Is the Financial Market in a Speculative Bubble?

Seth Klarman, the CEO of Baupost Group – one of the biggest hedgefunds in the world, claims that the financial market is in a speculative bubble.

Firstly, what is a speculative bubble? The basic description is that it is a rise in prices that is not fueled by underlying fundamentals, but rather market momentum and speculation.

A good example of this is the recent explosion in popularity of meme stocks and crypto currencies. The prices of these instruments skyrocketed not because of their underlying value, or profit potential, but rather market speculation.

According to Seth Klarman the huge influx of money into all types of assets, including speculative instruments was facilitated by historically low interest rates. A sustained period of low interest rates means that investors are no longer able to generate decent returns from low-risk investments like government bonds or savings accounts.

Low interest rates lured even the conservative investors into the stock market. That inflated the real-estate and blue-chip stock assets luring investors into riskier less mainstream assets that could yield higher returns.

Unfortunately, said assets of interest became more and more speculative, with investors looking for bigger and bigger return. Such assets include crypto, meme stocks, and special purpose acquisition companies (SPACs) among others.

The issue with such investments is that they usually do not have much underlying value, and the price is driven mostly by speculation – what the next person is willing to pay for it. That creates volatility, where the price could spike or drop without the possibility for an investor to safely predict these price moves.

Seth Klarman states that it is important for investors to find companies that they are interested in and have more information that the next person. It doesn’t matter what industry it might be in, it is important to arm yourself with as much information as possible before investing your money.