Brightest Mind: “few will remain unscathed” in this Market

Legendary investor Seth Klarman, founder of the $27bn Baupost Group, is warning of an asset price bubble, calling high-flying technology stocks like Tesla Motors and Netflix “nosebleed valuations”. Klarman believes a punishing correction is forthcoming in financial markets. He compared the current U.S. economy and the role of the Federal Reserve as “The Truman Show” — the movie starring Jim Carrey depicting a make-believe world.

Klarman, known as the “Oracle of Boston”, said the U.S. equity market is expensive by almost any metric. In a letter to his newsletter subscribers, he warned that investors were downplaying risk and unprepared for an end to the Federal Reserve’s current round of quantitative easing. He further noted that he could not foresee the precise date of a correction, but said few will remain “unscathed”.

Klarman’s warning is notable because of the following he has generated based upon his cautious, value-driven investing method, and the sale of his out-of-print investment book that sells for almost $3,000 on Amazon. It comes following a spike in U.S. shares by nearly a third last year when technology stocks like Facebook more than doubled. Klarman stated in his newsletter than one indication stocks are overvalued is that the S&P 500 and Nasdaq jumped 32 percent and 40 percent respectively, while corporate earnings did not keep pace. He felt this fact represents a reason for concern, not more bullishness.

In addition to his warning about tech stocks, Klarman also warned his subscribers about bubble in junk bonds, yields, and credit quality. Since the Federal Reserve has kept interest rates at record lows and bought up government bonds, the S&P 500 has increased in value over 150 percent to record highs. Bond yields have also fallen significantly and other assets like property in Singapore and London, and fine art have spiked in value.

As a hedge fund manager, Mr. Klarman is known for keeping most of his portfolio in cash, while still enjoying annual returns of 18 percent over the last 30 years. He was ranked recently as the fourth best-performing fund manager in history, having generated $21.5bn in profits, following such investing legends as George Soros, Ray Dalio, and John Paulson.

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