Klarman: this market is a bubble, credit is next

Seth Klarman, founder and CEO of Baupost Group (a Boston-based hedge fund managing approximately $30 billion through 44 years and only five down years), rarely speaks in public. His June 10 appearance at iConnections Global Alts New York 2026 — a roughly 30-minute sit-down with CNBC's Sara Eisen — was his first tracked public statement this cycle, which alone makes it worth reading closely. 1 2

What he said was not hedge-fund boilerplate. He called the current market a bubble, predicted a credit cycle is overdue, and named his single favorite investment idea — all within the same conversation.

"I think it has characteristics of a bubble"

Klarman's bubble diagnosis centers on the AI multiple problem. His argument: AI creates enormous uncertainty about employment, inflation, and economic structure that no one can yet resolve. That uncertainty, he said, should logically push market multiples down. Instead, they keep rising.

"Maybe the market should be actually at a lower multiple to accommodate all this uncertainty. And instead the multiple keeps going up." 1

He illustrated the "new era thinking" with a specific data point: when Allbirds, a shoe company in financial difficulty, added "AI" to its name, the stock rose. 1 He called it "crazy" and "reminiscent of the era" — a reference to the dot-com period when similar name-gimmicks preceded the crash. His bubble call is not about whether AI technology will succeed. Even if AI delivers on the higher end of expectations, he said, the multiple expansion on top of that uncertainty is what makes the market look bubbly.

Candlestick chart on a dark trading screen showing a sustained bearish price trend — The kind of market signal Klarman is watching: price action that has diverged from underlying fundamentals. Photo by Alex Luna via Pexels.

Melting ice cubes, faster than ever

For years, Klarman has used "melting ice cubes" to describe businesses with structural decay — companies that look cheap on current multiples but are quietly eroding. At iConnections, he updated the metaphor for the AI era: those ice cubes are now melting faster than ever, because technological disruption has accelerated. 1

"The melting ice cubes of today's businesses are melting faster than ever, that if you've got a business problem, you may be eroding really quickly. And so we stay away from those." 1

Baupost won't touch them regardless of how low the multiple goes — "four times cash flow, we don't care." 3 This is a meaningful clarification of how Klarman defines value investing. He explicitly rejected the academic version — screening for the lowest P/E ratios — saying the right definition is to ask what a business is actually worth. A growing business, he noted, is worth more than a stagnant one.

"We are due for a credit cycle"

Klarman's credit warning was his most direct market forecast. He described the period since the 2008 financial crisis as "a very strange environment" — no significant downside volatility, few corporate bankruptcies — and said the calm cannot continue indefinitely. 1

"I think we are due for a credit cycle." 1

He described early signs already appearing: corporate bankruptcies are starting to tick up, distress is emerging in private credit, and Baupost is seeing more opportunities "all of a sudden in the last few months." 1 The distress is currently "idiosyncratic" — a Brazilian company restructuring, a large private equity deal with impaired debt doing an exchange offer, software credits "getting pretty clobbered" — rather than systemic. But Klarman reads idiosyncratic distress as an early leading indicator, not a contained anomaly. 3

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Where Baupost is actually investing

Given the bubble and credit warnings, the portfolio breakdown is instructive. Roughly 10% of Baupost's book is positioned to benefit directly from the AI rollout, primarily through Amazon and Google, which Klarman praised as "enormous cash flow machines" bought at below-market multiples. 1 He noted that you don't need "heroic assumptions" to like them.

OpenAI and Anthropic are a different story. Klarman said they "eat a lot of cash," must keep investing to stay competitive, and carry "enormous valuations for companies that are still years away from bottom line profit." His summary: "That's not Warren Buffett's definition of a great business." 1

The other two areas getting Baupost's attention:

AI-agnostic businesses: companies being ignored while investors chase AI plays, with prices drifting lower. "We're spending a lot of time on AI agnostic, where people are just not paying attention." 4
Data center land: raw land with adjacent power, bought cheaply as optionality on future data center demand. Baupost also holds a private stake in non-China Asia data centers, acquired at roughly 40% of comparable public-market pricing. 1

His single best idea right now

When asked for his favorite investment, Klarman named assisted living commercial real estate — a sector hit hard post-Covid, with many bankruptcies because newly built facilities couldn't reach occupancy. 1 He believes the turn is starting, but said it's "still in the early stages." The broader commercial real estate theme, he said, offers the chance to deploy capital at significant discounts to replacement cost — with returns that don't require optimistic assumptions.

The logic fits his stated philosophy: buy what everyone else has been burned on, at prices that already price in the pain.

Why this matters today

Klarman's framing puts a specific question to investors holding index exposure: if the uncertainty around AI is genuinely unresolvable — AGI timelines, employment disruption, inflationary vs. deflationary effects — does a multiple expansion into that uncertainty make sense? His answer is no, and he is putting the fund's capital behind that view by hunting in the places the AI narrative has left behind.

He is also watching US debt at 100% of GDP as "an alarming number," flagging the potential for oil to reach $150 or higher if the Strait of Hormuz closes for several months, and describing the risk-free asset as "riskier every day." 1 The trajectory that concerns him:

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US federal debt as a share of GDP, 2008–2026 (approximate; source: US Treasury / CBO estimates). Klarman called the 100% level "an alarming number" and warned structural deficits could push it significantly higher within a decade. 1

None of those risks are new. What's notable is that Klarman — who almost never speaks — chose this moment to lay them all out in a single session.

Cover image: Seth Klarman at iConnections Global Alts New York 2026. Photo via iConnections YouTube.