Baupost CEO Seth Klarman is no doubt an ardent capitalist, but the Covid-10 pandemic has led him to see capitalism’s failings all around us—and he thinks change is afoot.
“Sometimes, right before our eyes, a major sea-change occurs,” the billionaire hedge fund manager wrote investors in a lengthy second-quarter letter that talked not only about his holdings but his views of where our nation and economy are headed.
“We ponder the current moment from the eye of the pandemic storm,” he wrote, at one point bemoaning, “How far gone are we as a society?”
Klarman was talking about the ideological and political divisions surrounding the wearing of masks, but he also underscored the growing class conflict and the shortcomings of the free market.
“It is untenable that the capital-owning class, or at least those owning publicly-traded investments (certain small-business private markets being very different), has been minimally harmed in aggregate, even as unemployment rises to Great Depression levels and much of America burns through their minimal savings,” he wrote.
The hedge fund mogul noted that it is “untoward” that “Wall Street has been effectively bailed out while programs designed to assist Main Street have been ill-designed, slow to be implemented, and inadequate to address the pandemic’s lasting impact,” emphasizing the adverse effect such policies have had on people of color.
Klarman noted that the pandemic put the nation’s inequality in great relief, predicting we will eventually see the “declining dominance of capital over labor.”
He expects the pandemic “may have the effect of bringing together a large constituency of the disaffected and dispossessed in short order. If labor will be “increasingly successful at organizing itself in the future,” as Klarman expects, “there will be considerable pressure for broadening social programs and institutions.”
“Class relations were uneasy before the current crisis, strained by four decades of widening inequality,” he wrote. “It’s not hard to imagine that there could be a movement encouraging impacted people not to pay their mortgages, auto loans, and credit card bills, and it would not be shocking if labor and political leaders emerge who begin to advocate this as an appropriate course of action.”
Klarman made another prediction: “Labor may start to demand more of the fruits of production, especially now that it is clear that front-line labor is at personal risk to a disproportionate degree not previously understood in keeping supply chains running and keeping America well stocked and well fed,” he wrote. “They may also have growing political support for their demands.”
Klarman, who in previous years has donated to numerous Republicans, has been critical of President Trump and this election cycle has become become one of the biggest donors to Democrats. He has given more than $6.3 million to Democrats and liberal groups, according to the Center for Responsive Politics.
The uber-capitalist also had harsh words for “rugged individualism” and “the invisible hand of the market.”
“The repercussions of our elevation of rugged individualism as a societal value has meant that a layoff, furlough, delinquency, or bankruptcy is seen as a personal (and not a shared) failure, and, thus, collective action is rarely even contemplated as a cure,” he wrote.
Moreover, he noted that our dependence on outsourcing to China has shown that the much-vaunted efficiency economists have touted leaves a lot to be desired.
“The invisible hand of the market can often lead to economic efficiency, but the invisible hand is apparently driven by an invisible (or non-existent) brain,” he explained. “No one could think, in retrospect, but even in prospect, that it makes sense to outsource American production in ways that made the American people dependent on their greatest geopolitical rival, one that routinely pilfers our intellectual property, and one with which we are in an escalating trade war. Hopefully we never make that mistake again.”
And while Klarman is a revered value investor, he has embraced the mantra of its opposite in the tech world: disruption. It’s “everywhere,” he wrote.
In fact, Klarman seemed to walk back from the value investing thesis espoused in Benjamin Graham’s Security Analysis, quoting from Horace’s “Ars Poetica” that appeared in the preface to the book: “Many shall be restored that now are fallen, and many shall fall that now are in honor.”
Klarman says technological disruption makes that unlikely for many. “At this moment, it’s hard to imagine Amazon’s online business collapsing or J.C. Penney’s retail operations being fully restored. Not everything will revert to the mean, and many companies, and especially small businesses, are reverting to not existing anymore.”
He continued: “The pandemic has managed to achieve, in a period of months, levels of digital transformation that had been expected to occur over a decade.”
The changes have not spared the $30 billion Baupost, which ended the first half of 2020 in the red. “The partnerships posted strong gains for the quarter, a substantial but not quite complete rebound from the first-quarter drop,” Klarman wrote.
Baupost’s winners during the first half were led by eBay, Pacific Gas and Electric (both credit claims and equity), Liberty Global, Viacom CBS, Steinhoff, and Translate Bio. Its private portfolio experienced what Klarman called “scattered markdowns exceeding modest gains” and hedges cost about 1 percent of NAV during the second quarter, in contrast to a gain of 3 percent in the first quarter. Klarman said the funds were about 31 percent in cash as of June 30.
Klarman singled out Jesse Downing, a principal at Baupost, for contributions to the portion of the letter that addressed the broader societal implications of the pandemic.
A spokesperson for Baupost did not return a request for comment in time for publication.
