Investment legend Seth Klarman went back to his roots at the Harvard Business School to declare that the stock market is still too pricey even with its slide this year.
“You’ve got a stock market that’s one of the most expensive ever,” said the chief executive of the value-focused Baupost Group, in an interview posted on Friday. The S&P 500
is now down 23% for the year.
He said there are cross-currents hitting the market right now, firstly identifying the rise in interest rates.
“Interest rates are starting to move higher, and they should move higher, because they’re been held artificially low for a really long time,” he told Das Narayandas, a professor at the Harvard Business School. “I think it’s going to jolt some people, and even the system, when they start to move higher.”
“It’s been a 35-year bond bull market, so that’s going to be a big shock that is going to test I think financial institutions who’ve been hedged, who’s been writing derivatives they shouldn’t write, who’s been stepping out to take greater risks in their portfolio, because if you can’t make it in bonds, people try to make it somewhere else.”
Inflation, he adds, is a challenge because investors don’t like to get guaranteed losses from their safe portfolio. The war in Ukraine — “clearly a war of aggression” — is another issue.
Klarman also identified another risk. “I’m also worried about the great divides in American society. It’s not just north and south, big cities and surburban and rural, it’s not just red and blue even. The divides are really enormous and they go to greater technology and who’s in a position to benefit and who’s not,” he said. “They go to a very rapidly changing job market and the destruction of a lot of jobs, they go to changes in media, where there’s so many different channels and we all don’t listen to Walter Cronkite.”
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He still thinks the U.S. dollar
will remain supreme as he dismissed the Chinese yuan, Japanese yen, euro and cryptocurrencies as viable alternatives. And he hedged his own answer about division in the U.S.
“We’ve clearly had worse here,” he said, noting the Great Depression, World War II, and a lack of civil rights. He also pointed to innovation, not just in Silicon Valley, but in Boston for biotechs, New York and Philadelphia, as well as world-class educational institutions.
Klarman said he sees value as gold for safety, even as he acknowledges the points made by Warren Buffett and others that gold does not pay interest. “It does have the history, it’s very hard to extract, it’s random that somebody settled on gold and that we couldn’t get more than this very limited supply that we have,” he said.
“I can’t see the point of crypto,” he added. “It has this feel to me of being like catnip for techies.”
“The idea that we’re using more energy than the country of Iceland, to mine extra crypto, to solve math problems that don’t need to be solved, seems crazy to me.”
Watch the full interview here: