Billionaire Seth Klarman says Fed aid ‘infantilized’ investors and decoupled the stock market from fundamentals

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  • The Federal Reserve’s emergency relief efforts are driving a “surreal” stock rally as prices decouple from fundamentals, Seth Klarman, manager of hedge fund Baupost Group, said in a letter seen by Bloomberg.
  • The S&P 500 surged on the central bank’s policy announcements in March and continues to hold highs despite worsening economic data.
  • “Investors are being infantilized by the relentless” relief efforts, 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 added.
  • Visit the Business Insider homepage for more stories.

The Federal Reserve’s unprecedented monetary easing is fueling a “surreal” market rally and treating participants like kids, 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. Its latest gains arrive as COVID infection rates soar higher and economic data points to a longer-than-expected recession.

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

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“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 refrained from updating investors on the firm’s performance, instead noting Baupost gained in the second quarter by selling positions “as prices rallied strongly.” Still, Klarman raised concerns around how the market will continue to trend as economic gauges sour.

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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, we can only wonder whether the markets will ever be expected to make it on their own,” Klarman wrote.

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