Baupost Group’s Seth Klarman is worried about what the election of Donald Trump means for global markets.
In a private letter to investors dated January 20 reviewed by Business Insider, he starts off with three quotes:
- “In matters of style, swim with the current; in matters of principle, stand like a rock.” — Thomas Jefferson
- “The world, that understandable and lawful world, was slipping away.” — William Golding, Lord of the Flies
- “Do I really look like a guy with a plan? You know what I am? I’m a dog chasing cars. I wouldn’t know what to do with one if I caught it. You know, I just … do things.” — The Joker, The Dark Knight
The rest of the letter serves as an explanation for the inclusion of those three quotes. Klarman runs through his thoughts on President Trump, volatility and the stock market.
Boston-based hedge fund firm Baupost managed $29.2 billion as of mid-year 2016, according to the Hedge Fund Intelligence Billion Dollar Club ranking. A spokeswoman for Baupost didn’t immediately respond to a request for comment.
Here are the key excerpts from the letter (emphasis added):
- “On November 8, the US electorate basically gave the middle finger to the establishment and the status quo by narrowly electing Donald J. Trump to the presidency of the United States.”
- “Ensuing animal spirits drove US stocks to repeated new highs, especially shares of those companies expected to benefit most from lower taxes, expanded infrastructure spending, and deregulation.”
- “The market’s post-election gyrations are emblematic of what markets do: they attempt to forecast the future and reflect it in daily securities prices. But markets are hardly efficient; they frequently overshoot.”
- “Trump’s erratic pronouncements — about tariffs, corporate actions, the cost of F-35s, a nuclear weapons buildup, and whatever else — are unusual and unsettling, to say the least. The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty. Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says its part of his plan. He’s also, at times, contradictory, giving one the perpetual feeling that just about anything could happen. Predictability in government policies, like predictability in business results, is important to investors. Amidst rapid-fire and tumultuous change, it’s going to be that much harder for investors to make assumptions, model business performance, and reach intelligent decisions. Personally, I’m troubled by Trump.”
- “As a student of history, I know that democracies are fragile and cannot be taken for granted. Democratic norms are crucial for the perpetuation of democracy. Political stability depends on the rule of law and adherence to precedent”
- ” Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers. President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces. While they might be popular, the reason the US long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off.”
- “The Trump presidency could, in the best case, mark a point of renewal for free market forces. The pro-business tilt of the cabinet is unmistakable, though the mélange of backgrounds, viewpoints, and, in many cases, limited Washington experience do not suggest consistent policy direction. If things go wrong, we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation, and global angst about the stability and wisdom of American leadership. ”
The investor letter was earlier reported by the New York Times.