The Conspiracy Theorists Were Right

The conspiracy theorists were right... The mob goons at JPMorgan... All the conspiracies are out in the open... Just the latest turn in a weird year... Welcome to the new 'Golden Age of Value' investing...

The conspiracy theorists were right...

For years, I shook my head every time some gold bug said, "The gold market is manipulated." I won't be shaking it anymore...

Megabanks JPMorgan Chase (JPM) and London-based HSBC (HSBC) dominate global precious metals trading. Yesterday, U.S. prosecutors charged three JPMorgan metals traders with a scheme to manipulate global precious metals markets over an eight-year period from 2008 to 2016.

The basic idea behind the alleged scam was simple...

Suppose the JPMorgan traders wanted to legitimately sell gold. They would place a large order to buy gold in the market so everyone could see it before quickly withdrawing it – an attempt to influence the other side of the trade in a way that benefited JPMorgan. This type of scheme is known as "spoofing."

The indictment includes messages between alleged co-conspirators, like this one: "So you know its gregg bidding up on the futures trying to get some off"...

To which, his alleged partner in crime responded: "sweet mate."

It appears damning and seems to support the charge. But attorneys for one of the indicted traders say their client did "nothing wrong." They expect their client to be "fully exonerated." Another trader's lawyer called the charges "heavy handed" and plans to defend him "vigorously."

Stories in the Financial Times and Wall Street Journal report instances of some traders being acquitted in spoofing cases and others being found guilty... But this is the first time the government has used the "RICO laws" – normally used to bust mobsters on racketeering charges – in a market-spoofing case.

I wonder... does the use of RICO mean JPMorgan Chairman and CEO Jamie Dimon is really a mafia Don? If I ask him for a favor on the day of his daughter's wedding, would he be required to grant it?

Or maybe he's just a lower level "capo," a captain working for the real Don – Federal Reserve Chairman Jerome Powell, perhaps?

The press reports say the government is ready to investigate this case as high as it goes... "Whether it's across desks or upwards into the financial system," according to a Financial Times article.

The most serious charges bear prison sentences up to 30 years. Will that encourage the traders to rat out the boss? If I was headed for a 30-year stretch in the big house, I might be inclined to turn snitch to get my load lightened. Gabish?

Makes ya wonder, doesn't it?

Yeah, it does... So I apologize to all of you conspiracy theorists.

There's enough evidence here to proclaim you're less batty than I originally thought. I stand corrected and will no longer criticize your labyrinthine theories of how the world works.

There's a poetic irony here, too...

You may remember how JPMorgan bought then 85-year-old failing financial giant Bear Stearns in early 2008. Bear blew up due to enormously high leverage – with assets leveraged more than 35-to-1 – and huge exposure to subprime mortgages just as the financial crisis began to unfold. Bear's stock price peaked well above $100 a share before the crisis. JPMorgan bought it for $10 a share, thought to be a steal at the time.

Two former Bear employees who joined JPMorgan as a result of the transaction are named in the federal indictment... one as a primary conspirator and one as co-conspirator.

So JPMorgan stole Bear, and as a direct result, it finds itself accused of stealing from precious metals traders in an effort called "massive" and "multiyear." Perhaps one massive turn at theft deserves another.

Makes ya wonder which other markets are manipulated...

Though, as I told a group of executives from a financial company in a meeting a few years ago, it's hard to believe any organized markets – financial or otherwise – are created except by those who intend to manipulate them to their advantage.

But you could argue that the JPMorgan episode is the end of an era, not the beginning...

You don't really need conspiracy theories these days. All the conspiracies are out in the open.

The conspirator's talent lies not in the scam, but in his ability to tell you a great story that you buy and become his willing victim. Or at least, he wants you to throw up your hands, step onto the floor, and agree to keep dancing as long as the music plays (paraphrasing former Citigroup boss Chuck Prince).

Take negative-yielding bonds, for example...

This could never happen without mob bosses like European Central Bank (ECB) President Mario Draghi telling us all that discouraging people from keeping money in the bank will stimulate economic growth. How do you grow an economy – global or otherwise – without capital? And where does capital come from if not formed through savings?

I'm primitive when it comes to economics. I have this crazy idea that saving is the cornerstone skill beneath all capital allocation, and capital formation is the root source of all economic growth.

Draghi recently called negative rates a "necessity," as though discouraging saving brings much-needed discipline or much-sought relief... Given the gargantuan bond bubble that has resulted, it's anybody's guess how it could be either.

With his term as ECB president ending in less than six weeks, Draghi is pulling out all the stops to revitalize the European economy. He's cutting the central bank's main deposit rate from -0.4% to -0.5% and launching a fresh round of quantitative easing – a fancy term for manipulating the bond market – starting in November.

Next, his successor, Christine Lagarde, will lead a strategic review in search of still more radical measures, including the ECB possibly depositing money directly into individual bank accounts. Free money for everybody.

Of course, you've likely heard news that various political candidates and Silicon Valley jerks have endorsed a similar measure for the U.S. – the universal basic income ("UBI"). Democratic presidential candidate Andrew Yang calls UBI – not making this up – the "Freedom Dividend."

According to his website, the idea is endorsed by the likes of "Mark Zuckerberg, Robert Reich, Elon Musk, Bill Gross, Richard Branson, Ta-Nehisi Coates, Noam Chomsky, and many others."

The UBI program is simple. The government would pay every U.S. citizen age 18 and older $1,000 a month, regardless of income, "no questions asked."

He'll pay for it by – what else? – raising taxes.

Yang can't wait to get elected. He's already giving other people's money away... He has started a contest to give away $1,000 a month for one year to 10 randomly chosen families – paid for out of his campaign fund.

He raised money to pay for his presidential campaign. He's stealing it from his campaign fund and buying votes with it. And he swears it's legal. (Note to self: Andrew Yang is a Clinton-level criminal. He's not Nixon-level yet, but give him time. He'll learn.)

The gold conspiracy headlines and push to give free money away are just the latest...

You have to admit, it has been a really weird year so far... Take yourself back to January 1, 2019. Back then, who was predicting...

• WeWork's valuation would fall by more than half, endangering its IPO?
• Gold would be trading for $1,550 an ounce?
• A Chinese currency exchange rate north of seven yuan per U.S. dollar?
• That 100-year bonds would become popular investments?
• Negative-yielding European junk bonds?!
• The largest number of measles cases globally since 1992?
• A traffic jam at the summit of Mount Everest?
• Marijuana cheeseburgers?

Maybe the cheeseburgers, mountain climbers, and measles don't belong on the list... but they're definitely weird. And maybe some gold bugs were predicting higher gold prices, but they do that every year.

All the rest of these wild financial phenomena are having the effect you'd expect, reported by our colleague, True Wealth editor Steve Sjuggerud...

The majority of the world is scared. Folks believe stocks "should" fall after this historic run-up. And that's caused the pros to get extremely bullish on bonds... at the worst possible time.

I say to do the opposite. Be bold and buy. Now is the time to do it.

I'm with Steve, but I would tell you to focus on beaten-down value names right now. They've had a huge bump recently, as I pointed out to Extreme Value subscribers and Digest readers last Friday.

I know mining companies are among the cheapest stocks today. But I had no idea just how cheap...

According to Bernstein Research, mining stocks today are cheaper than they've been at any time in the past century. 100 years.

Bernstein analyst Paul Gait says the mining stocks are trading at 1.4 standard deviations below their long-term cyclically-adjusted price-to-earnings ("CAPE") ratio.

"The only comparable period in recent history was during the height of the dot-com bubble in the late 1990s," Gait says. "However, even during the dot-com bubble the valuation disconnect was not as severe as it is now."

Between 1997 and 2001, the relative CAPE valuation averaged about 0.46 times, he wrote. From 2015 to present, the average has been 0.31 times.

Mining is an awful business, but that just helps make it incredibly cheap at times like this. People get tired of losing money and give up on it. So the stocks get cheap enough to produce huge returns. I've seen it many times in the past three decades.

I'll go one step further...

I don't think mining is the only beaten-down and ignored place to look for great performing stocks for the next several years. I think mediocre, underperforming businesses generally will be a more fertile ground than they have been over the past several years.

This happens every so often. Growth stocks shine for a while. Then value. Then growth. And now value again.

It's like the change of the seasons, and I've just noticed that the first leaves are turning...

A brand-new "Golden Age of Value" began on Monday, September 9.

As our friend Jason Goepfert reported at SentimenTrader.com, that day saw the biggest one-day shift in momentum since 2009 between the best-performing stocks year-to-date ("YTD") and worst performers. Simply put, the worst performers YTD performed best that day, and the best performers YTD performed worst.

Of course, the best performers YTD have been the best performers of the past decade. These are the big, fast-growing businesses that trade at high valuations. The worst ones are the opposite... slower growing and cyclical, with cheap valuations.

I think it's here...

I've been talking for two years about the impending arrival of a new Golden Age of Value. But until September 9, I wasn't willing to say that value stocks would do better than growth stocks in a bear market (which I've also been afraid would arrive soon).

Now, I'm confident that value has taken the market's reins and will outperform growth stocks – even in a bear market.

I looked at the difference between the Russell 1000 Growth and Value indexes back to the 1980s. It showed value outpacing growth in seven out of 12 bear markets and corrections.

Because of this change in my outlook, Extreme Value chief research officer Mike Barrett and I are shifting our efforts toward the high art of picking real, traditional value stocks... the likes of which we haven't really been looking for over the past several years.

It's time to look for them again.

It makes perfect sense that in a year of conspiracy theories proven real, negative-yielding junk bonds, and traffic jams atop Mount Everest, value would finally begin to outperform.

After 10 years of "FAANG" stocks, Tesla, and unicorn IPOs... nothing would be weirder than discovering that value investing works again.

If we're right and a new Golden Age of Value has dawned...

It's more critical than ever that you learn how to tell the unappreciated, hidden gems from stocks that deserve their poor valuations.

That's why we urge you to check out the work of our friend Joel Litman. Joel is a professor who has lectured at Harvard Business School, the University of Chicago, and Wharton, among other places...

He's also a forensic accountant who says deep flaws in standard accounting are warping our investors' understanding of the stocks they trade. These accounting problems mean valuing a company on available information can be misleading.

To see the true picture, Joel and his team of more than 90 accountants and analysts take apart the financial statements of more than 8,000 publicly traded companies around the world. Then, they reconstruct them using consistent standards to eliminate the flaws... They make more than 130 adjustments to create the true picture of a company's financials.

Some of the opportunities they've uncovered this way have been extraordinary...

For example, chipmaker Advanced Micro Devices (AMD) is up more than 1,000% since Joel's system identified an opportunity in it. And gym operator Planet Fitness (PLNT) has doubled since Joel told attendees at our Stansberry Conference about it in 2017.

We're holding a special event to introduce our subscribers to Joel and explain the details of how he finds these opportunities. To learn more about his research and how you can follow his work – as well as saving your seat for this event – click here.

New 52-week highs (as of 9/16/19): Booking Holdings (BKNG), Crestwood Equity Partners (CEQP), iShares U.S. Aerospace and Defense Fund (ITA), and Lockheed Martin (LMT).

A quiet day in the mailbag... Please send your taunts and criticisms to feedback@stansberryresearch.com.

Good investing,

Dan Ferris
Baltimore, Maryland
September 17, 2019