While the stock market continues to charge ahead and CEOs look forward to the generous tax cuts promised by Donald Trump, at least one big-name investor has offered some pause for thought.
Seth Klarman, the CEO and founder of Boston-based Baupost Group, has just written a letter to investors warning of the potential pitfalls of the president’s economic master plan. He’s also concerned about the extent of the market’s recent rise, labeling current stock valuations perilously high.
America’s benchmark S&P 500 index touched a new record last month, and, at 2,296.56 points, has risen 7.3% since Trump’s victory on November 8.
“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,” Klarman wrote, in a letter that was first reported by The New York Times.
Although pressuring companies to bring more jobs home could hold off the impacts of globalization and automation, Klarman argues that boosting uncompetitive enterprises would only briefly keep market forces at bay. “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,” he wrote.
Klarman, a respected author who’s company manages around $30 billion, isn’t the only investment titan sounding alarm bells.
As recently reported by Chief Executive, billionaire investor George Soros and Vanguard Group founder Jack Bogle both have questioned whether Trump’s plans will work over the long-term.
Bogle, for example, said the president’s pledge to spend up to $1 trillion on infrastructure would mean a lot of deficit financing. Klarman shares these concerns, arguing that large tax cuts also could swell government debt.
Klarman also fears that a massive dose of stimulus at a time when the economy is already showing signs of improvement could cause it to overheat, sending inflation soaring and “shocking” investors.
“The big picture for investors is this: Trump is high volatility and investors generally abhor volatility and shun uncertainty,” he said. ” Not only is Trump shockingly unpredictable, he’s apparently deliberately so; he says it’s part of his plan.”
CEOs, for the most part, remain optimistic that Trump’s plans to slash taxes and lighten regulation will give them the confidence they need to start investing more heavily in their businesses. Larry Fink, CEO of BlackRock, the world’s biggest fund manager, recently told CNBC that corporate America has high expectations for the administration to execute on policy pledges involving taxes and infrastructure investment.
He warned, though, that: “It always takes longer and is more difficult to roll out.”