Seth Klarman, the founder and head of the Baupost Group, has forecasted brutal corrections across financial markets in the aftermath of an anticipated asset price bubble. The predictions, made in a private letter to clients, suggested that investors are not factoring in risk, citing “nosebleed valuations” in technology shares in companies like Netflix and Tesla Motors. US shares increased in value by nearly a third in 2013, with big names such as Facebook increasing by over 100%, reports The Financial Times.
He added that the failure of investors to make provisions for a potential reversal in central banks’ five-year experiment with ultra loose money – which saw interest rates cut to record lows – was another area for concern.
The Baupost Group head stated that while he could not predict exactly when the devastating consequences of the asset price bubble would occur, the repercussions would be brutal for those who were not prepared.
“Any year in which the S&P 500 jumps 32% and the Nasdaq 40% while corporate earnings barely increase should be a cause for concern, not for further exuberance. On almost any metric, the US equity market is historically quite expensive. A sceptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla Motors,” he warns.
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