- The pandemic bubble in asset prices may not have burst yet, Seth Klarman said.
- The elite investor flagged the risk of further banking chaos as more troubled lenders are exposed.
- Klarman warned against assuming the worst is over and government bailouts are guaranteed.
The pandemic bubble may not have popped — and Silicon Valley Bank's collapse might presage further disasters in the financial sector, Seth Klarman has warned.
"You had a bubble, it was really a credit bubble, that became an everything bubble," the billionaire investor and Baupost Group CEO said during the latest episode of "Capital Allocators with Ted Seides."
"Super-low interest rates, at times zero rates, made capital easily available and incredibly cheap," Klarman continued. "That led to startup manias and SPACs and meme stocks and crypto, all kinds of speculative activity. I'm not convinced that we've even begun to sort out that bubble."
The hedge-fund boss noted the bubble did a "pretty good job of collapsing" last year, but emphasized that stocks have rebounded this year and entered a new bull market.
Indeed, the benchmark S&P 500 index has rallied 17% this year, while the tech-heavy Nasdaq Composite has soared 35%. Investors are betting big on an artificial-intelligence revolution, the Federal Reserve cutting interest rates, and the US economy escaping a recession.
Separately, Klarman issued a caution about the banking industry. Lenders had limited ways to make money for more than a decade, and may have joined SVB in placing risky bets or failing to hedge their wagers as a consequence, he suggested.
"I'm not convinced we know where all the bodies are buried," Klarman said. "I don't know anything, but I'd be nervous because markets cause behaviors, and when people have to put money to work ... they're going to do something with the money."
"We haven't seen a lot of bodies float up," he continued. "I don't know what that means, but I'd be worried."
Klarman also warned that many people assume the US government will bail them out of trouble, which might lead them to behave recklessly. He cautioned against complacency and ruling out disaster entirely.
"You had a lot of hiccups between '98 and ',01 and then the Great Financial Crisis was a really ugly 12 months or so," he said. "I'm just not sure why you couldn't have more trouble."
Klarman, a value investor who specializes in sniffing out bargains, has been widely hailed as the next Warren Buffett, including by the Berkshire Hathaway CEO himself.