Titan, Contrarian Klarman’s Views On Trump Rally

The conventional wisdom may hold that a number of new Trumpian policies auger well for business: Lower taxes, less regulation and sweeping infrastructure work.

But one investor who has made his name (quietly) and fortune (huge) betting against the grain has a less sanguine view of those policies. Seth Klarman, who heads the $30 billion hedge fund Baupost Group, has written a letter that has caused a stir on Wall Street, reported The New York Times.

The letter warns of “perilously high valuations” that have come in tandem with a furious stock market rally in the weeks since Trump won the election last November. In his letter, Klarman wrote that the new administration’s movement toward trade protectionism “may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces. While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off.”

As for tax cuts, those could push deficits higher, as they would alongside stimulus programs designed to create jobs yet must be paid for somehow, wrote Klarman. Deficits “could prove quite inflationary, which would likely shock investors.”

And as for the man himself (Trump, that is), Klarman wrote that the “erratic tendencies and overconfidence in his own wisdom and judgment that Donald Trump has demonstrated to date are inconsistent with strong leadership and sound decision-making.” All of this could lead to “high volatility” in the markets, which tends to be anathema to most investors (and certainly value investors).

Beyond the volatility that might loom in the markets, Klarman wrote that the hedge fund industry has been beset by poor returns in an age where a lot of money has flowed into those investment vehicles (the S&P gained 108 percent from 2010 to 2015, dwarfing hedge funds’ 23 percent). Now funds are flowing into ETFs, which Klarman said may just keep high-multiple companies sporting high valuations.