Broadest rally since 1990... Goldsmith does Grant's... Everybody's bearish... Hendry on hyperinflation... Sign of a top: Oaktree's IPO...
If today's activity is any indication, central banks are succeeding in their plot to re-liquefy and re-inflate the global economy. Stocks are up, and mortgage rates are hitting record lows.
Bloomberg reports this morning that the three-year bull market in stocks that started in March 2009 is the broadest market rally since 1990. In other words, more stocks have risen during this rally than in any other over the past 22 years. You may recall the U.S. was coming out of a recession in 1990... one caused at least in part by the savings and loan crisis... It's almost like the government regulators and bankers running the U.S. financial industry simply can't avoid a major, economy-crushing crisis every so often.
According to Bloomberg, the U.S. stock market's performance for the first quarter of 2012 was its best since 1998. The crash of 2000 came not long after... In fact, most U.S. stocks peaked in late April 1998, within days of Newsweek putting a bull in a wedding dress on its cover. So... should we be careful here? Is history about to repeat itself?
I (Sean Goldsmith) attended the Grant's Interest Rate Observer conference at the Plaza Hotel in New York City yesterday. Grant's is the premier investment conference in the country. It's one of two conferences I attend every year (the other being the Value Investing Congress). This year's speakers were the best I've seen.
Jim Chanos, the short-selling expert and founder of Kynikos Associates, outlined sectors he's shorting… David Einhorn – who founded the hedge fund Greenlight Capital and made a famous "short Lehman" call anticipating the investment bank's crash – gave his thoughts on the federal government's fiscal policy. (No surprise... his opinion is negative.)
Meredith Whitney, the Wall Street analyst who made headlines saying we'd see massive municipal bond defaults, updated us on her thesis... Stanley Druckenmiller, the billionaire trader who worked with George Soros, predicted another crisis in the coming years... We also heard from Joe Rosenberg, who is the chief investment strategist for Loews (a successful publicly traded investment vehicle, much like value-investing icon Warren Buffett's Berkshire Hathaway).
Grant's has first crack at publishing the specifics of the conference. So respecting our arrangement, I'll speak generally. All of the presenters are bearish. They agreed the bond market is in a bubble and the European monetary union is toast. And some said China faces a serious economic contraction (a so-called "hard landing").
That being said, many are long high-quality U.S. equities. The general belief is that the mountains of credit global central banks have created will lift the market for a few more years. The trend is undeniably up. I look forward to updating you on the specifics in the coming weeks.
One Grant's speaker – Hugh Hendry of the London-based asset management firm Eclectica – gave an interview to Barron's in February. In it, he says he doubts we'll see the Federal Reserve shift its money-printing machine into high gear until we experience another big economic crisis…
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The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it's proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can't. That's why people are struggling. |
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To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy and created a global recovery, which has just come to an end. I'm speculating that hyperdeflation happens before hyperinflation. What's the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that – and Europe – the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can't have all your assets in real assets, in case we get that hyperdeflation event. |
Hendry goes on to say he's currently buying cheap protection (in the form of credit default swaps) on large-cap Japanese companies. He says he's paying $50,000 a year per credit default swap to potentially earn $10 million per contract.
He's not bearish on Japan in particular. He's bearish on the world (especially Europe and China). Hendry's just searching for the cheapest insurance he can find.
If one of the most successful bond investors in the world wanted to sell you a piece of his company in today's market, would you buy? Don't you think it may be a hint that he's not thrilled about his investment prospects and wants to cash out? What other reason would the founder of a successful investment company have to go public? It's certainly not to enjoy the strangling regulation that comes along with being a public company.
Here's what we said last May when Oaktree Capital, the largest distressed debt investor in the U.S., announced it would go public…
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Signs of a top... Billionaire fund manager Howard Marks plans to list his Oaktree Capital Management on the New York Stock Exchange. Oaktree manages approximately $82 billion and focuses on fixed income. Marks sold shares in his company once before... In May 2007, months before the market peak, Oaktree sold a minority stake to institutional investors for $700 million. |
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We've said it many times... When these alternative asset managers, some of the brightest minds in the business, sell their companies, you don't want to be buying. Just look at private-equity firm Blackstone's IPO for proof. |
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In Howard Marks' case, he said so himself only two months ago. At a Berlin investment conference this March, Marks told investors it was time to be "cautious." He said the market could be "shaky" as the government reins in its quantitative easing... |
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"I'm quite confident we won't have a QE3, since I don't think there's any appetite for that, and this is what starts us on the path of restoration to market-derived interest rates rather than artificially low interest rates," he said at the conference. "That is a healthy thing as we wean the patient off of life support, but it is uncertain. To carry on the patient analogy, the patient will be a little woozy and a little shaky when he first gets out of bed." |
Oaktree started trading today. It raised $380.2 million yesterday, valuing the company at $6.2 billion. It raised about 27% less than it wanted to. In other words, the share price fell even before it went public. Oaktree's now-public shares fell more than 4% today.
New 52-week highs (as of 4/11/12): Texas Pacific Land Trust (TPL).
Thanks for the great farming feedback... From your stories, it's clear farmland hysteria is upon us. Any other personal investment stories you'd like to share? Let us know here feedback@stansberryresearch.com.
"My family has been farming in South Dakota since the late 1860s. Just in the last year we've seen the price per acre skyrocket in Lincoln County; which is in the most southeastern part of the state. Back in July of 2011 the going rate was $8,500 an acre, which was unheard of at the time. When I was visiting this past December 80 acres sold for $9,550 per acre. The townspeople are blown away by the market right now. My Uncle sold 80 acres just this past March for $11,500. I tried to talk him out of it but unfortunately failed. Farmers in Iowa are coming into South Dakota and buying up as much land as they possibly can.
"Thought I'd share this with y'all. Thanks for everything y'all do, I very much appreciate it." – Paid-up subscriber NL
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Regards,
Sean Goldsmith and Dan Ferris
New York, New York and Medford, Oregon
April 12, 2012