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Baupost’s Seth Klarman Warns of Asset Bubble

Posted by Larry Doyle on March 10, 2014 7:51 AM |

More often than not, I take the wisdom provided by selected talking heads and industry insiders with a pound of salt.

Without being overly cynical strictly for cynicism’s sake, I discount a fair bit of the analysis put forth by many financial sleuths based on the individual ‘talking his own position.’ In fact, I believe that many outlets predominantly look for guests who play the game and toe the industry’s party line.

To that end, I look elsewhere for insights and perspectives that I really appreciate. Who are some of the money managers I truly respect but are rarely seen on major financial outlets? Bob Rodriguez, Jeremy Grantham, and Seth Klarman, who just so happens to offer some pointed insights highlighted today in a commentary in the FT: >>>>>>  

One of the world’s most respected investors has raised the alarm over a looming asset price bubble, calling out “nosebleed valuations” in technology shares like Netflix and Tesla Motors and warning of the potential for a brutal correction across financial markets.

Seth Klarman, the publicity-shy head of the $27bn Baupost Group whose investment opinions have attracted almost a cult-like following, said that investors were underplaying risk and were not prepared for an end to central banks reversing a five-year experiment in ultra-loose money.

While noting that he could not predict exactly when a significant market correction would occur, Mr Klarman wrote in a private letter to clients: “When the markets reverse, everything investors thought they knew will be turned upside down and inside out. ‘Buy the dips’ will be replaced with ‘what was I thinking?’ . . .  Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

Baupost, which is closed to new investment, returned $4bn to clients last year.

The warning by Mr Klarman, who has won a devoted audience for his highly cautious, value-driven approach, and whose out-of-print book on investment sells second-hand for as much as $2,900 on Amazon, comes after US shares surged by almost a third last year. Many well known technology companies, such as Facebook, more than doubled.

“Any year in which the S&P 500 jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern, not for further exuberance,” Mr Klarman wrote.

“On almost any metric, the US equity market is historically quite expensive. A sceptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla Motors,” he wrote.

Navigate accordingly.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

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The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • John

    Scary. . .

  • EVJ

    Your discussion of an asset bubble is spot on. That said, do remember that while money is so cheap as to be without effective cost, large sums will be raised or borrowed and new industrial plants will be built.

    Specifically, Tesla is raising $1.2 Billion to build a new factory to manufacture Lithium batteries. I think this factory will be a huge success. Those batteries will be sold to others, including for uses that are not auto-related.

    Every now and then, you get a game-changer, a disruptive technology that re-sets the Rules for that industry. Tesla’s auto and battery concepts are such disruptors. I suspect some stock accumulators understand this, and by buying shares, have caused its valuation to go way up. Justified rise? Nobody knows. But it is a fairly good bet.

    Unless, of course, the economy totally tanks and nobody can afford to buy the final product of those factories – and that possibility always remains out there.






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