Seth Klarman: You Guys Know That Trump’s Going To Be A Total Catastrophe, Right?
By JON SHAZAR
Feb 7, 2017 at 1:27 PM
 By Hedge Funds [ CC BY 3.0], via Wikimedia Commons
That Baupost Group founder Seth Klarman doesn’t think that President Trump is going to make hedge funds—or anything else— Great Again shouldn’t surprise. The somewhat reclusive, famously press-shy hedge funder in August stepped out from the shadows back in August to endorse Hillary Clinton, pronouncing it “simply unthinkable that Donald Trump could become our president.” He was, of course, right: It is unthinkable, and gets more so with each passing hour, regardless of the fact that it is also our reality. Now, Klarman’s not the only hedgie who would have preferred someone—anyone—other than the current occupant of the Oval Office be sitting in the White House right now. Bill Ackman and Paul Singer come to mind. But while Ackman has turned cheerleader and Singer has made accommodations, Klarman doesn’t buy the Trump rally or that anything good could come from the next 1,443 days.
“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,” he wrote.
Contra the fairly widespread notion that Trump’s impulsiveness, combined with the ongoing regulatory bonfire, will bring about the market volatility that hedge funds crave, Klarman says to be careful of what you wish for.
“The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty,” he wrote. “Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.”
Oh yea, and those things he is “planning”? They’re not going to work. In fact, they’re probably going to be a disaster.
“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,” he continued. “While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off….”
“The Trump tax cuts could drive government deficits considerably higher,” Mr. Klarman wrote. “The large 2001 Bush tax cuts, for example, fueled income inequality while triggering huge federal budget deficits. Rising interest rates alone would balloon the federal deficit, because interest payments on the massive outstanding government debt would skyrocket from today’s artificially low levels….”
“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.”
With that off his chest, Klarman acknowledges that Trumponomics isn’t the only problem, or rather that it is just a manifestation of a larger problem, which is to say: us. Klarman’s not going to pretend that hedge funds have been worth 2 and 20 recently, but what do you expect when tons of dumb money chase returns from 15 years ago? Luckily for the savvy, dumb money goes both ways.
“When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership),” he wrote. “Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings….”
“This should give long-term value investors a distinct advantage,” he wrote. “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.”
Now we, and—as Andrew Ross Sorkin makes clear—everyone else would love to see the Oracle of Boston’s words in full, but ARS isn’t sharing. If you’ve been graced by the Great Man’s missive, perhaps you’ll be less selfish. Send it along to tips@dealbreaker.com and we’ll share with the whole class.
A Quiet Giant of Investing Weighs In on Trump [DealBook]
http://dealbreaker.com/2017/02/seth-klarman-trumponomics/
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Who is Seth Klarman?
By Nathan Reiff | February 7, 2017 — 11:07 AM EST
 Billionaire and head of Boston-based hedge fund Baupost Group Seth Klarman is a bit of an enigma in the investing world. Unlike some of his peers, Klarman typically prefers to conduct his business without making prominent statements on the business news circuit. Nonetheless, Klarman is widely respected in the field for his savvy investment decisions, a reputation which has only grown as Baupost Group has become one of the strongest and largest hedge funds in the industry, managing an estimated $27 billion in assets.
Klarman's HistoryKlarman got his start in economics at Cornell University and, later, in the Harvard Business School. Klarman's family history pointed him toward economics, as his father was a professor of public health economics at Johns Hopkins University in Baltimore. Immediately after his training, Klarman worked for the Mutual Shares fund, now known as part of the broader Franklin Templeton Investments group. In 1982, Klarman left to found Baupost Group in Boston.
Rise of BaupostIn more than three decades, Baupost has grown to become a major player in the U.S. hedge fund world. Klarman's investment strategy is unique, and he tends to be considered a highly conservative investor by his peers. It is likely that this reputation is strengthened by Baupost's large cash holdings, sometimes totaling more than half of the fund's assets. Klarman often looks for value in underappreciated stocks and puts his assets into areas in which other investors would not consider. However, Baupost has posted consistently impressive returns throughout its history, proving that Klarman's innovative approach to investing is a successful one, even if it is hard to predict or to duplicate.
Klarman himself has garnered a reputation as being one of the brightest minds in the investment world. A follower of Warren Buffett, Klarman himself has been called the "Oracle of Boston" for his savviness. Warren Buffett, notoriously tight-lipped about other investors, has heaped praise on Klarman for his work with Baupost. Klarman has also become known for his deep philanthropic interests as well. His Klarman Family Foundation makes regular and substantial donations to a variety of causes, including medicine, Jewish interest organizations, and pro-Israel support groups. Klarman himself is an active supporter of Israel, working with the Israel Project and a variety of related organizations. Beyond, Klarman is an active donor for Republican campaigns, although he has recently revealed that in the 2016 presidential election he backed Hillary Clinton over Donald Trump.
While Seth Klarman may be an investor that many outside of the financial world haven't heard of, those within certainly have. His book Margin of Safety routinely sells for hundreds of dollars or more on Amazon. Klarman and Baupost will likely continue to make impressive moves, whether or not the rest of the world realizes.
investopedia.com
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A Quiet Giant of Investing Weighs In on Trump
Andrew Ross Sorkin | @andrewrsorkin
Tuesday, 7 Feb 2017 | 6:26 AM ET
The New York Times
Seth Klarman warns about investing in Trump era Tuesday, 7 Feb 2017 | 9:37 AM ET | 00:40
He is the most successful and influential investor you have probably never heard of. His writings are so coveted and followed by Wall Street that a used copy of a book he wrote several decades ago about investing starts at $795 on Amazon, and a new copy sells for as much as $3,500.
Perhaps that's why a private letter he wrote to his investors a little over two weeks ago about investing during the age of President Trump — and offering his thoughts on the current state of the hedge fund industry — has quietly become the most sought-after reading material on Wall Street.
He is Seth A. Klarman, the 59-year-old value investor who runs Baupost Group, which manages some $30 billion.
While Mr. Klarman has long kept a low public profile, he is considered a giant within investment circles. He is often compared to Warren Buffett, and The Economist magazine once described him as "The Oracle of Boston," where Baupost is based. For good measure, he is one of the very few hedge managers Mr. Buffett has publicly praised
In his letter, Mr. Klarman sets forth a countervailing view to the euphoria that has buoyed the stock market since Mr. Trump took office, describing "perilously high valuations."
"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," he wrote.
"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," he continued. "While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don't work, they actually leave society worse off."
In particular, Mr. Klarman appears to believe that investors have become hypnotized by all the talk of pro-growth policies, without considering the full ramifications. He worries, for example, that Mr. Trump's stimulus efforts "could prove quite inflationary, which would likely shock investors."
And he appears deeply concerned about a swelling national debt that he suggests could undermine the economy's growth over the long term.
"The Trump tax cuts could drive government deficits considerably higher," Mr. Klarman wrote. "The large 2001 Bush tax cuts, for example, fueled income inequality while triggering huge federal budget deficits. Rising interest rates alone would balloon the federal deficit, because interest payments on the massive outstanding government debt would skyrocket from today's artificially low levels."
Much of Mr. Klarman's anxiety seems to emanate from Mr. Trump's leadership style. He described it this way: "The erratic tendencies and overconfidence in his own wisdom and judgment that Donald Trump has demonstrated to date are inconsistent with strong leadership and sound decision-making."
He also linked this point — which is a fair one — to what "Trump style" means for Mr. Klarman's constituency and others.
"The big picture for investors is this: Trump is high volatility, and investors generally abhor volatility and shun uncertainty," he wrote. "Not only is Trump shockingly unpredictable, he's apparently deliberately so; he says it's part of his plan."
While Mr. Klarman clearly is hoping for the best, he warned, "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."
Mr. Klarman is a registered independent and has given money to politicians from both parties. He has donated to Jeb Bush, Chris Christie, Marco Rubio, John McCain and Rudolph W. Giuliani as well as Hillary Clinton, Cory Booker and Mark Warner.
While he has remained largely outside the public eye, Mr. Klarman surprised some of his friends and peers over the summer when he issued a statement after Mr. Trump criticized a judge over his Mexican heritage, saying he planned to support Mrs. Clinton: "His words and actions over the last several days are so shockingly unacceptable in our diverse and democratic society that it is simply unthinkable that Donald Trump could become our president."
In his recent letter, he explained for the first time his decision to say something publicly. "Despite my preference to stay out of the media," he wrote, "I've taken the view that each of us can be bystanders, or we can be upstanders. I choose upstander."
From the letter, it is hard to divine exactly how Mr. Klarman is investing his fund's money. His office declined to comment on the letter, which I obtained from a source. His fund currently has more than 30 percent of its funds in cash. He has lost money in only three of the past 34 years.
What investors say publicly and what they do in the markets can be different things. Mr. Buffett campaigned publicly against Mr. Trump, but he has nevertheless invested in the market since his election — about $12 billion, according to a recent disclosure. George Soros, who also actively campaigned against Mr. Trump, bet — wrongly so far — that the stock market would fall; he lost about $1 billion.
Most hedge funds have found themselves on the losing side of trades over the past several years, a point Mr. Klarman addressed in his letter. Noting that hedge fund returns have underperformed the indexes — he mentioned that hedge funds had returned only 23 percent from 2010 to 2015, compared with 108 percent for the Standard & Poor's index — he blamed the influx of money into the industry.
"With any asset class, when substantial new money flows in, the returns go down," Mr. Klarman wrote. "No surprise, then, that as money poured into hedge funds, overall returns have soured."
He continued, "To many, hedge funds have come to seem like a failed product."
The lousy performance among hedge funds and the potential for them to go out of business or consolidate, he suggests, may become an opportunity.
Perhaps the most distinctive point he makes — at least that finance geeks will appreciate — is what he says is the irony that investors now "have gotten excited about market-hugging index funds and exchange traded funds (E.T.F.s) that mimic various market or sector indices."
He says he sees big trouble ahead in this area — or at least the potential for investors in individual stocks to profit.
"One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to 'lock in' today's relative valuations between securities," Mr. Klarman wrote.
"When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership)," he wrote. "Thus today's high-multiple companies are likely to also be tomorrow's, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings."
To Mr. Klarman, "stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it."
"This should give long-term value investors a distinct advantage," he wrote. "The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become."
How Mr. Klarman wants investors to behave in the age of Trump remains an open question. But here's a hint: At the top of his letter, he included three quotations. One was attributed to Thomas Jefferson: "In matters of style, swim with the current; in matters of principle, stand like a rock."
cnbc.com
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