Seth Klarman: Fed Has "Infantilized" The Market

(Business Insider) The Federal Reserve's unprecedented monetary easing is fueling a "surreal" market rally and treating participants like kids, the hedge-fund billionaire Seth Klarman said in an investor letter seen by Bloomberg.

The central bank's credit facilities, liquidity injections, and rate cuts helped stocks reverse their sharp bearish tumble in March. The S&P 500 now stands slightly higher year-to-date, though COVID-19 infection rates have recently soared and economic data has pointed to a longer-than-expected recession.

The Fed's measures are to blame for such rampant dislocation between stock performance and economic trends, said Klarman, who runs the Baupost Group.

"Investors are being infantilized by the relentless Federal Reserve activity," Klarman wrote. "It's as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene."

He continued: "When the market has a tantrum, the benevolent Fed has a soothing yet enabling response."

The fund manager noted Baupost gained in the second quarter by selling positions "as prices rallied strongly." Still, Klarman raised concerns about how the market would trend as economic gauges sour.

Business fundamentals "are often dreadful," and one has to wonder when prices will once again react to the greater economic backdrop, he said.

"As with the 30-year-olds still living in their parents' basements," Klarman wrote, "we can only wonder whether the markets will ever be expected to make it on their own."


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