Seth Klarman: where the next crisis lies

Seth Klarman © Getty images
Seth Klarman, chief executive, Baupost Group

“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels.” In his latest letter to investors in his fund, billionaire value investor Seth Klarman, 61, warns that the increasing ratio of government debt to GDP across developed countries – which has only deteriorated since the 2008 financial crisis – is unsustainable, even for the US, reports The New York Times.

“There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more sceptical debt market will refuse to continue to lend to us at rates we can afford. By the time such a crisis hits, it will likely be too late to get our house in order.”

Klarman, a former donor to the Republican party who turned Democrat after the election of Donald Trump, also warns that investors are too complacent about political turmoil. “Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this. Social cohesion is essential for those who have capital to invest.”

He tells Evan Osnos in The New Yorker that companies need to stop taking a short-term view or they risk heavy-handed regulation by populist governments voted in by angry electorates. “It is not hard to imagine worsening social unrest among a generation that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.”