You’ve heard of the tech bubble and the housing bubble. Now Seth Klarman says we have to be on the lookout for a “complacency bubble.” The rise in equities doesn’t seem consistent with growing geopolitical uncertainty and not-so-bullish economic indicators. In short, Seth Klarman is worried and feels that he is the voice in the wilderness.
For instance, the GDP was -2.9% but the stock market’s band played on, apparently oblivious to this alarming economic indicator. “Investors have grown weary of worrying about risky scenarios, ” Klarman said. He worries about stocking up a portfolio with substandard credit and the popularity of debt in portfolios. Another scary scenario will be if weakness in bond markets spreads to equities. He said we are in a ” Goldilocks stock market, resulting from a tepid economy, dampened volatility and relentlessly low interest rates.”
Governments are more interested in easing than austerity, and bonds yields are at staggering lows. Klarman comments, “Given changes in regulation, Wall Street has far less capital available to support the trading of this burgeoning junk issuance and the corresponding surge in debt ETFs.”
While Klarman doesn’t see a crash coming, there could be a major correction that could cause pain to the complacent.