In his letter, Mr. Klarman sets forth a countervailing view to the euphoria that has buoyed the stock market since Mr. Trump took office, describing “perilously high valuations.”
“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” he wrote.
“President Trump 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,” he continued. “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.”
In particular, Mr. Klarman appears to believe that investors have become hypnotized by all the talk of pro-growth policies, without considering the full ramifications. He worries, for example, that Mr. Trump’s stimulus efforts “could prove quite inflationary, which would likely shock investors.”
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Investing quote of the day, from Howard Marks on this week's Oaktree Capital Group call:
I would just add that as everybody knows, we are vociferous in asserting that we don't know what's going to happen. And the peak year for defaults was 2009, and 2018 will be 9 years later. We think the reason we raised a lot of money for Xb was that we thought by '17 or '18, maybe we'd be seeing some increase in defaults. Every year that goes by logically increases the probability, but there are times, like today, when people say, we're in a virtuous circle. We have an accommodative Fed, we have expanding -- well, the Fed's accommodative but not too much and the economy is expanding but not too much that it has to be reined in and corporations are doing well and piling up cash and debt has been refinanced and paid down. And they will give you 100 reasons why there's not going to be another down cycle again. But invariably, there is. And the question is, does it come after 12 years, like the gap between '91 and '02? Or does it come after 6 years, like the gap between '02 and '08? Or these subjects are not subject to science and statistics. My favorite new quote is from the physicist, Richard Feynman, who said that physics would be much easier if electrons didn't have feelings. The point is that investors and companies have feelings, and that's what causes markets to be radically unpredictable, and this one is too. But we think that on balance, having an $8-ish billion fund with substantial fees, where we can turn on the fund and turn on the fees whenever we think it's prudent, we think, gives us a great advantage. And it always has in past cycles and we think it will again. And -- but we -- I'll end by repeating what I said. We don't know what's going to happen. And what we state is our best guess, and there's always great uncertainty. So who knows, maybe there won't any defaults in '18 because things will be going so swimmingly. It's just that logic suggests that's not the case.