A bloody coup attempt in Turkey… Another terrorist attack in France… Attacks on police officers in Dallas and Baton Rouge… Negative interest rates on more than $10 trillion of sovereign debt… Two distrusted and discredited U.S. presidential candidates…
All this, and yet investors push the S&P 500 to record highs.
I don't know about you but I have never seen a more confusing and disturbing investment landscape in my 30 years in the business.
At the same time, I have been receiving a lot of feedback from readers and friends that my writing is making them uncomfortable.
I have news for everyone – my job is not to make people comfortable. My job is to keep you safe and keep you solvent.
The great English romantic poet William Blake wrote, "Opposition is true friendship." I may not be the friend with whom you want to have dinner, but I sure as hell am the guy you want in the foxhole next to you when the firefight starts.
And the firefight is raging all around us…
They Want You to Think Everything's Fine
The mainstream financial media is working overtime to convince investors that things are okay.
They should be ashamed of themselves, because they are misrepresenting the truth.
The Wall Street Journal tells us that the economy is seeing faster jobs gains despite the fact that the household employment survey shows that the economy lost 119,000 jobs in June and is down for three months in a row.
Columnist Jason Zweig, who is working overtime to give the consistently worst investment advice in America, has moved from calling gold a "pet rock" (gold is up around 25% year to date) to trying to convince people that "bonds aren't as awful as some may believe" (the actual title of his July 16 column in The Wall Street Journal).
Accepting the government's completely bogus and grossly understated inflation data on its face, Mr. Zweig argues that the miniscule inflation-adjusted returns offered by Treasuries today are attractive because they are higher than the negative inflation-adjusted returns that existed a few years ago.
Every word he writes is wrong. Inflation-adjusted returns on Treasuries – when inflation is based on real-world price data rather than on the phony numbers used by the government – have been negative for years.
Treasuries and other investment-grade bonds are certificates of confiscation and investors should not own any of them.
So, there may be better ways of losing money than listening to Mr. Zweig, but I am currently unaware of any.
Here's what I suggest you do while these clowns seem to call the shots…
We Can Still Put Markets Right
The establishment, of course, wants the status quo to continue because it doesn't have any answers for how to fix what it broke.
But there are answers, and all they require is some political and moral courage to carry them forward.
The answers are pro-growth tax reform (not simple-minded tax cuts, either), entitlement reform, budget discipline, a bolder and more disciplined and principled foreign policy, and a respect for the rule of law and the Constitution.
We need to return to limited government rather than an endlessly expanding federal bureaucracy that buries businesses in taxes and regulation, a respect for individual rights and equality under the law, and willingness to defend our borders and our allies.
That is what the upcoming election is about.
Markets, unfortunately, continue to focus on the next 10 minutes instead of the next 10 years. But as John Maynard Keynes reminded us, in the long run we are all dead.
That doesn't mean we have to run headlong to the boneyard, however. Yet many investors are doing precisely that. But stocks at their current valuations of 18.5 times earnings is a fool's game.
Second-quarter earnings are likely to decline for the fourth consecutive quarter (down 5%), and that doesn't take into account the fact that these earnings are inflated by billions of dollars of bogus non-GAAP adjustments that disguise the fact that Corporate America is more leveraged, less productive, and less profitable than a decade ago.
Intellectually dishonest commentators argue that low interest rates are not a sign of economic weakness but the result of low inflation, but the truth is that real-world inflation is raging and the global economy is anemic.
If the world economy were robust, interest rates would be much higher. And the U.S. Treasury yield curve would be much steeper. Investors are living a post-Brexit summer fantasy fueled by dreams of central banks printing trillions of dollars of euros and yen to prop up moribund economies, but the blood flowing in the streets should be a stark reminder of what is coming when the fantasy ends.
But don't try telling that to investors.
How to Cope with Massively Overbought Markets
The Dow Jones Industrial Average rose another 2%, or 370 points, to 18,516.55 last week, a new high. The S&P 500 jumped 1.5%, or 32 points, to finish at 2,161.74, just off its all-time high of 2,163.75. The Nasdaq Composite Index rose 1.5% to 5,029.59.
The market may well keep rising from here since there appears to be no sense of risk on the part of investors, but I would not be chasing stock prices at these levels.
I would be buying puts to hedge any long positions and trimming any long exposure I have.
And while stocks may be reaching new highs, many investors are not enjoying the party.
Hedge funds' performance, in particular, is lagging badly, even though the accredited investors in my Third Friday Total Return Fund LP are doing just fine.
The HFRX Equity Hedge Fund Index was down -1.47% in June and -3.92% year to date through the end of June (it may be slightly better now but still lagging the overall market badly).
Last week, one of the poster boys for why people should avoid hedge funds – Bill Ackman – had another horrible week as two of his worst bets moved further against him.
Investors at the toxic Valeant Pharmaceuticals International Inc. (NYSE: VRX) learned that its former CEO J. Michael Pearson sold much of his remaining stock in the company (despite putting out a phony Hillary Clinton-esque statement claiming that he was still confident in the company's future prospects) while the company's former largest shareholder, the Sequoia Fund, disclosed that it had sold all of its shares.
What's more, Mr. Ackman's largest short bet, his ill-advised crusade against Herbalife Ltd. (NYSE: HLF), came up dry as the company settled with the Federal Trade Commission for $200 million and the stock rose 10% to $65.25 (Ackman's break-even price is in the $30s).
Naturally, Ackman tried to put lipstick on his pet pig and claimed a victory because the FTC settlement requires Herbalife to change its business practices, which Ackman claims will eventually force the company out of business.
Admitting you are wrong is an essential attribute in a successful money manager – an attribute Ackman apparently lacks. He has not lost money for investors since 2012 yet prevents them from withdrawing more than one-eighth of their money from his funds each quarter.
He is giving all hedge funds a bad name.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.