Seth Klarman Sees Another Lost Decade For Stocks, "Artificial" Market Reminds Him Of A "Hostess Twinkie"

Tyler Durden's picture

Seth Klarman was speaking at the CFA Institute earlier, and in typical fashion cut to the chase: in summarizing the current market, the Baupost founder said he "sees few bargains in the current environment and
predicted on Tuesday that the stock market could suffer another
lost decade without any gains
." And the punchline: his description of market conditions which he compared to "a Hostess Twinkie snack cake because everything is being manipulated by the government and appears artificial."
Such facility with words, there is a reason the man runs a $22 billion fund and his book "Margin of Safety" has been out of print for years, and sells for a $1000 on ebay.

Some more of Klarman's relevant perspectives from Reuters, where we learn that he is neck deep in Constant Maturity Swaps:

"Given the recent run-up, I'd be worried that we'll have another 10 years of zero returns," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston.

"I'm more worried about the world broadly than I've ever been in my whole career," Klarman said.

Inflation is a risk that Klarman said he is particularly concerned with given the government's high rate of borrowing to bail out the financial system. Baupost has purchased far out-of-the-money puts on bonds to hedge the risk, he said.

The puts, which Klarman said he viewed as "cheap insurance," will expire worthless even if long-term interest rates rise to 6 or 7 percent. But if rates rise to 10 percent, Baupost would make large gains, and if rates exceed 20 percent the firm could make 50 or 100 times its outlay.

Typically, Baupost focuses on out-of-favor stocks and bonds. Klarman cleaned up in 2007 and 2008 buying distressed debt and mortgage securities that later recovered.

One area Klarman said he is currently scouring for potential investments is private commercial real estate below the top quality. Publicly traded real estate investment trusts, however, have "rallied enormously" and are "quite unattractive," he said.

And speaking of Baupost's $22 billion, Klarman said he may return cash to investors, as the fund is now 30% in cash and there are few immediately investable opportunities.

"We are thinking about actually returning it if it got higher," Klarman, who rarely speaks in public, said at the CFA Institute's annual conference in Boston on Tuesday. "We are trying to walk a tightrope."

"I've always thought that size was a negative," he said, adding that bigger size often means investors become less nimble.

before the financial crisis hit markets, the firm opened up to new investors for the first time in years, Klarman said, deciding that more capital might be helpful to pursue certain investment opportunities. "We went to our wait list for the first time" in years, he recalled.

In hindsight, the move proved especially smart, as it would have been extremely difficult to raise new money at the height of the financial crisis, he added.

"We'd rather underperform a huge bull market than get clobbered in a bear market," he said.

For those who wish to read Klarman's massively popular and out of print Margin of Safety, they can find a pdf version here.