The market is making Seth Klarman nervous.
On Wednesday night, Zero Hedge posted an excerpt from Klarman’s latest letter to investors. Klarman said, among other things, that we are marching towards a re-creation of the 2007 market.
“It’s not hard to reach the conclusion that so many investors feel good not because things are good but because investors have been seduced into feeling good — otherwise known as ‘the wealth effect.’ We really are far along in re-creating the markets of 2007, which felt great but were deeply unstable when shocks started to pile up.”
And Klarman doesn’t think the Fed is doing enough to keep markets in check.
“Even Janet Yellen sees ‘pockets of increasing risk-taking’ in the markets, yet she has made clear that she won’t raise rates to fight incipient bubbles. For all of our sakes, we really wish she would.”
Klarman also notes that in the current low-rate environment, investors have increased risk taking as the need for greater returns requires greater risk-taking with a shrinking potential payoff:
“The pressure to reach for return virtually ensures that many investors will take greater and greater risk for less and less potential reward at market peaks… A recent brokerage report excitedly touted the new HoldCo PIK Toggle notes of a Croatian consumer goods retailer. Nearly every word of that description is a flashing red light to seasoned investors.”
On Wednesday, Bill Fleckenstein of Fleckenstein Capital got into a shouting match on CNBC while defending his stand against the Fed’s monetary policy.
And recently we’ve seen noted bears, like Gina Martin Adams and Bob Janjuah turn less-bearish, and Klarman says that, “Investors have clearly grown weary of worrying about risky scenarios that never seem to materialise or, when they do, don’t seem to matter to anyone else.”
On Wednesday the Fed released its latest monetary policy decision, which indicated little change in the Fed’s language.
On Thursday, the S&P 500 and Dow Jones Industrial Average hit new all-time highs.