Seth Klarman Slams “Enabling” Fed For “Infantilizing Investors” In “Surreal” Market

“Surreal doesn’t even begin to describe this moment,” exclaims a frustrated-sounding Seth Klarman in his hedge fund, Baupost’s latest investor letter.

While the highly-paid, experienced, and process-oriented hedge fund managers are just “getting back to even” in 2020 (unable to beat the index), retail investors are crushing everyone in sight with gains above 25% as record economic contraction and unemployment did nothing to dent their demand to BTFD in any and everything from bankrupt HTZ to TSLA…

Source: Bloomberg

This should come as nothing new as we have detailed numerous times, how retail investors took over the stock market.

Goldman data showed that individual investor active trading is playing an increased role in market volatility, particularly in select stocks. In the shares market, 2.3% of all volume is made up of trades for $2,000 or less.

The increase in small trades has been even more notable in the options market, where 13% of all trades are for 1 contract.

Investor “psychology is surprisingly ebullient even though business fundamentals are often dreadful,” warns the billionaire fund manager who has historically not been shy to point out the reality behind the curtain. And it’s not just individual names like worthless HTZ, it’s systemic…

Source: Bloomberg

Klarman sees the culprit for all this insanity is obvious – The Fed!

Source: Bloomberg

Bloomberg reports that Klarman said his fund had strong gains and “we were significant net sellers as prices rallied strongly” in the second quarter.

“Investors are being infantilized by the relentless Federal Reserve activity…

It’s as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene.

When the market has a tantrum, the benevolent Fed has a soothing yet enabling response.”

Finally, echoing the somewhat shocking words of former Dallas Fed President Richard Fisher:

“the market is getting ahead of itself, because the market is dependent on Fed largesse… and we made it that way…

“The Fed has created this dependency and there’s an entire generation of money-managers who weren’t around in ’74, ’87, the end of the ’90s, and even 2007-2009.. and have only seen a one-way street… of course they’re nervous.“

“The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?“

Klarman warns:

“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.”

Indeed, as Fisher concluded earlier in the year in his infamous blasphemy:

“…but we have to consider, through a statement rather than an action, that we must wean the market off its dependency on a Fed put.”

Not gonna happen before Nov 3rd?