FINANCIAL TIMES

 

Klarman warns of impending asset price bubble

By: Miles Johnson
Financial Times | Monday, 10 Mar 2014 | 6:57 AM ET

 

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 $27 billion Baupost Group whose investment
opinions have attracted a near 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, valuedriven
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 percent and the Nasdaq 40 percent 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. The Baupost Group declined to comment.


Since central banks slashed interest rates to record lows and began a policy of buying up
government bonds after the 2008 market crash, the S&P 500 has rallied by more than 150
percent to new all-time highs. Bond yields have fallen sharply and many other assets, from fine
art to property in Singapore and London, have leapt in value.


Mr Klarman is exceptional among hedge fund managers for often holding the bulk of his
portfolio in cash, yet still generating annualized returns of 18 percent since 1983 using often
highly concentrated investments.


The Boston-based investor was recently ranked as the fourth best performing hedge fund
manager of all time for generating $21.5bn in returns over its history, coming behind George
Soros, Ray Dalio and John Paulson.


—By The Financial Times
© 2014 CNBC.com


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE
FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT
NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE
CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS
CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE
ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.