the Financial Times.
“But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognize the danger,” he added.
Klarman highlighted Tesla as an example of how heady markets have become. Elon Musk’s electric-vehicle company has seen its shares skyrocket more than 850% since the start of last year, and now commands a market capitalization north of $800 million.
The “barely profitable” automaker’s stock has surged “seemingly beyond all reason,” Klarman said.
Warren Buffett himself has tapped the Baupost boss as his spiritual successor. When a college student asked the Berkshire Hathaway CEO in 1992 who might be the next Buffett, he swiftly replied “Seth Klarman,” according to the professor teaching the class.
Klarman and his team have been more adventurous than Buffett in recent months. Baupost’s latest portfolio update revealed a $400 million stake in Bill Ackman’s special-purpose acquisition vehicle, Pershing Square Tontine, as well as a $52 million position in Redball Acquisition Corp, another SPAC that is co-chaired by “Moneyball” star Billy Beane.
On the other hand, Baupost slashed its stakes in Google-parent Alphabet and Facebook in the second and third quarters of 2020, after establishing those positions in the first quarter. Those moves suggest Klarman is concerned those technology stocks are outpacing their prospects.