Wednesday, May 19, 2010

Seth Klarman of Baupost Group Calls for Another Lost Decade

Hedge fund manager Seth Klarman of Baupost Group is not very well known among the retail crowd, but this value investing maven is considered a maestro amongst the institutional crowd. And it shows with their money, as he has one of the top 10 shops in terms of assets under management, in the world. [Mar 8, 2010: World's Largest Hedge Funds] The problem is, he really does not talk publicly much, so there is not much one can "blog" about in terms of verbiage with Klarman. I for one, do not have a single Klarman post, in 3 years and 6000+ posts - until today.

Klarman seems quite pensive about the future - much like Japan had back to back "lost decades" for investors [Dec 8, 2009: Japan Launches Another Round of Stimulus in 2 Decade Long Fight] [Oct 27, 2008: Japan's Lost Quarter Century] , Klarman sees the same for the United States of Debt. It would seem almost impossible if you are a 'reversion to mean' kind of person to put together yet another decade of sickly returns after what occurred in 2000-2009, [Mar 26, 2008 - WSJ: Stocks Tarnished by Lost Decade] [Oct 7, 2008: Bloomberg - 2000s Stock Market Worse than 1930s], but there do appear to be a myriad of challenges facing the U.S. and eventually the "market" is going to call the U.S. out for its Greek like behavior. [Dec 30, 2009: Eric Sprott Wonders if US Debt Scheme is Simply the Biggest Ponzi Scheme Ever] Knowing "when" is the tricky part. This country has become so addicted to cheap money [Jun 3, 2009: A Country that Cannot Function Without Easy Money] , the scenarios painted in my mind if interest rates are forced upward by bond vigilantes to somewhat "normal".... or dare I say mid 1980s levels are frightening. [Dec 15, 2008: The Economic "Recovery"] Further, as Klarman says ... what "market" do we really have at this point? It's all government & central bank steroid induced and subsidized... no one really can tell what is sitting there underneath in the land of reality. [Nov 18, 2009: Our Economy is on Steroids]

Some thoughts from Seth Klarman via Reuters:
  • Star hedge fund manager Seth Klarman sees few bargains in the current environment and predicted on Tuesday that the stock market could suffer another lost decade without any gains. "Given the recent run-up, I'd be worried that we'll have another 10 years of zero returns," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston.
  • Current market conditions remind Klarman of a Hostess Twinkie snack cake because "everything is being manipulated by the government" and appears "artificial."
  • "I'm more worried about the world broadly than I've ever been in my whole career," Klarman said.
  • Klarman has 30 percent of assets at his $22 billion Baupost Group in cash, he said. He started the firm in 1982 with $27 million and has averaged 20 percent annual gains ever since. In 2007, amid the depths of the credit crash, Baupost had its best year, gaining 52 percent.
  • Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said. The puts, which Klarman said he viewed as "cheap insurance," will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.
Dear FMMF reader, I want to reiterate - this not some two bit aspiring "doomsday" mutual fund manager who writes a blog saying these things This is not "those crazy folks" at ZeroHedge or that "lunatic" Denninger. This is amongst the most well respected mainstream investment managers of our lifetime... apparently he has left the Matrix. That doesn't mean the market cannot rally 100% from here - but then again do we truly have a 'market' anymore?

Hat tip ZeroHedge

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