Inflation is raging, and hedge fund titan Seth Klarman, chief executive of Baupost, says it has reached a dangerous level for financial markets.
Consumer prices soared 7% last year, the highest amount for any 12-month period in 39 years.
“We don’t know how bad the current bout of inflation will be, but we believe that mounting inflation and the related possibility of materially higher interest rates are posing a real danger to financial markets,” Klarman wrote in a letter to investors obtained by CNBC.
“To protect against continuing inflation and the prospect of rising rates, we have purchased hedges that stand to gain in such an environment.”
Bond yields have risen in response to soaring prices, and the Federal Reserve has indicated it will likely start raising interest rates in March. Interest-rate futures traders now expect the Fed to lift rates five times this year.
The rising yields and anticipation of Fed rate hikes have pushed stocks down. The S&P 500 index has slid 9% so far this year. The 10-year Treasury yield gained 0.3 percentage point during that period to 1.81%.
“With the possibility of higher interest rates coming into focus, investors had become less willing to pay astronomical multiples for uncertain and distant future cash flows,” Klarman said.
Technology stocks had some of the biggest multiples and have led the market lower. The tech-heavy Nasdaq Composite index has lost 15% year to date.
Another hedge fund manager warning about the risk of inflation is David Einhorn of Greenlight Capital, who told his investors that rising prices will cause a recession, CNBC reports.
