- The Federal Reserve's emergency response leads to a "surreal" stock rally as prices are decoupled from fundamentals, said Seth Klarman, manager of the Baupost Group hedge fund, in a letter from Bloomberg.
- The S&P 500 climbed to the central bank's policy announcements in March and remains high 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, said hedge fund billionaire Seth Klarman in an investor letter from 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 slightly higher since the beginning of the year. The latest increases are seen when COVID infection rates rise and economic data point to 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 refrained from informing investors about the company's performance and instead found that Baupost had grown in the second quarter due to the sale of positions "at sharply higher prices". However, Klarman expressed concerns about how the market will develop in the face of acidic economic measures.
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, we can only ask whether the markets are ever expected to do it on their own," wrote Klarman.
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