Why I Almost Didn't Write to You Today

My standard advice when I spot market bubbles... The biggest problem in financial markets... Mr. Market is driving... Every dark cloud has a silver lining... Why I almost didn't write to you today... How should one live if life is short?...

'You can't short this market'...

That's what a friend of mine on Twitter told me two months ago.

I (Dan Ferris) didn't think much of it at the time. He's a quant. I'm a value investor.

I rarely do anything that amounts to shorting an entire market. But there's no denying how bearish I've been on U.S. stocks for most of the past two and a half years.

Sure enough, the S&P 500 Index quickly made new highs... then it made them again.

I even had to issue a mea culpa to our Stansberry Investor Hour podcast listeners. I told them in January that I was afraid we'd see more of what ailed the market last fall, when the S&P 500 fell nearly 20% before bottoming out on Christmas Eve.

And yes, this past May was a tough month. So was August.

But the S&P 500 has hit new all-time highs more than once lately. It's up 22% this year... a spectacular performance. My Twitter friend was proved right.

For now.

As a value investor, I don't spend much time thinking about shorting entire markets...

That's an easy way to lose money. When I spot bubbles, my standard advice is to avoid, not short.

After decades of doing this, I've realized that negative advice – warning people about what not to do – is at least as important as telling them what to buy. So when I see a stock, bond, or market that looks frothy, I sound the alarm bells.

The loudest bells I've sounded have been on stocks, but I've also been worried for more than a year about investors going gaga for bonds. More than once on the Stansberry Investor Hour – and also at our Stansberry Conference in Las Vegas last month – I called bonds "the biggest bubble in history," due primarily to the sheer size of the problem...

For a moment in August – the hottest month of the global bond bubble – there was $17 trillion worth of negative-yielding debt in the world, nearly all of it Japanese and European sovereign debt. As insane as it sounds – as we wrote here in the Digest earlier this year – you could even find some negative-yielding European high-yield (or "junk") debt.

It's no surprise then that the bloom is coming off that rose at both ends of the credit spectrum...

Yesterday, a Barron's article from Randall Forsyth announced, "The Bubble Is Deflating for 100-Year Bonds." The article specifically mentioned Austria's 100-year bonds. Economist Julian Brigden called the Austrian bonds the "poster child of the bond bubble."

When the global bond bubble peaked in August, Austria's 100-year bonds hit 210 euros – more than double face value. That price pushed the yield down to just 0.61%. The bonds had been issued in two tranches – one a couple years ago at a yield of 2.1%, and another last June at a yield of 1.17%.

Forsyth, an associate editor at Barron's, channeled 1990s-era pop music group Destiny's Child to label the century bonds' yields as still "bubblicious."

The problem is, sanity is far less important than liquidity in financial markets...

I can't imagine lending even an advanced Western economy so much as a penny for 100 years. What if Austria doesn't exist 100 years from now?

Stranger things have happened. Countries have come and gone throughout history.

If Europe goes the way of all empires and dissolves into chaos, one might have bigger fish to fry than collecting interest and principal on one's sovereign debt holdings.

But let's say I had good genes, 150-year-old parents, and I was only 50 years old myself... I could agree to lend Austria money for 100 years. Would I lend it at 2% interest? I think I'd demand a lot more – triple that percentage, at least – to tie my money up for that long.

As long as plenty of liquidity exists, though, you can get away with anything...

Nobody is going to hold those bonds for 100 years. They'll still be getting bought and sold ad infinitum long after the government folks who spent the money and the bankers who underwrote the issue have all gone to their "great reward."

Holding for 100 years would be hard. The Austrian bonds had fallen back to 168 euros by Wednesday, a 20% decline. And here I've been wasting my time warning that the "FAANG" stocks could drop 20% in a heartbeat!

Other long-dated bonds have fallen, too...

The iShares 20+ Year Treasury Bond Fund (TLT) – an exchange-traded fund ("ETF") that holds a basket of long-term U.S. Treasury bonds – has fallen 7% from its August peak... even as the Federal Reserve dropped interest rates twice in that stretch, by a total of 0.5%.

That $17 trillion of negative-yielding debt has fallen to a mere $12.5 trillion, according to data compiled by Bloomberg.

Talk about still bubblicious! This is happening even though the European Central Bank ("ECB") is buying back 20 billion euros worth of bonds each month.

Central bank intervention clearly has its limits... Every time I say that, somebody says no, the Fed is obviously able to keep rates low and asset prices high, as if it's so obvious. Yes, obviously.

For now.

I'm not saying the Fed and the ECB will blow financial markets sky high. I'm just saying we have absolutely no idea what their actions will do... but that financial markets are huge and complex.

That creates more opportunities for things to go wrong. It doesn't matter that central bank actions are designed to be benign.

We're all just along for the ride. Mr. Market is driving, not the bankers.

Investor enthusiasm is starting to wane at the other end of the credit spectrum, too...

This morning, Bloomberg reported that BlackRock's IHYG – the largest ETF that owns European junk bonds – has seen 1.1 billion euros in outflows over the past 14 weeks, with money leaving the ETF in 13 of those weeks. Even with the recent retreat, European junk-bond ETFs have seen 5.9 billion euros of new money year to date, more than any year since 2010.

On this side of the pond, the story is similar, if more subtle. Yes, U.S. junk-bond ETFs saw $6.2 billion of new money in September and October...

But Barron's reported yesterday that November is gearing up to be the second month in a row to see a drop in the face value of bonds in the widely followed ICE BofAML U.S. BBB Corporate Index.

BBB is the lowest investment-grade rating. As we've reported several times in the Digest over the past year, more BBB debt is outstanding today than any other rating level of investment-grade credit. That has concerned us for some time.

Granted, shrinkage can happen in good ways. The ICE BofAML Index will see two companies leave this month... Consumer-products firm Newell Brands (NWL) will leave on a downgrade (to BB), but drugmaker Abbott Laboratories (ABT) will leave due to an upgrade (to A-).

In a recent interview on the Stansberry Investor Hour podcast, our friend and junk-bond guru Marty Fridson warned us not to wring our hands too hard...

Downgrades from BBB into junk territory would lead to indexes and other investors selling, for sure. But such an event would also raise the overall quality of higher-yielding junk debt... Once bond prices fall far enough and yields move high enough, it'll be a boon for patient, value-oriented investors.

Stansberry's Credit Opportunities editor Mike DiBiase watches the high-yield bond space closely... I bet he'd get very, very busy if mass downgrades hit the BBB bonds hard enough.

As Porter has told Digest readers a million times, you probably ought to have more money in bonds than stocks. Stay tuned... The ugliness that may have already begun could end up as a beautiful opportunity to take Porter up on his advice and watch Mike shine.

See that? I'm not all doom and gloom. You can't hang around financial markets for three decades without learning that every dark cloud has a silver lining.

That being the case, I can't help mentioning that the November issue of Extreme Value comes out today...

In it, analyst Mike Barrett and I recommend one of the all-time great businesses, which has been under an extremely dark cloud of intense government scrutiny for a few years.

It's one of the biggest companies in an industry that's virtually impossible for new competition to enter... an industry the likes of online juggernauts Alphabet (GOOGL) and Amazon (AMZN) will never disrupt.

We believe this company's troubles will soon be behind it. And we're eager for our subscribers to take advantage of its cheap price... huge economic moat... and nearly 4% (and growing) dividend yield.

Finally, I almost didn't write to you today...

I've had quite a scare this week... and it's still ongoing as I write this Digest.

My 92-year-old mother fell, breaking her elbow, wrist, and pelvis. My 94-year-old father was beside himself... And in a rare turn of events, none of my six siblings could be by their side. I hopped a cross-country, red-eye flight and drove three hours to their seaside home.

As it turns out... thankfully, things aren't as bad as I first thought. I initially thought the pelvic fracture was deemed inoperable due to her COPD. But in reality, the injury isn't severe enough to warrant surgery.

Still, you tell me... How terrified would you be if your 92-year-old mother were stuck in a hospital bed with three fractures? At one point, a nurse told us she had "a slight touch of pneumonia." A nonagenarian in bed with a fracture getting pneumonia is not good. But the nurse was wrong.

For most of my first day here, Mom's breathing was not good. It took all day for the staff to figure out her pain was so bad that it was affecting her breathing. After they gave her pain medication, her breathing went back to normal, enabling her to rest.

It also turns out that some of what happened to dear old Mom was... er... her fault.

She's been in and out of hospitals for months because she won't do a few simple things... The hospital stays weakened her, sending her to rehab. Mom fell in the rehab center because she got up and walked to the bathroom by herself, which she knew she wasn't supposed to do.

When they come in to give her medications, she tells them, "I don't want any more medications. That's probably what's making me feel so bad."

My wife told me last night on the phone, "You're just like her. You do what you want. Nobody can tell you anything."

I pride myself on my ability to change my mind when it's the right thing to do. But I have to admit, there was some truth in what I heard in that simple message from my wife.

I sure hope Mom pulls through. It's hard to be optimistic... except that she raised seven kids... smoked for decades... and is still here.

Put that way, maybe it's harder to be anything but optimistic.

Life is fleeting.

It begs the question... How should one live if life is short?

Tech entrepreneur Paul Graham has some ideas about it that I believe are worth considering. Because life is short, Graham says, you should do three things...

First, eliminate as much BS as possible. (Graham didn't say BS. His editor is more indulgent than mine.) Some of it will be obvious, but some of it will trick you by looking like important stuff. Graham identifies a potential trade-off that can help in this regard...

There has always been a stream of people who opt out of the default grind and go live somewhere where opportunities are fewer in the conventional sense, but life feels more authentic.

Second, seek out things that matter. Graham offers a tool for ferreting out the frauds here...

One heuristic for distinguishing stuff that matters is to ask yourself whether you'll care about it in the future. Fake stuff that matters usually has a sharp peak of seeming to matter. That's how it tricks you.

It's hard to ask what'll matter to you in the future.

I almost didn't fly out here this week. I almost stayed home. Seeing my father's confusion and worry once I got here made me realize how stupid that would have been. For the past couple of days, we've been driving back and forth to the hospital.

Along the way, he's been telling me stories... of his time in high school (he and all three of his sons went to the same school in Maryland, which was founded in 1845)... his time in the Ryukyu campaign in the Battle of Okinawa during World War II... his years as a star college athlete and law student... and much more. I can hardly believe I considered not coming here an option, even if it was only for several minutes.

Finally, Graham says, savor the time you have... I've gotten better at this. I stop work every day at 5 p.m. on the nose, no matter what. I refuse to work on Saturdays. I play my guitar every day. I stop and look around a lot more than I ever did before.

Graham says having small children around can help, too.

A big part of my job is finding the right words, but they're failing me now. So I'll let Graham do the heavy lifting. As he notes...

If life is short, we should expect its shortness to take us by surprise. And that is just what tends to happen. You take things for granted, and then they're gone. You think you can always write that book, or climb that mountain, or whatever, and then you realize the window has closed. The saddest windows close when other people die. Their lives are short too. After my mother died, I wished I'd spent more time with her.

I can't help but feel a sense of regret about some things. For example, I wish I'd made a serious attempt at a career as a performer, even though I realize now the odds of making a living at it were even worse than I thought back then.

The first time I took the stage as an actor (after grade school) was at age 36. A local Baltimore director saw my first performance (in the smallest role in Steinbeck's Of Mice and Men), and told me, "You're the most natural actor I've ever seen." I did a few big roles, but never got past community theater.

I had a bunch of good gigs as a musician, including playing the mandolin on stage in an opera at the Kennedy Center... under the direction of opera legend Placido Domingo, who looked me in the eye after opening night and said, "Bravo!"

It's all so distant now, but it seems like maybe I didn't honor whatever modicum of talent I truly possessed.

But whatever I did, it brought me to you. That's been a very good thing for me, and I'm grateful to you.

New 52-week highs (as of 11/7/19): Berkshire Hathaway (BRK-B), Celgene (CELG), New Oriental Education & Technology (EDU), SPDR Euro STOXX 50 Fund (FEZ), Alphabet (GOOGL), Huntington Ingalls (HII), JD.com (JD), JPMorgan Chase (JPM), Norilsk Nickel (NILSY), Invesco S&P 500 BuyWrite Fund (PBP), Flutter Entertainment (PDYPY), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), AT&T (T), TAL Education (TAL), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Financials Fund (UYG), and Vanguard S&P 500 Fund (VOO).

A quiet day in the mailbag. How do you live your life to the fullest? We'd love to hear your response at feedback@stansberryresearch.com.

Good investing (and not just in financial assets),

Dan Ferris
Berlin, Maryland
November 8, 2019