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- The Federal Reserve's emergency response leads to a "surreal" equity rally as prices decouple from fundamentals. Seth Klarman, manager of the Baupost Group hedge fund, said seen in a letter from Bloomberg.
- The S&P 500 rose to the central bank's policy announcements in March and remains near record highs despite deteriorating economic data.
- "Investors are infantilized by the relentless relief efforts," wrote Klarman.
- "It is as if the Fed thinks they are stupid children who are unable to rationally price securities so they have to intervene," he added.
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The Federal Reserve's unprecedented monetary easing leads to a "surreal" market rally and treats participants like children, hedge fund billionaire Seth Klarman said seen in a letter from investors to Bloomberg.
The central bank's credit facilities, liquidity injections and interest rate cuts helped stocks reverse their sharp bearish fall in March. The S & P 500 has been a little higher since the beginning of the year, although COVID-19 infection rates have risen sharply recently and economic data indicate a longer-than-expected recession.
The Fed's actions are responsible for such a widespread discrepancy between equity performance and economic trends, said Klarman, who heads the Baupost Group.
"Investors are being infantilized by the Federal Reserve's relentless activity," wrote Klarman. "It is as if the Fed thinks they are stupid children who are unable to rationally price securities so they have to intervene."
He continued: "When the market has a tantrum, the benevolent Fed has a reassuring yet empowering response."
The fund manager found that Baupost had grown in the second quarter due to the sale of positions "at sharply higher prices". Nevertheless, Klarman expressed concerns about how the market would develop as an acid economic measure.
The business fundamentals "are often terrible," and one has to wonder when prices will react to the wider economic environment, he said.
"Like the 30-year-olds who still live in their parents' basement," wrote Klarman, "we can only ask whether the markets are ever expected to make it on their own."
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