Charles De Vaulx On Seth Klarman’s Recent Warnings


Found this little nugget from Charles De Vaulx on Seth Klarman. As readers know we were THE FIRST (by several days) to report Seth Klarman’s 2013 letter to investors. Charles De Vaulx, who is a great value investor in his own right, also discussed the letter in his conference call to investors. Below is an excerpt from the call.


3.) Contrast the optimism displayed by many investors and commentators today with the sobering, if not outright frightening, words recently written by Seth Klarman at Baupost, as well as some stern warning from none other than the Bank for International Settlements, the central banks’ bank.

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Two, we at IVA always find it very worrisome but also telling, maybe foretelling…it’s a very foretelling sign when different markets are behaving very differently from one another and actually seem to contradict one another.


Today, to give you some examples, on one hand credit spreads are low; junk bond issuance is vibrant; IPOs are rampant; stock buybacks are increasing; optimistic investors are switching from passive ETFs investing in the S&P into more specialized equity ETFs, out of greed we would presume; and some “nifty-fifty” type companies like Netflix, Amazon, Facebook, LinkedIn trade at stratospheric valuation levels — “nosebleed” was the word used by Klarman recently; while margin debt in the US is at an all-time high.


On the other hand, we have seen how depressed and worried Dr. Copper has been over the past few weeks, dropping to levels not seen before 2010, while iron ore prices have dropped over 20% year to date. Both copper and iron ore, along with various other base metals, are obviously good barometers of what is happening in China, and they are quite loudly telling us that all is not well with global economic growth. Speaking of China, the renminbi, the yuan, has been quite weak over the past few weeks, devaluing a little against the US dollar, confounding investors who thought the Chinese currency was a one-way bet and could only appreciate. But maybe vindicating — although it’s really early stages, frankly — vindicating CLSA strategist Russell Napier who seemed so prescient late August of last year when he wrote, “Many people are writing about a Chinese credit crunch and a banking crisis. I disagree. The authorities will have a choice as to whether to accept such a crunch or devalue and launch a new credit cycle to keep the balls in the air once again. Devaluing is the preferred option.” If that devaluation continues – – it’s a big “if”, Chuck and I are not convinced – that would unleash huge deflationary forces, negatively impact Europe and the US.


Three, also worrisome is the exceedingly somber letter Seth Klarman wrote to his clients recently talking about “an overall picture of growing risk and inadequate potential return almost everywhere one looks”; talking about “the growing gap between the financial markets and the real economy”; talking about “a Truman Show markets, describing Ben Bernanke and Mario Draghi as the creators who have manufactured an idyllic, if artificial, environment for today’s investors” as in the 1998 movie, The Truman Show. Now, I have not seen the movie, but my understanding is that the ending is rather chaotic.


Besides Seth Klarman, another “killjoy” came a few days ago in the form of a white paper produced by the BIS, the Bank for International Settlements, a paper which establishes that forward guidance as to what will happen to

interest rates by central bankers threatens, in their opinion, to encourage excessive risks.


Two interesting points were made in that paper:


One, investors are being encouraged to load up on risk, because they believe forward guidance will warn them well in advance about any rise in interest rates. And, indeed, one of the issues for some of us that remember recent history is that last time around, early 1994, it’s literally only after Greenspan raised interest rates that the markets, bond markets and equity markets, took a hit. And so, it’s very tempting from that recent history to believe that it’s only once central banks actually raise rates that things may unravel. It may not be the case. Again, markets are supposed to be forward-looking discounting animals.


The second point I think made in the paper is even more interesting than the first one. The second point is that the strategy of forward guidance could also result in rates remaining too low for too long, because central banks fear the reaction of markets to any rate rise, fueling even riskier behavior.



Question: Thank you. Seth Klarman has the reputation of being somewhat reclusive, and I find it interesting that he would choose this time to make the pronouncements that he has made publicly. Do you have any idea what might have prompted him to do that, rather than maintain a silence?


Charles de Vaulx: If I had to speculate and guess as to why, for him to be on the paranoid side is nothing new and boy do I respect that. But I think he is truly disturbed by the extent to which central banks around the world are distorting and manipulating prices.


But I think the second reason why he’s speaking up is that he is getting a little older. I think he is starting to slowly think about succession. There may be an attempt there to start to institutionalize his business a little more.


And finally, because so many asset classes are so unattractive, I think it’s one way for him, along with him having just returned $4 billion back to his clients, it’s a way, maybe, for him to warn his clients that it’s going to be very difficult, if not impossible, for Baupost to deliver great returns for the next year or so. That would be my guess.

IVA Funds Conf Call Transcript March 12 2014 (Final)

Original source here.


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