By Andrew Ross Sorkin
As business and political leaders arrive in the Swiss Alps for the annual meeting of the World Economic Forum, a surprisingly alarming letter from an influential investor who studiously eschews attention has already emerged as a talking point.
The letter, written by Seth A. Klarman, a billionaire investor known for his sober and meticulous analysis of the investing world, is a huge red flag about global social tensions, rising debt levels and receding American leadership.
Klarman, a 61-year-old value investor, runs Baupost Group, which manages about $27 billion. He doesn’t make the annual pilgrimage to Davos, but his words are often invoked by policymakers and executives who do. His dire letter, which is considerably bleaker than his previous writings, is a warning shot that a growing sense of political and social divide around the globe may end in an economic calamity.
“It can’t be business as usual amid constant protests, riots, shutdowns and escalating social tensions,” he wrote.
He made the remarks in a 22-page annual letter to his investors, which include the endowments of Harvard and Yale and some of the wealthiest families in the world. It was being passed around before the Davos gathering, which draws business leaders like Bill Gates and Sheryl Sandberg, social and cultural figures like Bono, and elected officials like Chancellor Angela Merkel of Germany.
Klarman expressed bafflement at how investors often shrugged off President Donald Trump’s Twitter outbursts and the retreating American role in the world during the past year.
“As the post-World War II international order continued to erode, the markets ignored the longer-term implications of a more isolated America, a world increasingly adrift and global leadership up for grabs,” he wrote.
Trump and the U.S. delegation canceled plans to attend the Davos conference because of the government shutdown, which will leave Merkel and Prime Minister Shinzo Abe of Japan with an opportunity to fill the leadership void.
Citing the “yellow vest” marches in France that spread throughout Europe, Klarman said, “Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this.” He added, “Social cohesion is essential for those who have capital to invest.”
Klarman, sometimes called the Oracle of Boston, is one of the few financiers ever praised by that Omaha oracle, Warren Buffett. His views are so sought after that an out-of-print book he wrote about value investing sells for as much as $1,500 on Amazon.
The circulation of his letter is likely to add to the hand-wringing that typically takes place in Davos during a week of panels and conversation over Champagne and canapés.
For one thing, he details the way virtually every developed country has taken on mounting debt since the financial crisis in 2008, a trend that he says could lead to a financial panic. He cites the increasing ratio of government debt to gross domestic product between 2008 and 2017, to a point exceeding 100 percent in the United States and nearing that figure in France, Canada, Britain and Spain.
“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels,” he said.
Klarman is especially worried about debt load in the United States, what it could mean to the dollar’s status as the world’s reserve currency and how it could ultimately affect the country’s economy.
“There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more skeptical debt market will refuse to continue to lend to us at rates we can afford,” he wrote. “By the time such a crisis hits, it will likely be too late to get our house in order.”
Klarman believes that the public, almost irrationally, has become too blasé about all these risks and that investors have been lulled into taking on even more risk.
“Individuals, professional investors and financiers are prone to project their own recent experiences into the future,” he wrote. “So when adversity is absent, investors become complacent. They assume good times will continue, and they grow careless about risk, perceiving it through rose-colored lenses.”
In 2017, Klarman returned some of his fund to his investors, saying he didn’t see enough good investment opportunities. Yet he also acknowledged in his letter that even if he expected an eventual crisis, “since the worst does not frequently happen, you cannot let the fear of a monster storm completely paralyze you.” He seems to wrestle in his letter with how to continue investing profitably while protecting himself and his firm against his fatalistic expectations.
Klarman, a registered independent, was a donor to Republicans for years but has become a critic of Trump and has sought to elect Democrats to neutralize him. He said in his letter that he was particularly worried about the social and economic implications of Trump’s efforts to paint accurate information as “fake news.”
“This post-truth moment is quite dangerous,” Klarman wrote. “Imagine an incident that threatens national security. Will Americans see eye to eye on the seriousness of the threat? If our leaders are truth-challenged, will Americans believe the official explanation of the threat and the wisdom of the proposed response? Should they?”
The many technology companies in Davos — Facebook, Google and Amazon among them — may also want to take note of Klarman’s anxiety that “more and more people are choosing to only seek out information from those who share their views” and his blame that “technology and social media have made it increasingly easy to do so.”
Whether a crisis is around the corner or still years away, Klarman seems relatively convinced that it is coming and that it will manifest itself not just in a market downturn but potentially in more violence as well.
“It is not hard to imagine worsening social unrest among a generation,” he wrote, “that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.”