It's Time to Stir Up Some Trouble (Again)
It's time to stir up some trouble (again)... One of the best macro calls of my life... Accidentally causing a firestorm... Why I'm doing this blatant chest-thumping... The case for a stronger dollar in the short term... An easy way to bet on this expected reversal today...
The last time I (Dan Ferris) did something like this in the Digest, I caused a lot of trouble...
If you've been with us for a long time, you might even remember the day in question.
On that day, we talked about a wide range of topics in the Digest – including the Federal Reserve's first-ever press conference a day earlier, rising gasoline prices, China going "gold crazy," my plans to attend Berkshire Hathaway's annual meeting that weekend, and more.
But here's the passage that I want to focus on today...
The best way I know to reduce risk in your equities portfolio is to hold more cash. I like cash right now for a couple reasons.
First and most important, I doubt you understand any asset better than cash. Risk is not knowing what you're doing. I bet few gold stock shareholders understand how complicated, expensive, and messy the gold mining business can get. To reduce risk, put your money in the asset you know best: cash.
Second, I doubt any asset is more hated today than the U.S. dollar. It's nearing all-time lows against other currencies. Everyone is terrified of inflation. We can't ignore gasoline and food prices, which appear to rise daily. I'm certain the U.S. dollar is headed inexorably toward its intrinsic value – zero.
But stocks, bonds, and commodities have soared since early 2009 and again in late 2010 – thanks to the Fed's two rounds of quantitative easing.
Public securities markets are never permanently accommodating. They more often resemble Venus flytraps. They're highly seductive, right up until the moment they eat you alive. And what will everybody want, if only by mere default, as they exit falling stocks and bonds? Cash, of course.
As it turned out, in urging folks to hold more cash, my timing couldn't have been better...
It's one of the best macro calls I've made in my entire life...
The U.S. dollar bottomed the next day (April 29, 2011) – and started an epic run higher. Its value jumped 9% through October 3, 2011. That's a huge move in less than six months for the world's reserve currency... And it didn't ultimately top out until New Year's Eve in 2016.
Meanwhile, the stock market hit its highest point in 2011 on the same day, then started falling... It finally bottomed on October 3, 2011 – after a 19% correction. Take a look...
I was exactly right...
The U.S. dollar was too hated at the time, and the public securities markets weren't permanently accommodating. (Of course, the 19% correction also proved to be an awesome buying opportunity for stocks... The S&P 500 Index is up nearly 220% since October 3, 2011.)
As the dollar went on its incredible five-year run higher, gold peaked in August 2011 and plunged into a brutal four-year bear market... taking mining stocks down with it.
Now, I want you to put yourself in my shoes back in April 2011 for a minute...
An ounce of gold cost about $1,530 at the time – roughly a six-bagger from its 1999 low of around $250 per ounce. And lingering nightmares about the financial crisis still hung heavy in the air, even though the stock market had already doubled off its March 2009 bottom.
The 10-year U.S. Treasury note yielded about 3.3% back then, having risen substantially off its post-financial crisis low in August 2010 of about 2.5%. The Fed's assets had skyrocketed from $995 billion at the time of the Lehman Brothers bankruptcy in September 2008 to $2.7 trillion the day I wrote my Digest. (What a difference nearly a decade makes!)
Rising stock prices, gold prices, and Treasury yields showed investors' beliefs that the Fed's quantitative easing ("QE") would keep weakening the U.S. dollar, even as it pushed up stock prices.
The "reflation trade" was on... And almost nobody expected it to stop working as we went to press with the Digest on April 28, 2011. Well, that is, except for a contrarian like myself...
With everything going on, I knew it was the perfect time to bet against the reflation trade.
And while I got a little lucky by nailing the timing perfectly, the thinking behind it was certainly the right call at the right time – regardless of how it all played out... I know this sounds crazy, but it still would've been a good bet even if the result turned out poorly.
(The mistake of believing decision quality is determined solely by outcome is called "resulting." The topic features prominently in champion poker player and author Annie Duke's new book, How to Decide. We talked about resulting briefly with Duke on the Stansberry Investor Hour podcast in July 2019, and we'll probably have her on again soon.)
So by now, you're probably wondering – how did my April 2011 Digest cause any trouble?
It might seem harmless on the surface, but...
Back then, our founder Porter Stansberry had been wisely warning the world for a long time that the U.S. would lose its reserve currency status – and that you'd better own some gold.
To simply say Porter's message was well-received would be a dramatic understatement...
I don't know the numbers, but I bet Porter reached more readers with that strong, anti-dollar message than virtually anything else ever published in the financial-newsletter industry. He captured the hearts and minds of many folks... And of course, he was right.
Porter's message was – and still is – spot-on... The U.S. dollar is toast over the long term, just like every other fiat currency in world history. And it's inevitable that it will lose its reserve currency status someday – and you should prepare well in advance.
So when I told all those Digest readers who had been cheering Porter's anti-dollar message that they absolutely must hold more cash because the U.S. dollar was too hated in the short term... to say it didn't go over well was once again a dramatic understatement.
I inadvertently kicked a hornet's nest with my message that day...
Readers didn't want to hear anyone from Stansberry Research telling them to hold cash when Porter had so adamantly been telling them the dollar's days were numbered. Porter spent nearly the entire Digest on April 29, 2011, trying to assuage readers' concerns and separating his own views from mine.
A few days later, I devoted the May issue of my Extreme Value newsletter to telling folks to hold plenty of cash. And I specifically told my subscribers to sell all those risky little mining stocks that had made them so much money during gold's incredible bull market...
So, when I recommend you hold lots of cash, perhaps you wonder how to raise it. Sell overvalued small-cap mining and other high-flying small-cap stocks. You raise cash by selling the riskiest stuff in the market.
Now, why am I going through all this blatant chest-thumping nine years later about a call I made that – although correct – put me at odds with Porter and so many of our readers?
Because my "spidey sense" is tingling the exact same way today.
In other words, I've made this call before... And I'm about to do it again – right now. (I'll do my best to sidestep all the ruckus I caused in 2011.)
Of course, the setup with the U.S. dollar is a little bit different nowadays...
The U.S. dollar is significantly higher today than in late 2011, despite the fall from its highs in late 2016 and early 2017. It had quite a run from its 2011 bottom to its late 2016 peak...
After that 2016 peak, the dollar went on a wild ride...
It plunged all the way through 2017 as gold continued to rise (as much as 17%, perhaps in response to years of QE), and it finally bottomed in early 2018 – but still much higher than 2011. The Fed started raising interest rates to try to protect the currency (its standard operating procedure) until the COVID-19 sell-off put a stop to that idea, causing the dollar to spike higher once again.
And then, the Fed responded to the government's Draconian bludgeoning of the largest economy in the world with the one and only thing it knows how to do...
It printed a lot of new money and bought debt securities – including Treasurys, corporate-debt exchange-traded funds ("ETFs"), junk-bond ETFs, and even individual corporate bonds.
The Fed had $4.2 trillion in assets on its balance sheet just before the stock market peaked in late February. Today, it has around $7.2 trillion. That incredible surge of roughly $3 trillion comes from what the Fed printed so far this year with the press of a button.
The Fed uses the new money to buy securities from big banks. That raises the banks' reserves... And as we've said many times before, it won't cause observable price inflation until they're lent and spent.
Whether they're ever spent or not, the market knows they exist – so it's no wonder the dollar has retreated quickly from its March high.
While the circumstances might be a little different, one thing remains abundantly clear...
Just like in 2011, the long-term big picture is dire for the U.S. dollar...
As I said above, this year alone, the Fed has brought $3 trillion in new dollars into existence in an effort to goose the U.S. economy back to life. Like Porter, I still believe such reckless policies will eventually send the value of the U.S. dollar to zero – the ultimate fate of all fiat currencies.
When that'll happen, I can't (and don't need to) predict... All I need to do to prepare is hold gold, silver, bitcoin, and perhaps some alternative assets of my choosing. (I've mentioned art, Ferraris, vintage guitars, whiskey, land, and wine as possibilities in the past.)
With a good mix of those assets in my portfolio, I'll be well-protected whenever the bottom falls out from under the U.S. dollar and Porter's prediction of losing its reserve currency status comes true. I recommend you do the same sometime soon, if you haven't already.
That brings me full circle back to today... As Hall of Fame baseball catcher and even greater quote-maker Yogi Berra might say, "It's déjà vu all over again."
In other words, when it comes to the markets, it feels a bit like April 2011 once again...
Gold is at about $1,950 per ounce today – within spitting distance of its new all-time high above $2,000, which was just set in August.
While bitcoin existed in 2011, it wasn't on anyone's radar. Still, it's pushing toward $16,000 as I write – the crypto's highest level since the run up to its peak in late 2017.
(By the way, I also expect a short-term correction in bitcoin... It's my best-performing recommendation of 2020, and like I said back in 2011, markets aren't permanently accommodating forever. It'll experience ebbs and flows, ups and downs.)
U.S. Treasury yields are microscopic today, with the 10-year note yielding around 0.8%. Still, that's about 50% higher than its August bottom of roughly 0.52%.
The reflation trade is going gangbusters once again. And dollars aren't that popular with investors right now (relatively speaking, of course)...
Global macro trader and Real Vision co-founder and CEO Raoul Pal noted recently on Twitter that speculators have record short positions in 30-year Treasury securities and the U.S. dollar. Pal also pointed out that hedge funds have a record long position in equities.
Geopolitical analyst, investor, and author Marko Papic of investment firm Clocktower joined me on this week's episode of the Stansberry Investor Hour podcast... And he said the same thing as Pal – a lot of folks are short dollars and U.S. Treasurys today.
Miami-based Ned Davis Research weighed in similarly last week, declaring that the "Elite Eight" (Amazon, Apple, Facebook, Alphabet, Tesla, Nvidia, Microsoft, and Netflix) are in a bubble and due for a correction. Ned Davis Research used composite data from four previous bubbles (stocks in 1929, gold in 1980, Japan's Nikkei in 1989, and the Nasdaq Composite Index in 2000) to show that the Elite Eight bubble might be peaking right now.
According to sentiment trackers at Investors Intelligence, the percentage of equity investors expecting a correction recently hit a two-year low. And I love anecdotal signals like the one that flashed from famous hedge-fund manager David Einhorn's recent client letter. As Reuters reported...
One of the strangest signs may be a recent job application Einhorn said he had received via email from a from a 13-year old who says he quadrupled his money since February.
I promise you... That 13-year-old does not know what he's doing. He's confusing skill and brains with a bull market. Investing in publicly traded companies is hard... It requires knowledge and experience. The best long-term investors tend to have plenty of gray hair.
This kid is like the shoeshine boys giving stock tips back in 1929, just before the big crash. It's a bigger sign of the top than Barstool Sports' Dave Portnoy, who says he's better than Warren Buffett at stocks but is really just a grown man who should know better.
I believe valuation is a terrible timing tool, but it's the force of gravity in the stock market over the long term...
And wouldn't you know it?
The overall U.S. stock market is super-expensive right now. According to the "Buffett indicator" – the ratio of the total market capitalization of all U.S. stocks to the country's gross domestic product – it's bumping against its most expensive valuation ever...
Though not necessary, a falling stock market could easily provide short-term strength in the U.S. dollar. After all, what do you buy when you sell stocks?
Cash, of course. And most cash is in U.S. dollars... So lower stocks equals a stronger dollar.
The positioning, sentiment, and market action appear to be showing us a pristine setup for a long U.S. dollar trade starting very soon – just like they did on April 28, 2011.
But before we get to exactly how I believe you can profit today, let's deal with how I might be causing a little trouble with this idea like I did more than nine years ago.
While my bullish call was a problem for Porter's anti-dollar view back in April 2011, I might be causing a problem for my friend and colleague Dr. Steve Sjuggerud today.
As you're well aware, Steve has been calling for the "Melt Up" in stocks to continue. And frankly, he has been correct throughout the whole bull market... So it's hard to argue.
However, just like back in 2011, it's all a matter of your time frame...
I'm just trying to time a near-term correction in the reflation trade – a classic, short-term speculative bet. And remember, as Steve has noted time and again, Melt Ups are volatile events... The 5% to 10% correction I'm talking about wouldn't be out of character at all.
Besides supporting Steve's Melt Up thesis, I've also made it clear that I share Porter's view about the ultimate fate of the U.S. dollar... His writing on that topic is absolutely spot on, and I consider it a must-read for every investor on the planet.
(If you want to do some extra reading this weekend, check out "The Corruption of Currency" in the latest version of Porter's book, The Battle for America. Get your own digital copy for just $4.95 right here.)
Despite what I'm telling you today about the U.S. dollar, I hate fiat currencies... And I'm certainly not telling anyone to sell their gold, silver, or bitcoin today.
The only just system is one of competing, market-determined currencies.
Just about everything that comes top-down from our government masters – most of whom aren't elected – doesn't work as advertised and creates more problems than it solves... And even though it isn't technically part of the government, the Federal Reserve is no different.
Finally, I'm not recommending that you short stocks... I'm just recommending that you buy dollars. (See? You really don't have any reason to flood our inbox with invective.)
Also, this short-term macro trade doesn't change my overall investment strategy at all...
In Extreme Value, my senior research analyst Mike Barrett and I still recommend stocks whenever we find a good business whose share price reflects lower expectations for future revenues, margins, and cash flows than what our own analysis indicates.
And I'm also still recommending a truly diversified portfolio aimed as much at long-term wealth preservation as anything else... The basic components of that portfolio are still stocks (and bonds if you want), plenty of cash, gold, silver, and bitcoin.
With all that said, we can finally get to the No. 1 question in today's Digest...
What's the best way to bet on a reversal in the current negative sentiment on the U.S. dollar?
It's simple... You buy bonds denominated in U.S. dollars.
Bonds are the most macro-sensitive asset class. Don't bother shorting equities... The better macro investors tend to think of that move as a sucker's bet in situations like this one.
The easiest and lowest risk way to profit from the short-term move higher that I expect in the U.S. dollar is to buy the iShares 20+ Year Treasury Bond Fund (TLT). This ETF holds the long bonds that Pal was talking about when he noted the big bond short position recently.
TLT trades at about $160 per share today... It's down roughly 6% from its all-time high in early August.
If you want more upside potential, you'll need to take on more risk. So if you can afford to gamble a bit (just don't use the rent money), you might want to travel up the risk curve...
You could buy an investment-grade corporate-bond ETF – like the iShares iBoxx Investment Grade Corporate Bond Fund (LQD). Or you could dabble in distressed corporate bonds...
But if you venture into that space, just make sure you have a good guide – like Stansberry's Credit Opportunities editor Mike DiBiase. As Mike explained yesterday, a credit collapse is likely coming soon... So you'll want to be super careful with buying distressed bonds.
Fortunately, Mike is one of the best in the business at finding the best opportunities in this space. And right now, you can get Stansberry's Credit Opportunities at the lowest price we've ever offered. Just listen to how our work changed one subscriber's life right here.
If I'm right about the setup again, this trade should start working very soon – within days...
The entire opportunity could be over as soon as a couple of weeks from now... or it could last as long as a couple of months. But it's not something that will be around forever.
I believe TLT could move higher by 10% or more in that span (which would be a huge annualized gain and great for a bond trade). Riskier debt investments might do even better.
Don't bet too big, though. And please don't sell every stock you own and head for the hills simply because I've suggested that stocks might pull back as the dollar strengthens.
I never "bet the farm" on any one idea... and neither should you.
Before I wrap up, I wanted to take a minute to explain why I'm in the macro mindset this week...
As you've learned since I started writing these Friday Digests earlier this year, I share whatever is on my mind... mostly whatever I can't stop thinking about as I start typing.
This week, I can't stop thinking about this short-term, strong-dollar trade. The market is presenting us with an unusually extreme moment with good odds of success.
There's another reason why I'm writing about this idea today...
Over the past two years for the Stansberry Investor Hour, I've interviewed many macro investors – including Marko Papic, Raoul Pal, Mark Dow, Kevin Muir, and Cullen Roche – and other folks with great macro insights in various markets – like Vitaliy Katsenelson, Jesse Felder, Michael Gayed, Simon Mikhailovich, and too many others to name here.
Also, as I've mentioned before, I've been reading up on the period from 1929 to 1945 over the past several months. That era gave birth to the modern discipline of macroeconomics. So it seemed important for me to bone up on it as I continued to talk with macro investors.
And of course, I'm only human, so I'm probably feeling my oats right now, too...
A couple of weeks ago, among other things, I recommended buying cannabis stocks and bitcoin because I expected positive fundamental and price trends in both assets to continue after the election. I didn't name any specific cannabis stocks, but the AdvisorShares Pure U.S. Cannabis Fund (MSOS) is up around 13% since then... And bitcoin is up about 19%.
So far, so good. I expect both of those trades will take at least six months to play out... And the longer-term prospects for both are stellar.
Also, in Extreme Value, my two best recommendations in 2020 have been macro trades...
- Sprott Physical Silver Trust (PSLV) – up 55% since April
- Bitcoin – up 53% since February
The bottom line is...
At this point, I've added a healthy dose of macro insight to my quiver of investment arrows. And it's working well, so I'm ready to get more of these ideas in front of Stansberry readers.
Who knows... maybe I'll start an Extreme Value Macro service if I get enough of these ideas and can't keep them to myself. I'd have a lot of fun with that... But would you subscribe?
As always, I love to hear all your thoughts – both good and bad.
Please tell me at feedback@stansberryresearch.com whether you enjoy these macro ideas... whether my advice has helped you make some money... or whether you simply don't care at all.
New 52-week highs (as of 11/5/20): Almaden Minerals (AAU), Analog Devices (ADI), ARK Fintech Innovation Fund (ARKF), Autohome (ATHM), BlackLine (BL), Morgan Stanley China A Share Fund (CAF), Cognex (CGNX), Cresco Labs (CRLBF), Curaleaf (CURLF), Calibre Mining (CXB.TO), New Oriental Education & Technology (EDU), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), iShares China Large-Cap Fund (FXI), Alphabet (GOOGL), GrowGeneration (GRWG), Green Thumb Industries (GTBIF), Innovative Industrial Properties (IIPR), Ingersoll Rand (IR), JD.com (JD), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CICC China Leaders 100 Index Fund (KFYP), KraneShares CSI China Internet Fund (KWEB), Lonza (LZAGY), MAG Silver (MAG), MarketAxess (MKTX), Match Group (MTCH), Intellia Therapeutics (NTLA), Flutter Entertainment (PDYPY), ResMed (RMD), Rollins (ROL), Seabridge Gold (SA), Southern Copper (SCCO), Sea Limited (SE), ProShares Ultra Semiconductors Fund (USD), Vestas Wind Systems (VWDRY), ProShares Ultra FTSE China 50 Fund (XPP), Zebra Technologies (ZBRA), and Zendesk (ZEN).
The mailbag is quiet today. But as I noted above, I'd love to hear whether any of my recommendations have helped you grow your wealth over the years. Please share your story at feedback@stansberryresearch.com.
Good investing,
Dan Ferris
Vancouver, Washington (where I hope we don't have any riots)
November 6, 2020