Seth Klarman said the Federal Reserve is treating investors like children and is helping create bizarre market conditions that are unsupported by economic data.
“Surreal doesn’t even begin to describe this moment,” Klarman said in a letter to investors reviewed by Bloomberg News. Investor “psychology is surprisingly ebullient even though business fundamentals are often dreadful,” he added.
The culprit is the Fed, Klarman said in the 16-page letter.
“Investors are being infantilized by the relentless Federal Reserve activity,” said Klarman, who runs hedge fund firm Baupost Group. “It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene. When the market has a tantrum, the benevolent Fed has a soothing yet enabling response.”
Going further, he said: “As with the 30-year-olds still living in their parents’ basements, we can only wonder whether the markets will ever be expected to make it on their own.”
While Klarman didn’t disclose Baupost’s performance, he said his fund had strong gains and “we were significant net sellers as prices rallied strongly” in the second quarter.
Baupost’s cash balance was 31% on June 30, up from 26% disclosed in April, the result of selling a recently purchased portfolio of mortgage-backed securities and corporate debt holding, as well as net stock sales.
A Baupost spokeswoman didn’t immediately respond to an email seeking comment.
This article was provided by Bloomberg News.